June 16, 2020
By: AIF Staff
In his “farewell address,” American Idea Foundation President and former Speaker of the House, Paul Ryan noted:
“You all know that finding solutions to help people lift themselves out of poverty is a personal mission for me. I think we have made real progress here in a relatively short time…. We have begun to break this monolith. New opportunity zones, part of tax reform, will bring more investment to distressed communities….
“I believe firmly that solving our poverty challenges once and for all will require not just a great undertaking, but a great rethinking of how we help the most vulnerable among us. It begins with realizing that the best results come from within communities, where solutions are tailored and targeted for people’s needs. This battle will be won soul-to-soul and eye-to-eye.”
In keeping with its mission to advance data-driven solutions that expand economic opportunities, the American Idea Foundation has pushed for the proper development of opportunity zones, which were created as part of the 2017 Tax Cuts and Jobs Act.
As articulated by the Department of Housing and Urban Development, opportunity zones, which can be found in all 50 states and the District of Columbia, are economically distressed census tracts that are eligible for preferential tax treatment. As tax experts, Cesar Conda and Ryan Ellis wrote: There are “42,000 such communities in the United States today…. They are both urban and rural, home to Americans of all races. Poor whites in Appalachia will be beneficiaries of the same Opportunity Zone law as poor blacks in Chicago or poor Indians in South Dakota.”
Opportunity Zones, as designed by the author of the provision, Senator Tim Scott of South Carolina, “incentivize long-term investment in low-income and distressed communities by offering a deferral of capital gains taxes for investors.”
In 2018, Speaker Ryan described the incentives of Opportunity Zones succinctly, saying: “With these opportunity zones, we are essentially offering private investors a set of incentives. The longer you maintain your investment in these areas, the more tax benefits you receive. Right now, we have $6 trillion of unrealized capital that can be deployed to help alleviate poverty in distressed communities and improve people’s lives.”
As Conda and Ellis noted:
“Investors get three big tax benefits by rolling their gains into Opportunity Funds. First, they get tax deferral on the gains they roll in. Currently, that deferral is available through 2026, but if Opportunity Zones are successful there is every reason to believe Congress will extend this. Second, investors can “step up” their basis in their deferred capital gain by up to 15 percent provided they keep the money in an Opportunity Fund for at least seven years. Finally, an investor in an Opportunity Fund asset who holds the investment for at least 10 years pays a 0 percent capital gains tax upon sale, to the extent the gains are derived from the Opportunity Zone asset.
The promise of opportunity zones is that they will draw investment to areas around the country that need it most, and that investment will lead to rejuvenation and revitalization. At their best, opportunity zones will be locally-driven and serve as tools of reclamation rather than gentrification.
As the Economic Innovation Group noted: “Capital alone is not a strategy…. Going forward, state and local leaders are responsible for devising the strategies that will take these few new lines of the tax code and turn them into something that unlocks opportunity for local residents and entrepreneurs.”
The roll-out of opportunity zones has been deliberate, as these projects require relationships with local, state, and federal actors, but all across America, there is reason for hope that these zones will help communities rise up in unique ways. Forbes, in conjunction with the Sorensen Impact Center, highlighted a collection of the most promising projects underway across the United States.
Some other examples of how Opportunity Zones are improving communities around the country and allowing people to recognize their version of the American Dream include:
– Paterson, New Jersey: As columnist Chris Slevin said, “New Jersey has 169 Opportunity Zones, which carry an average poverty rate of 25 percent and a median family income of $48,000, on average. About 738,000 New Jerseyans live in these zones. In many of these communities, the ongoing challenge of redeveloping brownfield sites has made it harder to attract capital in recent decades.”
But the incentives provided by Opportunity Zones are attracting investors who are able to clean up the brownfields and environmentally-damaged land, allowing for further community development to take hold. As Democrat Senator Cory Booker said: “I see really the perspective from New Jersey and I’m seeing a lot of different groups: impact investors, people that have a social mission. There are some businesses that have a charitable foundation and (are) looking for ways to create a multiplier effect with their investment, which is exciting.”
New Jersey’s business and government leaders have made sure to take a step-by-step approach to developing opportunity zones, remembering that they are designed to thoughtfully rejuvenate communities with sustained investment and care.
– Provo, Utah: In announcing the state’s initial Opportunity Zones, Governor Gary Herbert described the program’s goals as “economic prosperity for all Utahns. Opportunity Zones will go a long way in helping to support growth in economically-distressed areas throughout the state. By working with these communities, the zones will attract more businesses and new investment.”
HUD Secretary Ben Carson said recently that Utah’s Opportunity Zones, “look like the 22nd century.” A local business owner in Provo noted, “the opportunity zone designation did serve as a sort of accelerant when it came to finding outside investors for the companies, most of which simply move to different buildings on the same large campus that Hall Labs exists on, so they continue to benefit Provo’s economy.”
As the Provo Daily Herald said: “If you are a small business owner, you are someone who … could take advantage of this … we’re trying to build this platform to not only provide temporal assistance to those who need it, but really match them with potential investors should they have a project that they feel warrants it.”
– Baltimore, Maryland: In the Charm City, the opportunity zones were selected based on need and around anchor projects that could serve as hubs for revitalization. One project, features a concert hall amid “a stretch of industrial buildings and vacant lots on Russell Street that the city wants to transform into an entertainment district.” As former Baltimore Mayor Catherine Pugh detailed at a Kemp Forum on Opportunity Zones, the city is more ready than any other to begin developing these promising parts of the city.
– Erie, Pennsylvania: As the Wall Street Journal noted, “Erie was one of the first cities to jump on the federal-opportunity zone program, creating a 58-page prospectus and identifying a dozen “shovel ready” projects, including the renovation of a 133-unit downtown hotel. Redevelopment would have happened with or without the opportunity-zone program, city leaders say, but the tax breaks will speed the process.” Erie’s promise is receiving further recognition, as it received one of the Forbes’ Opportunity Zone awards.
– Brooklyn Center, Minnesota: The Brooklyns Building is owned by the city’s Economic Development Authority and the incubator is going to focus on helping minority- and immigrant-owned startup companies. The project is designed to grow with the community’s involvement, and it was recently recognized by the Minnesota Opportunity Collective for its potential.
The rollout of Opportunity Zones has been accompanied by passionate debate, which is a good thing. It ensures that policymakers at the local, state, and federal level will work to design projects as the law intended. Because evidence and data should help drive decisions, it was encouraging to see a bipartisan group of Senators introduce legislation strengthening the reporting requirements for opportunity zones. As Senator Todd Young of Indiana said upon its introduction, “Our bill will help strengthen Opportunity Zones by increasing transparency within the program and creating metrics to measure and improve on its success.”
The promise of Opportunity Zones is directly connected to local entrepreneurs working within their communities and developing synergistic relationships with elected officials. As communities build themselves up one project at a time, lives can be improved and dreams can be realized in a sustainable and bottom-up way. As opportunity zones continue to germinate, the American Idea Foundation will ensure they comport with the original spirit and intent of the law.