HISTORY BEHIND THE PROGRAM
In 2015, the Economic Innovation Group (EIG) was formed by American entrepreneur and philanthropist, Sean Parker, in hopes of coming up with a place-based policy geared toward giving tax incentives to investors and entrepreneurs who invest their capital in distressed communities throughout America. EIG began by looking at trends in the economic recovery following the great recession that suggested a widening of geographic inequality. So the recovery was much more concentrated than previously seen, concentrated geographically in places that tend to be large superstar metro areas that were already accruing most of the job gains, most of the net business formations that were seen in the year post recession. Certain places that were doing okay, but were failing to gain any traction in their recovery, while other areas, that were doing poorly ended up being phased out.
Typically when the national economy is growing at a strong rate, most places are reflecting that same recovery, in this case, the recovery was not the same for all areas and it suggested a new type of policy challenge. EIG began their analysis by really evaluating the history and the legacy of place-based policy making. They really tried to understand what have been the dimensions of the programs, where have they fallen short of their aspirations, what design features have been reasons for their shortcomings and why? EIG felt that the correct attributes were not built into past place-based policies that would best set up communities for maximum success while creating an easy path for attracting private capital from private investors that have become accustomed to letting their capital gains sit idle for prolonged periods of time to avoid paying taxes.
These lessons learned were the impetus behind the Opportunity Zone concept and by 2016 the Opportunity Zones really began picking up steam as new stand-alone piece of legislation that quickly built strong bipartisan support. By 2017, as the topic of Tax Reform became a spotlight in politics, the OZ programs had over 100 co-signers in the House and Senate, of every region, both Democratic and Republican, in alliance supporting the passing of this legislation.
Opportunity Zones were created in December of 2017 as a part of the tax overhaul signed by President Trump.
When the sweeping Tax Cuts and Jobs Act was signed into law in 2017, the ways it changed the tax treatment of real estate attracted broad attention. Escaping initial notice was a piece of legislation within it, the Investing in Opportunity Act, which incentivized private investment in some of the nation’s most distressed communities. Also hiding in plain sight was philanthropy’s potential role in its ultimate success.
The act grew from bipartisan work by leading economists, and attracted support from both sides of the aisle. It gave governors the opportunity to designate up to 25 percent of their state’s low-income, high poverty census tracts as Opportunity Zones (OZs). Those areas then became eligible for private investments through Opportunity Funds, pools of capital created to stimulate long-term community investments in exchange for significant tax incentives on capital gains.
Opponents of the legislation, however, argue that Opportunity Zones will benefit investors more than communities and pour fuel on to the flames of gentrification. To resolve some of this discrepancy between local excitement and national concern, let’s address some of the most common misconceptions about Opportunity Zones.
Of course, investors will benefit from Opportunity Zones. The incentive is designed so that investors liquidate unrealized capital gains, moving their capital into investment funds created specifically for Opportunity Zone projects. The benefits are threefold: investors can potentially be granted immediate tax deferral for qualifying gains invested in Opportunity Zone funds; up to 15% of the original capital will remain tax-exempt indefinitely if left invested for at least seven years; and capital gains accruing from Opportunity Zones projects will be entirely tax-exempt if held for at least ten years. Clearly, this legislation offers investors a powerful incentive.
Yet there is great potential for communities to benefit as well. While government funding is contentious, over $6 trillion in unrealized capital gains lies untapped, and there is significant demand for investment capital throughout the country. The average poverty rate across the 8,762 Opportunity Zones is estimated to be nearly 31 percent, in contrast to a national average of 12 percent, and the unemployment rate of 14.4 percent is well above the 3.8 percent national average. Meanwhile, post-recession economic growth is concentrated in a small number of wealthy metro areas; five of these areas alone produced as many new businesses as the rest of the country combined from 2010 to 2014, according to the Economic Innovation Group. It is clear that without intervention, distressed communities are unlikely to realize the kind of economic development needed to reduce poverty – if they realize economic growth at all. That’s why Opportunity Zones were designed to be scaleable, commensurate with Main Street America’s need for capital. But more than this, they have been designed to empower the very communities that successive interventions have left behind.
Perhaps the most pervasive concern around Opportunity Zones is that they will accelerate gentrification. Although gentrification has brought new buildings, chic eateries, and tech-fueled economic growth to cities such as San Francisco, Portland, and Seattle, it has also ravaged existing communities. As a wealthier class colonizes revived spaces, crippling increases in rent push out hard-working residents who have lived in the area for decades.
Critics of Opportunity Zones are concerned that investors, incentivized by the high profits associated with gentrified economic development, will pour their capital into areas which have already experienced significant socioeconomic change. They fear that additional investment in these areas places low- and moderate-income residents at risk for displacement, hurting rather than helping Opportunity Zones’ intended beneficiaries and replicating the experiences of cities like San Francisco and Seattle. Furthermore, finite funding would be wasted on the communities most likely to see continued growth regardless. Based on these concerns, the Urban Institute conducted an analysis of investment flows and socioeconomic changes for all eligible Opportunity Zone tracts and compared them to eligible but non-designated areas. The results indicate that critics’ concerns have been disproportionate to the risk: fewer than 4 percent of designated Opportunity Zones show signs of substantial existing investment. This implies that low- and middle-income residents in the vast majority (96%) of Opportunity Zones are at little risk of displacement, and may actually be able to share in some of the economic benefits. Nonetheless, many stakeholders are still working proactively to manage gentrification risk.