The $100 Billion Question

As the American economy has grown more unequal, with urban areas thriving and rural areas falling behind, free-market Republicans have generally stayed away from the debate about potential government solutions.

That is, until Tim Scott came along.

Scott, the first African-American senator from South Carolina since the end of Reconstruction, grew up in working-class poverty. And he’s championed essentially the only congressional effort to close this economic divide during Donald Trump’s presidency.

Scott’s Opportunity Zones would provide tax incentives for investment in parts of the country that have not seen big gains since the Great Recession ended. He helped get the provision tucked in the tax bill signed by Trump in December 2017, and along the way won the support of several Democrats.

“I am certainly an advocate of the free market, without any question,” Scott told me in an interview. “However, my worldview, really, is oftentimes seen through the eyes of a 7-year-old kid, growing up in a single-parent household, mired in poverty, feeling hopeless, at times frustrated, realizing that there was more potential in me than I could get out.”

Scott acknowledged in our interview that, contrary to conservative orthodoxy, he does believe that government can play a role in pushing against the economic tendency for investments to cluster in certain areas while leaving others behind. “We always struggle with an even spread of resources,” he said, noting that one way government can address this is to ensure better access to broadband internet outside of major metropolitan centers.

The idea for Opportunity Zones initially came from the Economic Initiative Group, a D.C. think tank set up by Sean Parker, the tech billionaire who co-founded Napster and served as the first president of Facebook. Parker eventually enlisted Scott in his effort to get the Opportunity Zones into legislation.

The program would allow investors who direct their money into distressed communities to defer capital gains taxes for up to 10 years. It is not yet operational; the Treasury Department in October released proposed rules to guide investors on how to take advantage of the tax incentives. Treasury Secretary Steven Mnuchin has suggested that the program could attract $100 billion in investment in distressed areas.

Tax incentives haven’t always proved successful in addressing entrenched poverty or stopping the decline of local economies based on old-line industries. And some progressives worry that programs like Scott’s can turn into boondoggles that give tax breaks to wealthy investors without doing much for the places they’re supposed to help. In a paper earlier this year, Adam Looney, senior fellow at the Urban-Brookings Tax Policy Center, said there isn’t good evidence that tax incentives actually boost low-income local residents; Empowerment Zones, a previous government effort to boost troubled areas, wound up costing $850 per resident and in the end was limited to just 11 neighborhoods.

Scott, for his part, said he thought the program could create enormous investment within just a couple of years. “There’s over a trillion dollars on the sidelines that could be deployed,” he told me. “I think a realistic estimation, in the first few years, would be about $100 billion.”

Scott spoke to POLITICO from his office in North Charleston, S.C. The following transcript has been condensed and lightly edited for clarity.

Ben White: I wanted to start with a kind of existential question. When we think of using the tax code to effect economic change and stimulate investment, we tend to think of it as something that Democrats do more than Republicans. How do you approach this as a Republican, when the classic Republican thinking is, “Just let the market decide”?

Sen. Tim Scott: What I have tried to do is create a program that is not a government-centric program, but that does create an incentive for people to take a second look at parts of the country that have been missed by the economic recovery that we’ve experienced over the last few years. In the Opportunity Zones, the poverty rate is over 30 percent. I look at it from a common-sense perspective and I ask myself, “Is there a way for me to positively impact the lives of 50 million Americans by providing an incentive to unlock investments for those areas?” And from my perspective, this is a free-market approach to doing so.

White: Let’s just explain to people exactly what Opportunity Zones are.

Scott: The short answer is, Opportunity Zones are aimed at folks who are willing to make a long-term investment in one of the distressed communities around our country … If you will make a long-term investment in one of these zones, then you can defer—you don’t eliminate, but you defer—your capital gains tax for up to 10 years, or through the year 2026. So it’s a phenomenal incentive for people to take a second look at areas that they would not necessarily pay attention to because they would feel like the return is too low, or the risk is too high.

White: OK. And then when we’re talking about these Opportunity Zones, I think you referenced a number, 50 million, as in the number of people that could be impacted by this. How does it break down between rural and urban? A lot of times, when we’re talking about economic opportunity and inequality, there’s a tension there.

Scott: Ben, that’s a great question. I’ve been on a national opportunity tour. I’ve gone to states like West Virginia, Iowa, New Hampshire, that have large rural populations, including South Carolina … It absolutely works in rural areas, from poverty to the opioid crisis, and in inner cities. It certainly allows for the creation of jobs and, frankly, for a walkable economy, for the ability to walk to work. Its application is universal. As long as there is need, I think the Opportunity Zone legislation provides an answer for those areas.

White: Let’s just take South Carolina as an example, since it’s your backyard. What type of business do you see taking advantage of this Opportunity Zone?

Scott: Sure. Let me give you just two real-world examples. First would be, in South Carolina, we are a transportation-centric state. So high-tech manufacturing is booming from the coast to the mountains in Greenville. And so you could see the development of a support company for the Boeing Corporation here in North Charleston, whether it’s providing paint for the planes, or rubber for the wheels, or any other aspect of the engineering for the planes, there’s a ton of opportunities out there that you could see. The second example would be, we are heading towards a service economy in South Carolina. So while we’re going to continue to celebrate our success as a manufacturing headquarters, we are, at some point in the future, going to become what we call the “Silicon Harbor” in Charleston, in the upstate. We’re going to have a focus on the jobs of the future. And so you could see a company started in the Medical University of South Carolina spill into an opportunity zone. And as that company grows, you would see how quickly investors might find it attractive … not only do you have the tax deferral from your initial tax burden, but as your company starts to grow in that zone, that growth is capital gains tax free during those first 10 years of your growth.

White: Have you put a dollar figure on how much investment you think that this tax program could generate?

Scott: There’s over $1 trillion on the sidelines in the United States that could be deployed. I think a realistic estimate in the first few years would be about $100 billion. Talking with Secretary Mnuchin and others, they see, on the sidelines, $5 billion to $10 billion initially, looking to be deployed in just a few states. The states that I’ve talked to, I would add on top of that number another $10 billion or $15 billion.

So in the next several months, $25 billion to $30 billion. And in the next couple of years, $100 billion or more.

White: Let’s pull back the lens a little bit to talk about the broader question of access to opportunity in the United States, and the fact that it is so unevenly distributed through our economy. How do you think we got to this point?

Scott: I’m a young fellow. Not as young as you are, Ben, but I’m a young fellow. And I will tell you that all my life I’ve seen the same thing play out, and that is that there’s always an uneven recovery. And frankly, there’s typically an uneven success trajectory. There have been communities that have been mired in poverty for generations. And the real question is, how do we break that cycle? One of the ways that you do that is by making sure that the private sector, the free markets, have the ability to operate fully. When that happens, you see the most even spread of our resources. As an example, 10 years ago, the African American unemployment was about 12 or 13 percent. Less than six months ago, it was under 6 percent. Today, it’s in the low 6 percent range. What happens is, as we grow the pie, we see more folks being able to engage in finding and chasing the American dream, which is the fastest way to actually even out the recovery. I think we’ve seen that number improve for every minority group.

So when you take those dots and you connect them back, what do you find? What you find is that educational success seems to be still a strong indicator of the evenness of this opportunity in America. And so, for me, there are two major pillars. One is the economic pillar. The second is the education pillar. And if our goal is to make sure that we spread opportunities and success throughout this nation in an even way, we have to focus first on the education system, particularly the education system in the poorest parts of this country. A poor education system or a failing school typically leads to higher unemployment. Higher unemployment typically leads to more government services. And frankly, obviously, it leads to lower net worth. The correlation, of course, is that education and opportunity are like wet and water. They are very difficult to separate.

White: I want to ask you, more broadly, about what role government can play here. Are there other policy levers that we could be pulling? What else can Washington be doing to kind of work with states to address this problem of access to opportunity?

Scott: We could spend a long time talking about education because I think it really is the forerunner to opportunity. Another issue, of course, is the connectivity issue. Broadband and online services are a prerequisite for success in most of America. I think what you’re going to see in the next 10 to 15 years, and you’re seeing it start now, is the fact that people can live where they want to and then decide the type of work they want to do. Our economy is absolutely moving in the direction of people deciding the quality of life they want, the location they want. And then later deciding on the job they want because of the ability to work from home. So the truth is that we’ll probably see more opportunities in rural America than we’ve ever seen before, as people have the chance to pick and choose their site and then their jobs. That is going to be a unique experience for many people in the workforce because, up until now, they really haven’t had that as a real option.

White: It’s somewhat ironic that I’m recording this with you and talking to you from my basement in Englewood, New Jersey, even though I work for POLITICO.

Scott: In Washington, D.C.

White: So I’m a distributed worker and I’m—

Scott: And I’m in Charleston.

White: —taking advantage of connectivity. Exactly. We are dispersed right now, you and I. Just one more thing on the broad macroeconomic level that I’m interested in: the federal deficit and the national debt, and the fact that we’ve seen the numbers go up pretty significantly. An increase in 17 percent to $779 billion in deficit for the last fiscal year. I’m sure you’re probably hopeful that the tax cuts will pay for themselves long term. But how much do you worry now about that growing deficit and the debt on economic growth and interest rates going forward?

Scott: I was at lunch today with some folks and the primary question on their minds was the national debt and how we wrestle with that. One of the things that was clear to most of us at the table is that the tax cuts, so far, have actually increased revenues to the federal government, not decreased it. So we’ve cut taxes, but we always have believed in the Laffer Curve or the inverse relationship. Unfortunately, at the exact same time, what we’re seeing is that spending has not leveled off, it’s not plateaued. It continues to increase. About 70—maybe it’s 67 percent—67 percent of the budget is on automatic increase because those are our mandatory spending programs. We are going to have to not look at cutting benefits for our current people. That’s one of the fictional stories that you can find out there. You can actually reduce our long-term exposure without touching current beneficiaries, or, frankly, people within a 10-year window of receiving their benefits from an entitlement perspective of Medicare and Social Security. But we do have to wrestle with the long-term consequences of mandatory spending that we haven’t wrestled with before. But in order for that to happen, we’re going to have to do that in a bipartisan fashion or it just will not happen.