Paul L. Caron

Friday, August 30, 2019

Weekly SSRN Tax Article Review And Roundup: Layser Reviews Hemel's A Place For Place In Federal Tax Law

This week, Michelle Layser (Illinois) reviews Daniel Hemel (Chicago), A Place for Place in Federal Tax Law, 45 Ohio N.U. L. Rev. ___ (2019). 

Layser (2018)

Place-based investment tax incentives are nothing new, but they were dragged into the spotlight when Opportunity Zones were introduced through the 2017 Tax Cuts and Jobs Act. Depending on who you ask, OZs are either a long overdue solution to the complicated and administratively inefficient incentives of the past—poised to drive large sums of much-needed capital into otherwise disinvested communities—or a misguided law that may create more problems than it solves. Many academic observers, including myself, view OZs with skepticism. Some are so skeptical that they would recommend we abandon our experiment with place-based investment tax incentives altogether. But Professor Daniel Hemel, expanding on remarks given at the 42nd annual Ohio Northern University Law Review Symposium, argues in his forthcoming essay that there is a place for “place” in federal tax law. I agree.

Hemel begins by defining place-based tax rules as “spatially differentiated” in the sense that “its application depends upon the geographic sites at which persons reside, properties are located, or activities occur.” He distinguishes such rules from other types of tax law that, at least superficially, have a spatial component. A tax rule is not spatially differentiated, for example, merely because it reflects interjurisdictional variation, results in spatial redistribution, or tracks international boundary lines.

Like me, Hemel points to incentives like the Low-Income Housing Tax Credit, the New Markets Tax Credit (NMTC), enterprise zones and Empowerment Zones as examples of laws that meet the definition of place-based tax rules. Also like me, Hemel believes it is time to rethink our approach to these incentives. In essence, Hemel’s suggestion is that we reimagine place by focusing on people. And he’s got some cool ideas for how we can do that.

First, Hemel draws on a theory by economist Danny Yagan to posit that tax law can use place as a “tag,” independent from income, to indicate need or ability to pay. (Income, Hemel explains, is a problematic indicator of ability to pay since it is itself responsive to taxes). By way of example, Hemel points to places that have experienced a cataclysmic economic event that had long-term effects on residents’ ability to accumulate income—events like Hurricane Katrina in New Orleans in 2005. He explains how tax law could address this place-based variation in ability to pay by tracking (or “tagging”) residents who lived in that place at the time of the event in order to direct tax benefits to them in recognition of their place-based need.

Though this proposal raises some questions (Should the law assume all residents of New Orleans in 2005 were similarly affected? For how long? Full disclosure: I lived in New Orleans during Katrina.), there is a lot to like about it. For one thing, it is a clever response to the complication presented by human mobility, which often limits the effectiveness of place-based policies. By using place “as a backward-looking tag for redistribution” rather than adjusting taxes based on current residency, such a law could address place-based disadvantage without creating an incentive for people to remain in those places or to move to them. The proposal also reflects a community-oriented understanding of place that pushes the concept beyond fixed geographic boundaries to prioritize the shared experience of place over mere residency. Since the effects of living in a place may follow people even after they leave, this approach would recognize former residents’ continued membership in that community.

Hemel’s next proposal seeks to leverage human mobility for the benefit of places. Here, he floats the idea of spatially differentiated income tax rates with “steeply progressive rate structures in low-poverty areas and flatter rate structures in high poverty areas.” This, he explains, would create an incentive for low-income households to move to high-income areas with more progressive rate structures, while high-income households would have an incentive to move to low-income areas to benefit from flatter rates. After all, he explains, some degree of gentrification is probably inevitable if we hope to integrate low-income neighborhoods, which are often racially segregated.

My critique of this latter proposal is that it assumes that high-income and low-income households are similarly mobile. Based on what we know about the mobility patterns in low-income communities, however, a more likely result is that most displaced residents would move to other low-income places. This may further concentrate poverty. As Hemel alludes in his essay, my own concerns about gentrification are somewhat at odds with my view that tax law should discourage segregation. Nevertheless, I am skeptical of integration proposals that rely on moving higher-income people into lower-income areas. I am also more optimistic than Hemel about the possibility that there is a place for place itself in tax law—that is, tax rules that target neighborhoods themselves.

In addition to linking place to community like Hemel does in his proposals, I believe that tax laws can also be used to improve low-income neighborhoods for the benefit of residents. And it turns out that some place-based investment tax incentives might be better positioned to achieve that goal than we thought. For example, my forthcoming analysis of 443 NMTC-financed projects from five cities reveals that over half of projects benefited social service organization like homeless shelters, women’s shelters, youth centers; medical facilities like rehab centers and family health clinics; charter schools; community gardens; and similar uses. As I will explain in my forthcoming articles, these types of tax-subsidized projects stand to benefit communities through their impact on community infrastructure.

Despite these critiques, I recommend this essay as a provocation to take seriously the issue of place-based inequality and the possibility that tax law may be part of the solution. This essay should be of interest to any tax scholar interested in investment tax incentives, geography and taxation, or tax and poverty.

Here’s the rest of this week’s SSRN Tax Roundup:

Michelle Layser, Scholarship, Tax, Tax Scholarship, Weekly SSRN Roundup, Weekly Tax Roundup | Permalink