A new federal tax incentive intended to help low-income areas could put Oregon taxpayers on the hook for millions of dollars in incentives to downtown Portland developers and investors from across the nation.

Though the opportunity zone program is national, Oregon will feel the tax impact thanks to the state’s own tax code. It automatically mirrors the federal one, so Oregon is effectively offering the same discount a second time on Oregon tax bills.

And it will be felt all the stronger because Gov. Kate Brown, working with Business Oregon, picked some of the state’s hottest real estate markets to be among the zones eligible for the tax incentive.

Critics are now calling on the Legislature to end Oregon’s part of the tax break, which they say will reward investors in projects that would have happened anyway.

A spokeswoman for Brown said she supports the idea of disconnecting from the federal tax code, but she hasn’t publicly pushed for it. In a year when Democrats are focused on passing significant tax increases to pay for K-12 education and public pension costs, such a change might lack momentum.

State officials defended their choices of opportunity zone locations, saying that offering the tax incentives in areas already popular with developers gives Oregon a better chance at triggering an influx of out-of-state cash.

Looking forward, state leaders say they can’t predict how much the opportunity zones will stimulate investment or affect state revenue, questions the Brown administration first raised a year ago but never answered.

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The opportunity zone program, passed by Congress in the waning days of 2017 as part of President Trump’s tax overhaul, allows an investor to sell something that has increased in value, such as stock or real estate, but delay paying taxes on their profits, known as capital gains, if they immediately reinvest in a building or business located in one of the zones.

When those investors sell their stake in the new investment after at least five years, the taxes on their reinvested capital gains are discounted by 10 to 15 percent.

But if they keep the new investment for at least 10 years, taxes on any capital gains reaped from the project are completely wiped away.

Nick Batz, policy and government affairs director for Business Oregon, the state economic development agency, explained the benefit in an email a year ago to agency Director Chris Harder:

“It creates domestic tax havens. If I’m an investor, I park my capital gains in the safest company I can find in one of these zones and wait ten years to withdraw ... tax free.”

But economic development officials view Oregon as competing with other states for opportunity zone dollars.

“We’ve had a growing economy,” Business Oregon spokesman Nathan Buehler said. “But we don’t want to take our foot off the gas.”

The Oregonian/OregonLive’s review of 1,000 pages of public records revealed that Oregon leaders made the decision to go all-in on the opportunity zone program despite lacking answers to two key questions: How much tax revenue the state stands to give up and what economic payoff the investments might yield for Oregonians.

“I suggest we start with staff from an economic development perspective and then we can follow up on the revenue impact side at a later date,” Brown’s chief of staff Nik Blosser wrote in a Feb. 3, 2018, email. “The biggest question I have is how much investment is this likely to incite -- I’m assuming Business Oregon is doing this analysis.”

In an interview a year later, Buehler of Business Oregon said, “The answer is we don’t know.”

In the near term, the state’s tax agency estimates opportunity zones will cost Oregon $10.5 million in lost revenue in the current budget and $15.9 million in the next budget cycle.

That’s just state capital gains taxes that investors will defer on their previous gains — that Oregon could otherwise tax — by plowing the money into the new opportunity zones in Oregon or any other state. A bigger hit will almost certainly come a decade from now, when investors sell their stake in Portland opportunity zone investments.

Although Oregon doesn’t have a handle on that future impact, state economist Mark McMullen said he expects opportunity zones will generate a relatively small portion of future capital gains in Oregon. “The magnitude of the impact is not expected to be large relative to the huge size of total capital gains,” McMullen wrote in an email.

Overall, capital gains are a significant chunk of the state’s $20.5 billion in general fund revenue this biennium. From 2017 through 2018, the state could receive roughly $1.4 billion in capital gains tax revenue, given taxable gains and average tax rate information provided by the Oregon Office of Economic Analysis.

Still, the progressive tax advocacy group Tax Fairness Oregon and others are pushing lawmakers to end Oregon’s part of the tax break during the legislative session underway in Salem. House Bill 2144, introduced by the House Revenue Committee, would uncouple Oregon’s tax conformity for opportunity zones.

The double tax break is "clearly going to benefit the owners of projects that were going to happen anyway,” said Jody Wiser of Tax Fairness Oregon. “There will be some projects that will happen earlier than they might otherwise have gone in, but there’s nothing in there that Oregon’s going to do to create additional public benefit."

Some developers, such as Vanessa Sturgeon of Sturgeon Development Partners, say the incentives are stimulating new investment.

Daniel Hauser, a policy analyst and registered lobbyist with the left-leaning Oregon Center for Public Policy, said the organization supports efforts to end the state tax incentive. Keeping it would mean less money for the state’s coffers and subsidizing “investments that would already be happening,” Hauser said.

However, Hauser said that killing the opportunity zone break ranks low on the policy center’s priorities this session. That’s because it’s unclear how much the double tax break would lower state revenues, whereas the bipartisan momentum to raise business taxes by $1 billion a biennium or more this session would have a huge impact the state’s ability to fund education and other public services.

Sen. Mark Hass, a Beaverton Democrat and chairman of the Senate Finance and Revenue committee, said there are a couple proposals in the Legislature for Oregon to broadly stop copying federal tax code, a practice intended to simplify tax returns.

“This points to a larger issue,” Hass said. “Should the state be connected to federal tax policy that nobody in the state had any role in creating? I think the answer is ‘no.’”

As for why he isn’t working to end the opportunity zone incentive specifically this year, Hass said the lack of information makes it unclear what lawmakers should do.

“I don’t have any intel on the extent they’re being used and whether they’re detrimental or good,” he said. “Business groups haven’t come and said they love it. Consumer groups haven’t come and said they hate it.”

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The program could, in fact, prove a timely shot in the arm for a regional construction market in a slump.

New development proposals have slowed thanks to the rising costs of construction materials and labor paired with flattening rents.

“I think we’re actually going to see some projects come out of the ground now that would not have before,” said Sturgeon, whose Sturgeon Development Partners has proposed building in opportunity zones in Portland and Salem. "I can tell already that money that was just sitting on the books is now going to be used out in the market and invested in projects that are going to create jobs."

Opportunity zone projects would have benefits to Oregon that would offset the loss of state taxes on capital gains, said Buehler, the Business Oregon spokesman. The investments bring an infusion of cash into the economy, generating income taxes on resulting jobs. New construction results in more property tax revenue for cities and schools.

Sturgeon, whose other company, TMT Development, most recently completed the downtown Park Avenue West Tower, is recruiting opportunity zone investors for a $285 million mixed-use tower on one of three sites in central Portland, as well as the renovation of a $43 million downtown Salem hotel.

Sturgeon said the materials sent to prospective investors don’t factor in the matching state tax incentives. Nonetheless, she said, “it’s always disappointing when Oregon decides to break from the federal government in a tax matter.”

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Opportunity zones are scattered throughout nearly every county in the state and throughout the country. But Portland in particular is poised to see an outsized influx of out-of-state investment.

The city’s zones are an outlier nationally because they’re such hot construction zones already. They include downtown Portland, the Pearl District, the South Waterfront and much of the Lloyd District.

Real Capital Analytics, a New York company that analyzed opportunity zones for prospective investors, found Portland opportunity zones saw more than 40 percent of the city’s commercial development by dollar volume over the last four years — even though they contain just 13 percent of the city’s land area and 9 percent of its population.

The opportunity zone program could further concentrate development in those areas, said Jim Costello, a senior vice president for the company. And investors will like that there’s little ambiguity in Portland’s downtown core over which sites are in opportunity zones and which aren’t.

“The pain of traveling around the state and finding deals is negated when it’s very concentrated” in the city’s core, Costello said.

Another report, from the national developers’ coalition Locus, found that Portland’s opportunity zones stood out as some of the most appealing for investors, given their already strong market demand.

But Portland’s opportunity zones also rank high among areas with access to mass transit, a supply of affordable housing and vulnerable populations — such as minority, low-income or disabled residents.

If communities don’t act to protect those assets, Locus director Christopher Coes said, redevelopment in opportunity zones could kick displacement into overdrive.

“Our hope is to make sure they have do-no-harm policies in place,” Coes said. That could include policies that encourage the construction of housing over other uses, as well as affordable housing mandates and tenant protections, he said.

Portland has in place a zoning policy that requires developers to include affordable units in large housing developments, as well as a suite of new tenant protections passed as rents climbed in recent years. Some developers, however, have pointed to these policies as a contributing factor in the construction slowdown.

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City economic development officials are watching with some apprehension to see what the flow of opportunity zone capital could bring.

“I don’t really believe this is structured as an economic development program,” said Justin Douglas, a policy manager at Prosper Portland, the city’s economic development agency. “It’s structured as a way for individuals to shield capital gains taxes, and it just happens to be through investments and businesses in low-income communities.”

Portland took no position on the state’s opportunity zone selections, though one neighborhood — Cully, which has seen some of the city’s fastest-rising home prices in recent years — opted out for fear it would advance gentrification. In a letter to the governor’s economic adviser Jason Lewis-Berry and a long list of state lawmakers and local officials, community groups asked to be left off Brown’s list.

It’s not clear what cities like Portland can do to make sure the tax-advantaged development meets any kind of community need — nor even to monitor what kinds of development it’s attracting.

Instead, they hope to harness it by joining in — by using opportunity zone incentives to develop city-owned sites or selling sites to developers with strict community benefit agreements in place.

“The most control that cities have over something like this is in a case where a municipal agency like Prosper Portland owns real estate,” Douglas said. “Otherwise it’s not clear how a local municipality, through the current structure of the program, could layer on any sort of local rules or notifications.”

— Elliot Njus | enjus@oregonian.com; 503-294-5034; @enjus

— Hillary Borrud | hborrud@oregonian.com | 503-294-4034 | @hborrud

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