Drive about 14 miles west from here on Ohio State Route 81 and just when you cross I-75, before entering downtown Lima, you will find that you have arrived in a different capital gains tax regime. The grass may not be greener on the other side of I-75, but the capital gains tax rules surely are. If you sell a capital asset at a gain and plow the proceeds into an investment here in Ada, you will owe capital gains tax today and potentially will owe more tax when you sell the Ada asset in the future. If you put the proceeds into an investment in downtown Lima instead, you can potentially defer capital gains tax until 2026, reduce your taxable income by 15 percent, and avoid any capital gains tax when you ultimately liquidate your Lima-based holdings.
Downtown Lima is home to a new opportunity zone created under the December 2017 tax law.1 And it is not the only nearby location where this strange new regime applies. Drive east for 35 miles on U.S. Route 30 and you will arrive at another one of these opportunity zones in Upper Sandusky. You can find another one 40 miles to the northeast, just past Findlay, and yet another east of there in Tiffin. All in all, 320 census tracts across Ohio—in 73 of the state’s 88 counties—are now federally designated opportunity zones where investments are potentially subject to much more complicated, but more generous, capital gains tax rules.2
The opportunity zone provision of the 2017 tax law is one of the most significant experiments with place-based taxation in federal tax history. It is not the first such effort: the now-expired empowerment zone program, established by Congress in 1993, was an earlier, narrower—and in many respects, better targeted—effort at spatial differentiation in federal taxation.3 Several other ongoing federal tax programs—including the Low Income Housing Tax Credit and the New Markets Tax Credit—also have strong spatial components.4 But while place-based taxation is not new, its expansion as part of the 2017 tax law provides an opportune moment to assess what role, if any, geographically differentiated rules ought to play in a tax system that otherwise follows a norm of formal equality with respect to individuals and firms in different domestic locations.
The 2017 tax law’s space odyssey is, I will argue, unlikely to be a successful mission in its own right. The new opportunity zones are virtually no one’s idea of sound tax policy. The legislation is so poorly designed that one wonders whether the flaws might have been intentional: whether this was simply a cynical attempt to give tax breaks to rich donors and more work to well-connected lawyers, all under the guise of aid to distressed communities. I am not yet convinced that the cynical story is right, but not so sure it is wrong either. It is difficult to see how anyone who genuinely sought to lift up communities left behind by the recovery from the Great Recession would have written the law this way.
Yet the design flaws of the opportunity zone program do not (necessarily) augur the failure of all place-based federal tax policies. There are, I will argue, a number of ways in which spatial differentiation can plausibly improve the federal tax system, both on dimensions of efficiency and of equity. An optimistic scenario is that the December 2017 law’s foray into spatially differentiated taxation will draw our attention toward more productive uses of place in federal tax policy. But one must don rose-colored glasses in order to glimpse such a scenario, because the opportunity zone program before our eyes inspires little confidence.
My talk today will examine spatially differentiated federal taxation in three parts. The first part will provide a definition of place-based taxation and a description of previous spatially differentiated federal tax programs. The second part will consider the opportunity zone provisions of the December 2017 tax law, outlining their key features and highlighting their deepest flaws. The third part will sketch a number of more promising paths for place-based federal tax policy.
Hemel, Daniel, "A Place for Place in Federal Tax Law" (2019). Public Law and Legal Theory Working Papers. .