The never-told story of how an unlikely group of billionaires and politicians quietly passed a law that revolutionises investment in struggling regions—and offers one of the greatest tax-avoidance opportunities in American history
The Zone Rangers: Senator Tim Scott and entrepreneur Sean Parker in North Charleston, South Carolina
Image: Evan Kafka for Forbes
Success Street in North Charleston, South Carolina, might be the most misnamed place in America, a path through a weedy, desolate neighbourhood with 20 percent unemployment and a 40 percent 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 US 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’s 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 greying 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, US 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 neighbourhoods.
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.
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 plough recently realised 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.
Senator Cory Booker has a name for O-zones: Domestic emerging markets
(This story appears in the 28 September, 2018 issue of Forbes India. To visit our Archives, click here.)