- Most changes in the Tax Cuts and Jobs Act, the tax-reform law pushed by President Donald Trump and Republicans in December 2017, have been a dud for the economy.
- But there was one bipartisan idea, called "opportunity zones," that has shown promise.
- Opportunity zones are designed to move capital toward underperforming areas in the US.
- While there are risks that opportunity zones could be abused, there are also promising signs the tax break could help boost struggling communities.
- Jared Bernstein is a senior fellow at the Center on Budget and Policy Priorities. Bernstein served as the chief economist and economic adviser to Vice President Joe Biden.
- Visit Business Insider’s homepage for more stories.
Most of the changes to tax policy in the Tax Cuts and Jobs Act, the 2017 tax cut passed by Republicans in Congress, were designed to cut taxes for wealthy households and corporations, and these cuts have worsened inequality and led to much higher deficits.
But there was one bipartisan policy in the tax plan with the potential to help low-income people by incentivizing investments in their communities: "opportunity zones."
Eligibility for this tax break on capital gains (income from selling an appreciated asset) is conditioned on making long-term investments in areas designated as distressed. It is one part of the tax plan that has real potential, but, like any bank-shot tax break, it also carries significant risks, including wasteful subsidies, tax sheltering, and the chance that the program will fail to reach those who need it the most.
It’s far too early to judge which of these outcomes is dominating, but as the program gains momentum, I still think opportunity zones have great potential. In fact, looking at the some of the seeds being planted has boosted my enthusiasm. But the risks have also become more evident.
Opportunity zones are trying to turn around struggling areas
More than 8,700 areas were chosen by state governors and designated by the Treasury Department last year as eligible for the opportunity-zone tax incentive, which is designed to incent patient capital investments in places long suffering from disinvestment.
For the most part (there are notable exceptions), the zones were well chosen. Their average poverty rate is twice that of the nation. Their median income is 63% of that of the country. Residents of the zones have lower educational attainment, and their life expectancy is three years below that of the national average.
One particularly telling statistic is that population growth in designated zones is one-third of that in non-opportunity-zone tracts; in fact, 45% of zone-designated areas have lost population. Such population loss is a reliable sign that a community is in trouble.
Can opportunity zones help turn these places around? The theory of the case is that the tax break, which allows investors to defer and reduce capital-gains taxes, and earn tax-free returns from opportunity-zone investments held for at least a decade, will encourage investors to reexamine communities they’ve rarely afforded a passing glance to because of their own biases, simple uncertainty, or information gaps.
Though I was one of the early progenitors of the idea that became opportunity zones, one of my concerns was that the idea would just fade on the vine as investors couldn’t figure out how to make it work.
At least from the early reaction, I was wrong. Bloomberg’s Justin Fox shows that at least as far as commercial-real-estate transactions go, "volume hasn’t just been rising faster lately in opportunity zones than in also-ran tracts; it’s been rising faster there … than in the rest of the country, too."
Fox and others raise salient concerns about some opportunity-zone real-estate investments, including luxury hotels in "thriving neighborhoods" where the tax breaks look a lot more like windfalls for wealthy investors than anything that will help the poor.
Such early developments need to be documented and elevated because, in a unique characteristic of opportunity zones relative to earlier versions of federal place-based policies, local leaders have the authority to push back on such abuses and proactively shape outcomes. They have wide leeway over permitting and land use within opportunity zones, and ample tools to discourage projects that don’t provide real opportunities for left-behind people and places.
And, in fact, many projects in the spirit of the original idea are underway, including:
- In Charlottesville, Virginia, Habitat for Humanity is planning to use opportunity-zone funds to build 800 homes in a mobile park in an opportunity zone with a 33% poverty rate. Habitat for Humanity will build half the homes, which will be affordable to current low-income residents, and the rest will be market-price homes built by private developers, potentially turning an impoverished area into more of a mixed-income area. The project will also include rent-free commercial space for residents who want to start a business.
- In Newton, Massachusetts, a new opportunity fund — the vehicle through which investments in the zones are made — is working to raise $10 million to acquire and revitalize "small manufacturing companies located in Opportunity Zones in the Northeast and Mid-Atlantic."
- Tapping the first fully capitalized opportunity-zone fund, a developer plans to clean up a polluted brownfield in East Chicago, Indiana, and build a logistics and distribution hub that’s expected to create as many as 3,000 jobs. A legitimate concern with opportunity zones is needlessly subsidizing projects that would have occurred anyway. Well, this area has been listed as a hazardous-waste site since 1997. It’s a good bet that the opportunity-zone program was the deciding factor.
In other words, it’s not hard to find evidence that opportunity zones have promise — and that they pose risks. The bottom line is that it’s far too early to know if we’ve finally identified a way to steer patient capital to places suffering from systemic disinvestment. But there’s enough promise to keep this experiment running.
But at the same time, I’ve watched risks evolve. We need to start collecting baseline data now, which means moving the bipartisan bill requiring such data collection.
My colleague Samantha Jacoby at the Center on Budget and Policy Priorities said "policymakers should prevent wealthy investors from using the OZ program as a massive, wasteful capital gains tax shelter. The rules don’t do enough to stop a pharmaceutical company, for example, from trying to move its valuable intellectual property to an OZ and selling it 10 years later tax-free."
A good rule of tax policy is that a tax break ignored can become a tax break abused.
The stakes are too high to let that happen to an idea with this much potential to give deserving people stuck in places where economic opportunity and upward mobility are as scarce as investment capital. If we get this right, we just might be able to change that.
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