Opportunity Zones: Promise or Profiteering?

The $1.5 trillion tax cut that was signed into law at the end of last year was largely a massive giveaway to corporations and wealthy individuals. However, a smaller provision that was added to the bill near the end of the process is getting a lot of attention from cities and states: “Opportunity Zones”. This piece of the tax plan could potentially bring economic benefits to distressed communities across the country.

Opportunity Zones would provide tax incentives to encourage investments in targeted distressed areas. The zones were added to the tax bill by Senator Tim Scott, a Republican from South Carolina. In past bills, Democrats have also voiced support for Opportunity Zones in both the House and Senate.

Since the Great Recession, national economic growth has become increasingly concentrated in large metropolitan areas, leaving smaller metropolitan and rural areas farther behind. Opportunity Zones are designed to change that by attracting more funds from corporations and investors to these neglected areas.

Under the proposal, governors in each state and territory (or, in the case of the District of Columbia, the mayor) will designate Opportunity Zones for investment in low-income and high-poverty census tracts. The new program uses the definition of “low-income community” that is used for the New Markets Tax Credit. Governors can only designate up to a quarter of the tracts in their jurisdictions as Opportunity Zones, and these designations must be certified by the Secretary of the Treasury.

Investors or financial institutions can then create Opportunity Funds to make investments in real estate developments or new businesses in the certified Opportunity Zones. Funds must maintain 90% of their holding in Opportunity Zone properties or businesses, so in theory, these funds could direct much needed capital to the targeted areas. Investors would be able to defer tax payments or be exempt from paying taxes on their profits from the funds entirely, depending on how long they hold the investment.

While Opportunity Zones could be a great way to spur investment in distressed communities across the country on paper, past efforts to use tax incentives to spur economic development in distressed areas have produced mixed results. Programs such as Enterprise Zones and Empowerment Zones have had wildly disparate impacts on communities. For example, research on California’s Enterprise Zones suggests no positive impact on employment, and this and other studies reveal that lower-income workers do not benefit from these investments because disparities in how employment opportunities are distributed remain a challenge.

Other factors to weigh include how to avoid subsidizing investments that were already planned and how to make sure the most vulnerable members of these communities—not just developers, investors and new residents—can benefit from these investments.

For example, research examining place-based programs, which also include federal Empowerment Zones, underscore additional concerns. Housing prices, not surprisingly, generally increase, which can lead to displacement, evictions and other negative impacts if effective strategies to mitigate these are not implemented to benefit existing residents.

Another concern is that the legislation that includes Opportunity Zones, the Tax Cuts and Jobs Act, was so poorly and hastily drafted that numerous substantive and technical corrections are needed to meet the bill’s intent. It is possible that the language in this small section of H.R. 1 includes errors that may complicate its implementation.

While not an error of omission, one major oversight in the design of the Opportunity Zones provision is that it ignores housing challenges. For starters, local residents in certified Opportunity Zones are likely to experience price shocks from the infusion of capital into their communities. Homeownership remains the great unfinished business of the economic recovery following the Great Recession, as rates of single-family homeownership remain in flux across the country. Given the great need to create and rehabilitate starter housing stock, the intended impact of the Opportunity Zones provision will be limited absent a corrections bill or other vehicle to address the fact that the Tax Cuts and Jobs Act makes no investments in homeownership in the targeted communities.

One possible fix is a targeted tax credit program, such as the Neighborhood Homes Investment Act, a version of which was introduced in 2004. This program would enhance Opportunity Zones in a few ways. Tax credits would expand and improve the quality of the community’s housing, adding value to targeted buyers. It could add owner-occupied homes in communities that have experienced loss of wealth and homeownership. And, it would offer some families a way to insulate themselves from inevitable housing price increases.

Regardless of the flaws of the proposal, Opportunity Zones can be beneficial to low- and moderate-income families, especially if the identified flaws are addressed. Unfortunately, the process is scheduled to move very quickly, which may present its own challenges. Governors have until March 21 to designate their census tracts, or until April 20 if they seek a 30-day extension. From there, the Secretary of the Treasury has 30 days to certify jurisdictions’ Opportunity Zones. This is a tight timeframe, considering that further issues will need to be resolved around the Opportunity Funds and exactly how they function as well.

When it comes to the true effectiveness of this proposal in helping lift the economic prospects of struggling communities and their residents, the devil will be in the details and only time will tell. Meanwhile, the time for concerned local governments, organizations and individuals to get involved in shaping the future of Opportunity Zones is now.

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