Success Street in North Charleston, South Carolina, might be the most misnamed place in America, a path through a weedy, desolate neighborhood with 20% unemployment and a 40% poverty rate. Its biggest claim to fame strolls past the gritty brick apartment buildings and tumbledown bungalows on a muggy morning in late June: Timothy Scott, a local product who grew up to become the first black Republican U.S. senator in more than three decades. Joining Scott is another success story: the frenetic, peripatetic tech billionaire Sean Parker, who flew in by private jet from Los Angeles’ ritzy Holmby Hills for a personal tour of the senator’s hometown.
“I remember so many kids with amazing potential who died on the vine,” Scott says as he surveys the shuttered Chicora Elementary School, where weeds climb the walls and graying plywood shields shattered windows. “The frustration, irritation and low expectations were so pervasive here that I always wanted to make a difference.”
He now may get his chance. Today’s visit is less a grim walk down memory lane than a legislative victory lap for Scott and Parker. The unlikely pair are core members of an even more unlikely group of conservatives and liberals, capitalists and philanthropists, U.S. lawmakers and small-town mayors who have successfully created one of the greatest tax-avoidance opportunities in American history, in the service of underperforming American cities and neighborhoods.
For all the focus on drastic tax-rate cuts, the fate of the state and local tax deduction and the exploding federal deficits, it’s the least-known part of last year’s tax-cut law that could be the most consequential. Officially called the Investing in Opportunity Act, it promises to pump a massive amount of cash into America’s most impoverished communities by offering wealthy investors and corporations a chance to erase their tax obligations.
If everything goes right, a big slice of the estimated $1.6 trillion of paper profits on American balance sheets could go to revitalizing depressed communities.
Too good to be true? “The incentive needs to be powerful enough that it can unlock large amounts of capital, aggregate that capital into funds and force the funds to invest in distressed areas,” says Parker, the original Facebook president whose think tank, the Economic Innovation Group, created the policy and helped press it into law. “Instead of having government hand out pools of taxpayer dollars, you have savvy investors directing money into projects they think will succeed.”
The heart of this new law: Opportunity Zones, or “O-zones,” low-income areas designated by each state. Investors will soon be able to plow recently realized capital gains into projects or companies based there, slowly erase the tax obligations on a portion of those gains and, more significantly, have those proceeds grow tax-free. There are almost no limits. No limits on how much you can put in, how much tax you can avoid and, for most of the country, the types of taxes you can avoid, whether federal, state or local. No limits on how long those proceeds compound tax-free. And precious few limits on what types of investments you can make.
As Senator Scott rests against a rusting handrail at the abandoned school in his old neighborhood, he and Parker brainstorm what these investments could look like in North Charleston, which already has its O-zone designation. Real estate investors rehab the school into a tech incubator. Venture firms back the startups that emerge, while other funds launch automotive vendors and suppliers to serve the $1.1 billion Volvo plant recently opened 30 miles away. To help fight gentrification, impact investors can offer cheap renovation loans and subsidized mortgages so locals can benefit from rising property values instead of getting priced out. Finally, local government can take the new payroll-tax and property-tax revenues and reinvest them in the community to improve basic services and infrastructure.
In other words, systemic change. “This isn’t about the redistribution of other people’s wealth,” Parker says. “It’s the redistribution of their time, attention and interest.” Senator Cory Booker has a name for O-zones: “domestic emerging markets.”
“If we can get the trillions of dollars of capital off the sidelines and get the best investment minds coming into our communities,” adds Booker, a New Jersey Democrat who cosponsored the bill, “we can end up creating jobs and opportunity.”