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Wessel's new book delves into the creation of a massive tax break


Thousands of places in this country are formally designated as areas of opportunity. The official term is opportunity zones. They're supposed to help revitalize areas that need it, and they are all over in every state. David Wessel, a frequent guest on this program, writes about them in his book "Only The Rich Can Play." He spoke with Noel King.

NOEL KING, BYLINE: There is a big idea at the heart of this book that I think is really fascinating. There are places in this country that are really doing poorly. And we know that people from those places will either leave or they will stay, and they'll get stuck. And so economists talk about helping the person or helping the place. Can you start us out by explaining some of the conversation around that big idea?

DAVID WESSEL, BYLINE: So there are a lot of economists, perhaps a little hardhearted, that think that it would be foolish and take too much money to save a place like Flint, Mich., or a really bad neighborhood in Baltimore and that we ought to do is invest in the people, and they should move to places that are more prosperous. And that really has been a common refrain of economists for some time. But the tune has changed recently - and I think for a couple of reasons.

One is we learned that many people don't tend to move, even if some economists think they should. Moving from Detroit to Dallas or Houston sounds good to some economists, but if your whole family is in Detroit or Flint, you're not likely to move. Secondly, Americans are moving less often than they used to. And third, frankly, I think of - a lot of liberal economists said, oh, my God, there's all these people in left-behind areas. They voted for Donald Trump. We got to do something for them. So that has changed the dynamic and made people think that we ought to figure out a way to do some investment in people and places so that these left-behind communities are not so desolate.

KING: And opportunity zones are one way to do that. So explain to us what an opportunity zone is.

WESSEL: So in the 2017 tax bill, Congress created a provision that led to 8,764 tax havens across the United States called opportunity zones. And the concept is pretty simple. Rich people have a lot of money. If you give them a big capital gains tax break, maybe they will put that money into poor neighborhoods. And that's basically the concept. In practice, however, I don't think it's worked quite as well as the proponents thought it would.

KING: Explain how capital gains play a role here. So let's say that I am a good person with $50,000 in the bank. And I know that I've been lucky and worked hard, but I want to help a disinvested area. Can I take my $50,000 in cash and invest it into an opportunity zone?

WESSEL: Not really. In order to play in this game, you first have to have a big, unrealized, untaxed capital gain. So say you bought Apple stock, and it's now worth $50,000 more than you paid for it. If you sell it, then you can use that money to invest in an opportunity zone through something called an opportunity fund. But right from the beginning, it's really only a game for people who have wealth that they - some business, property, art, something that they bought that profited.

KING: Then the government gives them an opportunity, these wealthy people, to invest in a neighborhood or a county or an area of a city that really needs the investment. That sounds great. What's so bad about that?

WESSEL: Well, there's nothing bad about it in practice, and I think it was well-intended. But the problem is the way this program works, I think it's giving more tax breaks to rich people than it's producing jobs and prosperity in poor neighborhoods. And that's because of the way it was designed. It doesn't have any strings or not substantial strings. And what that means is there's nothing to require this money go for a project that lifts the fortunes of the people who live in the neighborhood called an opportunity zone.

KING: Tell me about an opportunity zone that you visited that you think illustrates some of the problems.

WESSEL: Well, I have a chapter in the book about Portland, Ore. I went to Oregon because there's no hint of corruption in the way they pick their zones. In this case, each governor got a list of zones that were eligible, and he or she could pick up to a quarter of those to designate them as opportunity zones. And the state of Oregon decided to do some in areas that were already attracting money and some in more remote areas that weren't. And downtown Portland is an opportunity zone. It was drawing lots of private investment. It's kind of the spillover from San Francisco and Seattle. And so in downtown Portland, they are building a Ritz-Carlton hotel and condo complex. The condos are going to go for millions of dollars. And the guy who's building it raised it through opportunity zone funding. That is, people are getting a tax break to build a Ritz-Carlton condo and hotel complex in downtown Portland.

Meanwhile, there's a community outside of Portland called Rockwood - small houses that were built after World War II, largely immigrants. It's also an opportunity zone. But as far as I can tell, they got hardly any opportunity zone money. And that's not surprising because when you create a tax break, lots of which is going to real estate, unless the investor is really interested in social justice or something, he or she is going to go for what's the greatest return with the lowest risk? And it's much less risky to put an office tower in Portland or Chicago or Philadelphia than it is to build affordable housing in a gritty neighborhood of Rockwood, Ore., or Baltimore.

KING: This country is going to continue to have a problem in that some areas are thriving beyond - almost beyond belief, and some places are decaying and abandoned and dying. You've done a lot of research. You've looked at some of the solutions. You looked very deeply into this one specific solution. What is your solution? What would you like to see happen?

WESSEL: That's a really hard question. And it's one I've thought about, and I don't have a good answer. I think one lesson I draw is that as nice as it is to say that we can use the tax code to get rich people to put money in poor neighborhoods, it may be that where the government just has to spend the money - that using this indirect route is not going to be enough. But the second thing is there have been previous proposals like opportunity zones that had components that incentivize the businesses that look - they took advantage of the tax break to hire people. In other words, you couple this, some kind of tax break, with some requirement that you use the money to help the people in the community. Maybe we need more oversight from the Treasury to make sure you're doing it. But at the very least, we ought to make sure that the provisions include some requirement that people who live in the community get some benefit.

KING: David Wessel is the director of the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution. The name of his new book - "Only The Rich Can Play." David, thank you so much for being with us.

WESSEL: You're welcome.