WASHINGTON — The Biden administration is weighing how to overhaul a Trump-era tax incentive that was pitched as a way to drive investment to economically depressed swaths of the country but which early evidence suggests has primarily fueled real estate development in areas like Brooklyn neighborhoods that were already becoming richer and whiter.
Administration officials have not yet settled on how to make adjustments that critics and supporters alike say would improve the so-called opportunity zone program, a creation of President Donald J. Trump’s 2017 tax law that Mr. Biden vowed on the campaign trail to reform.
The zones give tax breaks to certain investors who pour money into designated areas, which include high-poverty communities but also some neighborhoods that are rapidly gentrifying. Mr. Trump praised the zones repeatedly and claimed they were pulling large amounts of investment into impoverished neighborhoods, particularly Black ones.
“They’re the hottest thing you’ve seen,” Mr. Trump said in North Carolina in February last year. “Tremendous amounts of money being put into areas that hadn’t seen money for decades and decades.”
The most comprehensive study of investment in the zones to date, released by a pair of University of California, Berkeley, researchers last week, contradicts Mr. Trump’s assessment of the zones’ early performance. The authors, Patrick Kennedy and Harrison Wheeler, are graduate economics students who were granted access to anonymous tax returns filed electronically. Mr. Kennedy is also an economic analyst at the congressional Joint Committee on Taxation.
The study suggests that in 2019, only about 16 percent of the 8,000 census tracts nationwide that were designated by state officials as opportunity zones using criteria set under the Trump administration received any investment at all. Rural areas received almost no investment. Most of the capital was concentrated in a small slice of zones.
Investors mostly flocked to real estate, construction and finance businesses in areas “with pre-existing upward trends in population, income and home values” that predated the creation of the zones, along with “declining shares of elderly and nonwhite residents,” the authors wrote.
The study does not address whether the investments created tangible economic benefits for residents of the zones, or track investments after 2019.
Supporters of the zones say the study includes signs of promise for the program, including that every state saw at least some investment in a zone, but is not a complete view of the program or its potential. They say regulations that the Trump administration completed at the end of 2019 will pave the way for larger and more diverse investments in the years to come.
Supporters and critics alike have pushed Mr. Biden’s team to act unilaterally, and to urge Congress to pass new legislation, in order to improve the zones and try to drive a higher share of investment to projects that will benefit people and businesses in impoverished rural, urban and suburban swaths of the country.
A collection of business groups, investor organizations and others involved in the zones — including the U.S. Chamber of Commerce and the Economic Innovation Group, the Washington think tank that first proposed the opportunity zone concept — suggested detailed changes to the administration last month. That included changes the Treasury Department and Congress could make to improve the program’s performance, including new reporting requirements for investments in the zones and additional flexibility to allow investors to put money into affordable housing projects.
“The opportunity zones incentive is well on its way toward making its intended impact in struggling communities across the country,” they wrote, “but its effectiveness could be enhanced through a number of targeted improvements.”
John Lettieri, the president of the innovation group, said that the need for improvements to the program had been clear for years, and that the Berkeley study did not show it was failing.
“We’re grading an incomplete. It’s far too early, and the data are too incomplete, to draw definitive conclusions about what is and is not working,” Mr. Lettieri said. “In the absence of all the things that create a stable market, to nevertheless see a stable market taking shape is promising.”
Opportunity zones convey tax advantages to investors who take the proceeds of a capital gain, like the sale of a stock or a business, and invest them through a fund into a qualifying project in a designated zone. They were a largely overlooked provision of Mr. Trump’s tax law when Congress was debating it in 2017, but after the law’s signing, the zones have stirred interest from investors on Wall Street, along with philanthropists and city leaders looking to revitalize distressed areas.
Critics of the program say the regulations issued by Mr. Trump’s Treasury Department, which were meant to clarify what sort of investments would qualify for the special tax treatment, are unlikely to drive much investment into the sorts of projects that would help struggling people and communities, such as new businesses that would create jobs in areas with persistently high unemployment. Critics say evidence suggests the zones could be rewarding wealthy investors for projects that might well have happened even without the tax breaks. That includes a Mississippi sawmill that Mr. Trump spotlighted in 2019, which a new owner agreed to buy even before state officials decided to designate an area including the mill as an opportunity zone.
“It’s hard to see any evidence that low- and moderate-income people are benefiting from this incentive,” said Brett Theodos, director of the Community Development Economic Hub at the Urban Institute in Washington. “The Biden administration right now could institute reforms and make this program work a lot better for communities.”
While campaigning for president, Mr. Biden promised to improve the zones, seeing that as a way to bring about more economic equity. Among his promises was to require detailed new disclosure by investors in the zones in order to better track their effects on the distressed communities they are meant to help.
“We cannot close the racial wealth gap if we allow billionaires to exploit opportunity zones tax breaks to pad their wealth,” his campaign said as part of its Build Back Better agenda, “rather than investing in projects that benefit distressed low-income communities and Americans that are struggling to make ends meet.”
The Treasury has already issued one regulation governing the zones, and more are on the way. Still, the program has not yet risen to the top of the president’s tax agenda, administration officials say, given the other priorities that the White House is trying to push through Congress, including a $2.3 trillion infrastructure package.
Mr. Biden’s economic team has not waded deeply into a bipartisan debate on Capitol Hill over how to apply new rules over what projects can qualify for the tax breaks associated with the zones, or whether to strip some wealthier communities of their opportunity zone status. But administration officials are aware of the new study and concerned about its conclusions. They are particularly interested — as Mr. Biden promised in the campaign — in efforts to increase transparency and affordable housing investment in the zones.
In many cases, the administration’s plans line up with what critics and supporters are calling for. In others, the sides disagree. Mr. Theodos is pushing the administration to embrace a sort of government certification process for investment in the zones — essentially requiring officials to sign off on projects that are worthy of the tax breaks. Mr. Lettieri said such a requirement would cripple the program.
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