Opportunity Zones: Gambling with Our General Welfare
Jen L. Davison*
The economic inequality gap in America is in a crescendo. From WWII to the 1970s, economic growth was generally steady and prosperity was increasingly shared, but since then growth has slowed, the income gap has increased, and wealth has become highly concentrated among fewer people. An alarming 45 million Americans now live below the poverty threshold, with 140 million classified as poor or low wealth. The distribution of this remarkable economic inequality is not evenly spread. For the past forty years, “[mi]xed-income neighborhoods, and with them mixed-income schools and playgrounds, have been replaced by a rapidly growing number of neighborhoods that are either very poor or very affluent.”
When the market fails neighborhoods, legislation can intervene. The Constitution creates a fundamental tie between federal taxing and spending powers and the general welfare of America’s people. Article I of the Constitution spells out this power-bound-by-intent relationship: “The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the . . . general Welfare of the United States.” During the Great Depression, the Supreme Court definitively adopted the perspective that taxing and spending are constitutionally constrained by their intent, which must be for the general welfare. Fiscal policies based in legislation flowing from this authority have the advantage of being able to “target specific communities.” Out of these powers come federal tax bills, including the Tax Cuts and Job Acts (TCJA) and its creation of Opportunity Zones (OZs).
Opportunity Zones Create Particular—Not General—Welfare
Sean Parker was an early investor in Facebook who was worried about how much he would owe in taxes when he sold his stock. Joining forces with other billionaires, his coalition began lobbying Congress for a new tool to deal with their capital gains. As a result, at the end of 2017, the TCJA was passed, heralding the dawn of a seemingly uncontroversial new program called Opportunity Zones. The program was built to limit the capital gains tax liability of corporations and financiers while spurring the economic revitalization of America’s poorest neighborhoods.
TCJA empowered each governor to designate one quarter of their low-income, high-poverty census tracts in their state or territory—often marked by high unemployment, population decline, vacant buildings, and residents with low income and/or education levels—as OZs. Meanwhile, hedge funds and banks created Qualified Opportunity Funds (QOFs), investment vehicles organized to hold 90% or more of their assets in OZs. Investors could qualify for the program if they located 70% of their tangible property in an OZ. Once investors rolled their unrealized capital gains into a QOF, they began temporarily deferring some of their capital gains taxes. The longer they retained that investment, the greater the guaranteed tax relief. However, there were no such guarantees of economic benefit for the communities identified for investment. Their benefit from OZs was a gamble.
OZ Reforms and the General Welfare
So far, OZ investors can look forward to cashing in on tax-free capital gains. In contrast, economically impoverished communities can look forward to mostly unrealized gains. These results suggest that Congress has delegated its spending power by tax incentive in the OZ program, but it has not effectively delegated the general welfare intent that serves to guide and limit that spending power. Among his economic plans, President-elect Biden has proposed reforms to the OZ program. Perhaps these reforms will be the necessary tether binding OZs to the welfare of our economically depressed communities; those reforms are sorely needed. But the tale of OZs also serve as a reminder. In a time when private-government partnerships are an increasingly new normal for the U.S., and when COVID-19 is causing widespread economic desperation, Congress should enact fiscal policies that do not surrender general welfare outcomes into the hands of those driven by particular welfare outcomes.
* J.D. Candidate (2021), University of Minnesota Law School. The author lives in an Opportunity Zone in Cedar-Riverside, Minneapolis, Minnesota.
 Chad Stone et al., A Guide to Statistics on Historical Trends in Income Inequality, Ctr. on Budget & Pol’y Priorities, (Jan. 13, 2020), https://www.cbpp.org/research/poverty-and-inequality/a-guide-to-statistics-on-historical-trends-in-income-inequality.
 IMF, United States of America: Staff Concluding Statement of the 2019 Article IV Mission (2019), https://www.imf.org/en/News/Articles/2019/06/06/mcs060619-united-states-staff-concluding-statement-of-the-2019-article-iv-mission.
 Reverend William Barber, Opinion, Trump’s Greatest Vulnerability is the Economy—Just Ask Poor Americans, The Guardian (Feb. 11, 2020), https://www.theguardian.com/commentisfree/2020/feb/11/trump-economy-poor-americans-vulnerability; The Daily Social Distancing Show, Thomas Piketty—Why Capitalism Must Be Reformed, YouTube (May 6, 2020), https://www.youtube.com/watch?v=XtahuPcsNVM (featuring economist Thomas Piketty who observes, “In the past three decades, we’ve seen a lot more billionaires, but we’ve seen a lot less growth. And so in the end, the idea that you get prosperity out of inequality just didn’t work out.”).
 Sean F. Reardon & Kendra Bischoff, No Neighborhood is an Island, in The Dream Revisited: Contemporary Debates About Housing, Segregation, and Opportunity in the Twenty-First Century 56 (Ingrid Gould Ellen & Justin Peter Steil eds., 2019).
 Troy Segal, Monetary Policy vs. Fiscal Policy: What’s the Difference?, Investopedia.com (May 5, 2020), https://www.investopedia.com/ask/answers/100314/whats-difference-between-monetary-policy-and-fiscal-policy.asp.
 U.S. Const. art. I, § 8, cl. 1.
 United States v. Butler, 297 U.S. 1, 64 (1936) (“The true construction undoubtedly is that the only thing granted is the power to tax for the purpose of providing funds for payment of the nation’s debts and making provision for the general welfare.”); Helvering v. Davis, 301 U.S. 619, 641 (1937):
Nor is the concept of the general welfare static. Needs that were narrow or parochial a century ago may be interwoven in our day with the well-being of the nation. What is critical or urgent changes with the times. The purge of nation-wide calamity that began in 1929 has taught us many lessons. Not the least is the solidarity of interests that may once have seemed to be divided. . . . Rescue becomes necessary irrespective of the cause. The hope behind this statute is to save men and women from the rigors of the poor house as well as from the haunting fear that such a lot awaits them when journey’s end is near.
In deciding if a particular expenditure is intended to serve the general welfare, courts defer to Congress “unless the choice is clearly wrong, a display of arbitrary power, [or] not an exercise of judgment.” Helvering, 301 U.S. at 640.
 See Segal, supra note 6.
 Jesse Drucker & Eric Lipton, How a Trump Tax Break to Help Poor Communities Became a Windfall for the Rich, The Bonanza, N.Y. Times (Aug. 31, 2019), https://www.nytimes.com/2019/08/31/business/tax-opportunity-zones.html (quoting Parker who said, “When you are a founder of Facebook, and you own a lot of stock, . . . you spend a lot of time thinking about capital gains”).
 Ctr. for Responsive Politics, Client Profile: Economic Innovation Group, https://www.opensecrets.org/federal-lobbying/clients/summary?cycle=2015&id=D000068054,
 Tax Cuts & Jobs Act, H.R. 1, 115th Cong., § 13823 (2017), https://www.congress.gov/115/bills/hr1/BILLS-115hr1enr.pdf. Six pages of the Act are devoted to Opportunity Zones and are now housed in the Internal Revenue Code under Title 26, Subtitle A-Income Taxes, Chapter 1-Normal Taxes and Surtaxes, Subchapter Z-Opportunity Zones. This OZ program was never debated on the floor of the House or Senate. See Jim Tankersley, Tucked Into the Tax Bill, a Plan to Help Distressed America, N.Y. Times (Jan. 29, 2018), https://www.nytimes.com/2018/01/29/business/tax-bill-economic-recovery-opportunity-zones.html.
 See Tankersley, supra note 11.
 Treas. Reg. § 1400Z-1 (2019).
 Treas. Reg. § 1400Z-2(a) (2019).
 When combined, the 90% QOF requirement and the 70% tangible property requirement means QOFs set a floor of 63% investment in an OZ. Alec Fornwalt & John Buhl, Treasury Department Proposes New Regulations for Opportunity Zones, Tax Found. (Oct. 22, 2018), https://taxfoundation.org/new-proposed-opportunity-zones-regulations/.
 Treas. Reg. § 1400Z-2(a)-(b) (2019).
 Treas. Reg. §§ 1400Z-2(b)(B)(iii)-(iv), 1400Z-2(c) (2019). See also Forrest David Milder, INSIGHT: A Dozen Things You Should Know About Setting Up an Opportunity Fund, Bloomberg Tax (Nov. 29, 2018), https://news.bloombergtax.com/daily-tax-report/insight-a-dozen-things-you-should-know-about-setting-up-an-opportunity-fund?utm_source=twitter&utm_medium=taxdesk&utm_campaign=6pm.
 See Steven Bertoni, An Unlikely Group of Billionaires and Politicians has Created the Most Unbelievable Tax Break Ever, Forbes (July 18, 2018, 6:00 AM), https://www.forbes.com/sites/forbesdigitalcovers/2018/07/17/an-unlikely-group-of-billionaires-and-politicians-has-created-the-most-unbelievable-tax-break-ever/#2bbe65171485 (“If everything goes right, a big slice of the estimated $6.1 trillion of paper profits currently resting on American balance sheets is about to go to work to revitalize America’s depressed communities. If all goes wrong, however, it will prove to be one of the biggest tax giveaways in American history, all in service of gentrifying neighborhoods and expelling local residents.”)
 Theodore Schliefer, The New Hotness for Tech Billionaires? Do-gooder Investments They Can Write Off on Their Taxes, Vox (Oct. 16, 2018, 5:50 PM), https://www.vox.com/2018/10/16/17940120/opportunity-zones-sean-parker-silicon-valley-wealth-taxes (“[T]he whole point of tax breaks is that it incentivizes selfish behavior that the government thinks is good for society.”).
 Unrealized Gains: Opportunity Zones and Small Businesses, Smart Growth Am. & Democracy at Work Inst. (Oct. 2020), https://smartgrowthamerica.org/resources/unrealized-gains/.
 The Biden Plan to Build Back Better by Advancing Racial Equity Across the American Economy, “Reform Opportunity Zones to Ensure They Serve Black and Brown Communities, Small Businesses, and Homeowners” (2020), https://joebiden.com/racial-economic-equity/#.
 Nick Routley, Mapping the Uneven Recovery of America’s Small Businesses, World Econ. Forum (Oct. 6, 2020), https://www.weforum.org/agenda/2020/10/mapped-uneven-recovery-us-america-small-businesses-closure/.
 Jody Freeman, Private Parties, Public Functions and the New Administrative Law, 52 Admin. L. Rev. 813, 816, 818 (2000) (“Contemporary regulation might be best described as a regime of “mixed administration” in which private actors and government share regulatory roles . . . . Unlike agencies, however, [private actors] are not generally expected to serve the public interest.”).
 Lauren Bauer, Kristen E. Broady, Wendy Edelberg, & Jimmy O’Donnell, Ten Facts about COVID-19 and the U.S. Economy, Brookings Inst. (Sept. 17, 2020), https://www.brookings.edu/research/ten-facts-about-covid-19-and-the-u-s-economy/ (documenting facts ranging from decreased small business revenue to unemployment, and from rent nonpayment to food insecurity).