The world’s two richest men, who committed billions of dollars of their own money to a private space race, are now eligible for an extra boost from the federal government: a tax break intended to help poor communities.
Jeff Bezos and Elon Musk had competed for nearly a decade to develop engines and rockets through their privately owned space companies when the perk came their way in 2018. Their companies' sites were included among the thousands of tracts across the U.S. designated as Qualified Opportunity Zones, part of President Donald Trump’s plan to use tax breaks to attract investments and jobs to distressed neighborhoods.
At the time, Musk’s Space Exploration Technologies Corp. was building a launch operation along the Texas-Mexico border. Bezos’s Blue Origin had struck a deal to build a $200 million rocket engine plant in an Alabama research park. The companies had already committed to job creation and secured local tax breaks.
The billionaires’ qualification for the federal benefit, which hasn’t been previously reported, enables them to avoid capital gains taxes on money they steer into opportunity zone operations. Those investments can then grow tax-free, and if the billionaires keep their investments in place for a decade, any appreciation can be shielded from federal capital gains taxes forever.
That would be a valuable break for Bezos, whose Amazon.com Inc. gains have made him the world’s richest individual, and Musk, who just became the planet’s second-wealthiest person as the value of his Tesla Inc. stake has swelled.
Their space gambits could fizzle, of course. But they could also generate lofty profits for the pair, who have already received billions of dollars in federal space contracts between them, including for Musk’s SpaceX to deliver four astronauts to the International Space Station last month. Musk said this week he has moved to Texas in part to be closer to SpaceX’s operations.
A third billionaire with celestial ambitions is also poised to benefit. Sir Richard Branson, currently No. 379 on Bloomberg’s global wealth list, is pursuing space ambitions through a public company, Virgin Galactic, that operates from California and New Mexico sites that were also included in the program.
The opportunity zone incentive has come under fire since it was introduced as part of Trump’s signature tax package. Detractors, including academics, neighborhood activists and tax-fairness advocates, say the program has delivered scant benefits to the impoverished areas it was meant to help. Instead, they see little more than tax breaks to wealthy investors.
The space trio’s eligibility rankles these critics in particular, because the plan was designed to spur new investments rather than offer incentives for existing enterprises. But as the proposal became policy, its wording was broadened so that projects that were already in the works in areas that gained the designation—like those of Musk, Bezos and Branson—would qualify as well. The Trump administration’s Council of Economic Advisers determined in August that nearly one-third of the investments eligible for these federal tax breaks “would have occurred anyway,” without the incentive.
“It would be a gross misuse of scarce resources to be subsidizing billionaires to go out into space when there are people struggling with real problems here on earth,” said Brett Theodos, a community development expert who has studied the program for the Urban Institute.
There’s little hard information to stand up or knock down criticisms like those, in part because the program’s scant data collection makes it all but impossible to weigh the program’s local benefits against its long-term costs to taxpayers.
For example, companies in opportunity zones aren’t required to disclose whether they're claiming the tax break. Those that do tap the benefit aren’t obligated to create new positions or document any job creation, as many previous development programs demanded.
The lack of transparency extended to how zones were selected. State officials, who were asked to pick impoverished census tracts for inclusion in the federal program, weren’t required to seek public input before making their choices. Loose selection standards allowed state and local officials in some areas to dole out the federal breaks based on political favoritism rather than economic need, according to a Duke law school study, which didn't examine the billionaires' tracts.
The three billionaires and their companies didn't address questions from Bloomberg News about whether they asked state officials for the designation for their territories or whether they intended to use the break; Bezos’s Blue Origin declined to comment for this article and officials for SpaceX didn’t respond to requests for comment.
“We have been members of our communities in California for over a decade and in New Mexico for almost a decade. We have not taken advantage of opportunity zone tax incentives,” said a Virgin Galactic spokeswoman. The company didn't comment on whether it intended to use the break for any future profits.
State and local officials in these areas see not only new jobs but also intangibles, like optimism, that a backyard moonshot project can generate. They said they based their opportunity zone selections on the economic need of the communities. Because the billionaires’ companies have the potential to create hundreds of new jobs, local community leaders said they welcomed any federal incentives that might encourage that growth. Musk’s SpaceX launch site in Texas, for example, has brought 500 jobs to the region since 2014, according to a local space development official, although it couldn't be determined whether any of them can be attributed to the recent opportunity zone breaks.
It’s unclear whether President-elect Joe Biden will bring radical changes to the effort. One of his close economic advisers, Jared Bernstein, supports the program and co-wrote the research paper upon which it is based. Biden has pledged to continue it while requiring investors to show the projects benefit the community.
The program’s opacity frustrates even supporters such as Senator Angus King, an independent from Maine who caucuses with Democrats.
“This is taxpayer money,” said King, who has co-sponsored a bill to mandate more disclosure from companies and funds that invest in the zones. “Taxpayers have the right to know who is using it, how much it’s going to cost, and whether the project being subsidized will add economic activity to the community, like it’s supposed to.”
There’s no dispute that Musk is spurring economic activity around Boca Chica Village, a settlement at Texas’s southernmost edge. What’s less clear is how much new opportunity the program is creating for residents.
A modest refuge for a few dozen birders and retirees, Boca Chica Village sits at the confluence of white-sand beach, dunes and marshes. When Musk sniffed around the area nearly a decade ago in search of a launch site for SpaceX, local officials and then-Texas Governor Rick Perry lured him with more than $30 million in incentives. Breaking ground on the site in 2014, Musk cited multiple goals: to save humanity by colonizing Mars and to bring prosperity to South Texas by making it the next Cape Canaveral.
Residents, some of whom live just 100 yards from the launch site, worried that political leaders could sacrifice their village to Musk’s galactic dream. “We just kept hoping he would run out of money,” said Cheryl Stevens, 60, who bought her bungalow in 2005 and rented it for $100 a night to birdwatchers.
In the fall of 2018, Boca Chica residents began to notice a flurry of activity. Giant satellite dish antennae were brought in to build a ground tracking station for spacecraft. Welders and generators worked around the clock. Rocket modules towered above the site. As the site expanded, SpaceX also began buying up Boca Chica’s three dozen modest homes.
Musk eventually revealed his new plan in filings with the Federal Aviation Administration. Although SpaceX still had its eyes on Mars, according to the filing, the site would also be used for testing in preparation for putting thousands of satellites into space and building a global broadband network called Starlink.
The building activity began a few months after the site was named an opportunity zone. It’s unclear whether those two events were linked. Even so, any capital gains that Musk deployed through his SpaceX would be eligible for the opportunity zone breaks — the millions of dollars that SpaceX has spent to build hangars and launch pads, the cost of completing a luxury resort for space tourists now envisioned at the site, and the payments to buy locals out of their homes.
Musk, who served on two of Trump's business advisory councils early in the administration, has publicly courted and won subsidies for previous projects. SpaceX declined to respond to emails and telephone calls requesting comment about the project.
The area around Boca Chica is a natural choice for development incentives. Twenty miles to the west is one of the poorest U.S. cities, Brownsville, with a downtown area spurned by investors.
Ron Garza, who was executive director of the Lower Rio Grande Valley Development Council, said that Governor Greg Abbott’s administration gave local officials only 48 hours to suggest which of the dozens of census tracts around Brownsville were most needy. Garza said many of the officials wanted dense downtown areas to be chosen so that more residents might benefit.
Abbott and his economic development office declined to discuss why they selected Boca Chica over other blighted areas in Brownsville or whether they discussed the issue with SpaceX or its lobbyists.
As the SpaceX site grew, it became clear that it could not coexist with Boca Chica. Test launches that began in 2019 occasionally shattered windows. One launch started brushfires that burned through 100 acres of a nearby wildlife refuge. The road from Brownsville was shut down for launch days, leaving locals stranded and shutting Brownsville residents’ public beach access.
Musk announced in 2019 that SpaceX would buy out all the Boca Chica homes he hadn’t already purchased. Homes in the area had previously changed hands for $85,000 or $90,000, and SpaceX began offering property owners three times their homes’ appraised value, according to letters it sent to residents. Many took the deals. About a half dozen holdouts remain.
Stevens, who accepted SpaceX’s buyout but declined to reveal the amount, said the money wouldn’t be enough to relocate to a spot that would match Boca Chica’s unobstructed ocean views, solitude and starry night skies. “What they gave me will buy a house, but it won’t buy me a house anywhere like this,” she said.
In the long haul, a major space port could transform the entire surrounding Rio Grande Valley, according to Gilberto Salinas, who helped recruit the company to the area a decade ago when he was a member of the Brownsville development council. Salinas, now a member of the Texas Aerospace and Aviation Advisory Committee, said the project was an economic necessity for one of the country’s poorest communities. “For our youth to be able to dream big, and have an interstellar career, in their own backyard? That’s priceless,” he said.
For Bezos, there were no worries about displacing a residential neighborhood for his rocket engine plant.
The opportunity zone program was still languishing in Congress in 2017 when Bezos’s Blue Origin announced it would set up operations in Cummings Research Park, a 3,000-acre crucible of Fortune 500 companies, high-tech start-ups and university laboratories in Huntsville, Alabama. The research park, founded by space pioneer Wernher Von Braun, made logistical sense for Blue Origin: It’s close to NASA’s Marshall Space Center, which helped earn Huntsville the nickname “Rocket City.” Alabama officials helped make it more financially appealing, too, by giving Blue Origin $16 million in incentives.
The following year, as the company finalized its construction plans, Alabama Governor Kay Ivey’s administration included Cummings’s census tract on its list of opportunity zones. Blue Origin could potentially save tens of millions of dollars in federal taxes if it avails itself of the benefit for the $200 million plant, considering the 20% tax rate on capital gains in 2018. The company has said that at peak production, the rocket plant could employ 400 people.
The park itself is the antithesis of economic distress, with 26,000 jobs and 300 companies including Lockheed Martin, Teledyne and Booz Allen Hamilton. The vast majority of its workers commute from elsewhere. But the key qualifying factor for opportunity zones is the per-capita income of a census tract’s full-time residents, which is below Huntsville’s median. The park is located near a public housing project and a few low-income neighborhoods, satisfying the program’s definition of economically troubled.
Even some people who run Cummings were surprised to learn it was among Huntsville’s 10 chosen tracts. Erin Koshut, its executive director, said its officials didn’t discuss the program with the governor’s office until after the selection.
Ivey’s office declined to respond to questions about why the research park’s census tract was chosen over another one of Huntsville’s struggling neighborhoods. Ivey’s office said it didn’t discuss the matter with Blue Origin.
Alex Flachsbart, who founded a nonprofit group that connects investors with Alabama opportunity zones, said Cummings has so much potential to create jobs that he believes it was a wise choice by the governor’s office. “If you want to turn an area around, jobs are the factor,” he said.
An emerging criticism of opportunity zones is that the new investments can price residents out of local housing. In the neighborhoods near Cummings, it’s a mixed picture. Some modest housing is being built in the zone, said Harrison Diamond, Huntsville’s director of economic development. But there are also high-end apartment complexes in the works near the park where rents would be out of reach of many local residents, he said. Although some younger families are moving in, he said, “we’re still waiting for more changes to help lift the neighborhood.”
Mary Ellen Judah, an affordable housing advocate, called the program a missed opportunity. “There was very little outreach beforehand to people in the area, so it’s no surprise that they haven’t seen the benefit,” said Judah, executive director of the group Neighborhood Concepts.
For all the rivalry between Musk and Bezos, Branson is outpacing them in the opportunity zone space race—with projects in California and New Mexico to advance his goal of charging would-be space tourists for suborbital flights.
Branson’s Virgin Galactic is building its so-called SpaceShipTwo at the Mojave Air and Space Port in California, a civilian testing facility that is home to a handful of other aerospace companies and is part of a designated opportunity zone.
Virgin Galactic also announced this year that it would operate space tourism flights out of Spaceport America, a sleek launch field and terminal in New Mexico. The state spent more than $220 million in taxpayer funds to build the facility more than a decade ago—before the opportunity zone program had even been proposed—with the understanding that Virgin would one day base its tourist flight operations there. The opportunity zone benefit could be applied to ongoing lease payments and site improvements. That operation is expected to create about 200 jobs, New Mexico economic development officials said.
New Mexico officials declined to say whether Branson asked for the Virgin Galactic location to be included in the program. Local officials in California said they didn’t have discussions with anyone at Virgin Galactic and pushed to have the Mojave site included because of its job-creation potential. In filings with the Securities and Exchange Commission, the company indicates that it hasn’t yet paid federal taxes because it hasn’t begun flying paying passengers or turned a profit.
Service at Spaceport America is scheduled to begin early next year, with Branson as the first passenger. Hundreds of people have put down a deposit on the $250,000 fare for a suborbital flight. Virgin Galactic has said it expects to become profitable in 2021. Some analysts predict the company’s annual revenue could top $1 billion in a few years.
Biden, who vows to eliminate many of Trump’s tax breaks for the wealthy, has indicated that he will preserve opportunity zones while pushing for more transparency and better deals for communities.
In the meantime, financial advisers who have been marketing opportunity zones to investors have found a silver lining in Biden’s proposal to raise the tax rate on capital gains: It would make the opportunity zone subsidy even more valuable.
This article was provided by Bloomberg News.
