A little-noticed provision of last year’s tax reform push is starting to take shape, and according to an Urban Institute researcher, has the potential to become the nation’s largest economic development program.
Opportunity Zones weren’t initially part of President Trump’s tax reform agenda, and were slipped into the Tax Cuts and Job Act by members of congress, according to Brett Theodos, a researcher at the Urban Institute.
But supporters believe that ultimately, this vehicle for investment can become a vital tool for communities that haven’t benefited from the recent recovery.
The program, which was championed by Sens. Cory Booker (D-NJ) and Tim Scott (R-SC), provides tax benefits and breaks to specifically defined census tracks, based on designations by governors. Investors can claim breaks on capital gains taxes, depending on how long they invest in an area designated as an Opportunity Zone, and receive a deferment on taxes owed.
In particular, the exclusion of capital gains can be a “extremely meaningful investment” in both city and rural areas in need of an economic boost, according to Theodos.
Outside of restrictions on funding “sin” businesses, benefits can be applied to a broad array of investments, including commercial real estate, housing, infrastructure, and even existing and start-up businesses.
The program works by giving wealthy investors an incentive to target distressed areas.
Funding comes from the estimated $2.2 trillion in unrealized capital gains in stocks and mutual funds held by individuals and corporations. Funds will be able to defer and reduce federal tax liability on the sale of these assets if they channel that into an Opportunity Fund and invest in an Opportunity Zone.
According to the Joint Committee on Taxation, the measure is expected to cost the government $7.7 billion between 2018 and 2022, and $1.6 billion over 10 years as deferred taxes are paid.
Theodos sees this as a continuation of the general federal approach to community development over the last few decades. Beginning with the establishment of Community Development Block Grants during President Nixon’s administration in the ‘70s, which gave wide leeway to local communities, the federal government has given local leaders more authority over how to spend development funding.
Opportunity Zones allows state leaders to shape the contours of the program, with investors deciding what projects and businesses will be the most viable.
So far, Opportunity Zones have been approved in 15 states and 3 territories, with other states expected to make their choices within the next month. The Urban Institute created a data set to help leaders choose which tracks may get the biggest boost from the designation.
One worry from supporters of the measure is how the potentially eligible areas are selected for the program. The eligible tracts, defined by poverty rates and income levels, include some areas that aren’t necessarily the most needy.
According to a Wall Street Journal story, areas with lots of students can qualify, due to their low income, as well as fast-gentrifying areas, can qualify. Some of California’s initial Opportunity Zones include parts of Stanford University, as well as fast-gentrifying parts of San Francisco.
But, if leaders designate the areas in true need, says Theodos, the program has great potential due to its open-ended design.
“Once it begins to work and show benefits, we’ll start seeing more and more investment,” says Theodos. “It’s going to be an evolution.”