Bloomberg Tax: New York’s Opportunity Zone Decoupling Spurs Cheers and Fears

Originally published in Bloomberg on April 08, 2021.

State budget plan includes tax break decoupling; Some rejoice as others worry investors will be driven away

New York’s plan to strip an opportunity zone tax break from its tax code through a new state budget proposal drew praise from progressives who hope it’s a trendsetting move, and jeers from those worried it will cause investors to flee.

In a budget deal unveiled late Tuesday, the state lawmakers would no longer allow investors to defer state and New York City capital gains taxes on the profits they put into “opportunity funds” that finance projects in the state’s opportunity zones. The move has significant implications for a state that houses a major global finance and real estate market and has high taxes on capital gains.

Deputy Senate Majority Leader Mike Gianaris, who was behind the budget bill provision, estimated it would bring in $65 million in revenue annually—meaning that’s how much more investors would have to pay on the capital gains they funnel into these funds, which finance projects in the state’s 514 zones. A spokesperson from his office said the staff interpreted this as rendering moot the opportunity zone policy’s other tax benefits, which involve reductions of capital gains taxes.

Progressives on Wednesday said they were hopeful that other states would also decouple their tax code from the contentious federal tax breaks, as the new administration hasn’t taken action to reform the incentives at the federal level so far. Some, however, say that to diverge from the federal policy and take away the tax break will only serve to push investors into other states where the break is readily available.

“It’s not a big deal because it’s not that much money,” said Kathryn Wylde, president and CEO of the Partnership for New York City, representing the city’s top business leaders. The lawmakers behind this provision of the sweeping budget plan, she added, “really wanted to make a statement by rescinding that credit at the state level.”

She said, however, that along with other provisions in the budget proposal to hike taxes on the wealthiest, this “reflects a political climate that will drive investors away from New York.”


Reasons for Decoupling

In 2018, New York adopted the incentives, which provide capital gains tax breaks for investors who finance projects in certain census tracts chosen by state governments, as part of the 2017 overhaul of the federal tax code.

handful of other states have already decoupled from the federal incentives amid concerns that the direct benefits go to holders of assets like securities, art, and real estate that earn the sort of profits eligible for these tax-advantaged investments. Critics also fear gentrification as a result of the incentives—the tax breaks reward high profits rather than job creation or other measures of economic development, and the rules may support construction of new projects rather than existing businesses, among other policy design issues.

“As I dug into the policy, I discovered that while it’s being sold as a way to help distressed communities it was essentially a pure giveaway to wealthy developers,” said Gianaris.

Gianaris added that he believes the policy isn’t doing much to encourage new activity, but primarily subsidizing pre-planned developments, and criticized the state government’s choice of census tracts for the tax breaks.

In early 2018, state governors chose up to 25% of their “low income” census tracts for the incentives—with eligibility based on median incomes and poverty rates, among other factors. These decisions, in many cases by Democratic governors in states like California, Oregon, and New York, have prompted further criticism, with college campuses and trendy areas of major cities among those chosen.

Greg LeRoy, who heads the Washington group Good Jobs First, has long been advocating for states to decouple from the federal incentives, citing revenue concerns. The group has noted that several states have reported multi-million-dollar revenue hits as a result of adopting the program in their tax codes.

“There’s no reason states should lose revenue passively to a terrible program that was snuck into the Trump tax cut,” he said, calling the decision to decouple “wise.”

Pat Garofalo, director of state and local policy at the nonprofit American Economic Liberties Project, said he hopes it’ll inspire more states to take the same route.

“New York is a big deal,” he said. “It’s a national trend-setter on just about everything.”

But others, like Ken Weissenberg, a tax partner at EisnerAmper in New York who specializes in real estate, warned that it will only send investment funds to other states that continue to conform to federal law.

“I think it’s shortsighted,” he said, calling the retroactive Jan. 1, 2021, effective date “patently unfair.”