Building an Economy that Works for Everyone

The Snake Oil in the Rural Development and Opportunity Zone Act

Should Washington taxpayers pay $1.7 million dollars to create one job?

“OZ” is almost synonymous with charlatanism. The Wizard of Oz was just a man behind the curtain pretending he had fearsome powers. Dr. Mehmet Oz from television advocates for astrology and has been called before Congress for selling “miracle” diet pills. And now, traveling fraudsters are trying to get the Washington Legislature to invest in “Opportunity Zones” – OZ.

For almost 40 years, three companies – Advantage Capital, Enhanced Capital and Stonehenge Capital – have peddled their snake oil around the country, promising to spin taxpayer money into gold.

At first they called them “Capital Companies” (CAPCOs). Through CAPCO-sponsored legislation, states gives tax credits to investment capitalists investing in small businesses. Supposedly, this would incentivize the insurance companies funding the investment capitalists to invest money and create lots of jobs.

Those were aggressively promoted around the country throughout that 1980s, 1990s, and 2000s. But after scrutiny, they failed. Every. Single. Time. Washington, D.C., for example, audited their CAPCO program in 2009, finding that after investing $76 million dollars of public money, only 31 jobs were created in 5 years. That’s $2.5 million of taxpayer money per job created.

So just like Blackwater and Safe Seattle, CAPCO hucksters changed the name to avoid the bad press. CAPCOs became “New Markets Tax Credit” programs – same policies, new name. But then these programs started failing and getting bad press, they rebranded again.

Now the mountebanks have presented our Legislature with the “Washington Rural Development and Opportunity Zone Act.” It combines the worst of CAPCOs with the worst of Trump’s 2017 tax cuts for the rich. And it’s basically the same bill they’ve peddled to 13 other states in the last two years.

According to Trump’s tax cut, an “Opportunity Zone” is an economically-distressed community where new investments, may be eligible for preferential tax treatment. It sounds magnanimous. But “economically-distressed” is not a term that means anything under these guidelines. Amazon was eligible for these tax breaks in its abandoned New York City campus, where the median family income was already $130,000 a year and poverty was half the city average.

Under the OZ Act, applicants can apply for part of $60 million in Washington State taxpayer money that they can turn around and invest in rural areas to create jobs. But applicants have to meet several odd and specific criteria, including:

  • Be licensed by the USDA as a for-profit rural business investment company or as a small business investment company, meaning that their main business model is to make more money from moving money around. No Washington State company currently has this certification;
  • Have invested at least $150 million in nonpublic companies located in areas that would be qualified areas if in Washington State and have employees on the jobs for at least four years, meaning no one can found a local company to compete with out-of-state investors;
  • Submit an estimate of the amount of tax revenue and jobs they’ll create as a result of the applicant’s growth investments – sounds good, but could be one job (more on that later);
  • Submit a nonrefundable application fee of $5,000;
  • Be able to rub their stomachs and pat their heads at the same time.

If any applicant meets these qualifications, they could get up to $21 million in state taxpayer money on a first-come, first-served basis. Judging from the past, the people pushing this legislation will be the first in line to reap its benefits.

In 2017, a Pew Charitable Trusts reviewed more than half of these investment programs, all of those for which state information was available. Under those programs, about $2.6 billion in state tax credits was allocated, and $1.6 billion (62 percent!) was managed by Advantage, Enhanced, Stonehenge or their affiliates.

The guidelines only require that companies provide an estimate amount of jobs they’ll create. It could be one job, and the state would have no option but to approve it. Because it’s first-come, first-served, the legislation ties the hands of the government to evaluate proposals on any metric other than meeting the bare minimum of standards.

And the state only has 30 days to review applications, so can’t vet applications properly.

The legislation does not require applicants to demonstrate that they have made successful investments in rural areas or have created high quality jobs – or any jobs.

Multiple states have evaluated the various iterations of this program and have published very critical reports. In 2018, the New York State Department of Taxation and Finance asked their governor to veto their version of the same bill. They said they’d tried this kind of program before, making available up to $400 million in tax credits. In return, they got 188 jobs in 14 years. That comes to $1.7 million per job created.

Should Washington taxpayers pay $1.7 million dollars to create 1 job?

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