By: AIF Staff
Last month at the Republican National Convention, South Carolina Senator Tim Scott laid out a clear vision for expanding economic opportunities so more Americans have the chance to realize their full potential. In recounting his upbringing and humble roots, Senator Scott remarked: “Our family went from cotton to Congress in one lifetime. And that’s why I believe the next American century can be better than the last. There are millions of families like mine across this nation, full of potential, seeking to live the American Dream.”
Senator Scott and his family are emblematic of the transformative change that can occur if Americans are simply given the chance to succeed. Policymakers have an important role to play in creating the conditions for transformations like these to occur and Senator Scott and former Speaker Paul Ryan have been leading by example in this regard.
As part of his speech, Senator Scott, who was instrumental in passing the Tax Cuts and Jobs Act, highlighted how Opportunity Zones in particular could yield tremendous benefits for distressed communities and produce positive changes for individuals. Scott characterized these 8,800 areas as:
“The first new, major effort to tackle poverty in a generation — Opportunity Zones. We put hard earned tax dollars back in people’s pockets by cutting their taxes, especially for single parent households like the one I grew up in – cutting single mother’s taxes 70% on average. President Trump supported these tax cuts for those single moms, and other working families, and signed these policies into law…and our nation is better off for it.”
Senator Scott’s optimism about Opportunity Zones is justified, particularly given some of the findings by the White House’s Council of Economic Advisers (CEA) in a report entitled: The Impact of Opportunity Zones: An Initial Assessment.
The White House’s report aimed to quantify the early benefits of Opportunity Zones to investors, residents, and the nation as a whole. It also provided additional details on the nearly 9,000 communities that have been designated to receive specific tax incentives and compared the impact of Opportunity Zones to other federal poverty-fighting programs. The whole report is accessible here.
The CEA noted that the Tax Cuts and Jobs Act provided a number of benefits to investors operating in Opportunity Zones. Specifically:
“The first benefit of investing in these funds is that the investor can defer paying taxes on capital gains rolled into OZs until potentially as late as 2026. Second, when these taxes are paid, the investor may omit 10 percent (15 percent) of the original gain if the investment is held there for at least five (seven) years. Finally, and most important, any capital gains that accrue to investments in a Qualified Opportunity Fund are tax free if the investment is held for at least 10 years.”
Ultimately, the CEA found that these benefits have resulted in positive economic developments and the CEA’s findings underscore the potential power of Opportunity Zones to be forces of good for communities in need of revitalization and rejuvenation. Among the top takeaways, the CEA found that:
- The tax changes in Opportunity Zones has resulted in significant investments in high-poverty areas, particularly from qualified investment funds. “The report estimates that Qualified Opportunity Funds raised $75 billion in private capital by the end of 2019, most of which would not have entered OZs without the incentive. This new capital represents 21 percent of total annual investment in OZs.”
- The designation of Opportunity Zones is resulting in an increase in housing values, which benefit home-owners in these areas. The CEA estimated the 1.1% increase in housing values due the Opportunity Zone designation and the resulting investment provided an “estimated $11 billion in new wealth” for home-owners in these areas.
- Based on the $75 billion in private capital raised, per the CEA’s projections, 1 million people could be lifted out of poverty and the investment in these Opportunity Zones could reduce poverty by 11%.
The goal of Opportunity Zones is to spur private-sector investment, ideally long-term investment, in areas that need it most and revitalize these communities from the ground-up. As these investments take hold, job creation should follow because, as the CEA noted, Opportunity Zones stimulate demand for labor and do not create a disincentive to work that can sometimes accompany other federal anti-poverty programs.
As the CEA concluded, its initial assessment of Opportunity Zones shows this model “can help spur economic recovery in thousands of distressed communities across the United States. It has the power to mobilize investors, engage State and local stakeholders, and improve the outlook for low-income communities—all with limited prescription from the Federal Government.”
While the CEA’s findings are no doubt encouraging to those who want to see the federal government achieve better results in its ongoing War on Poverty, a June 2020 Urban Institute report makes clear that more work must be done to ensure that Opportunity Zones achieve their full potential and truly revitalize communities.
In a report entitled, An Early Assessment of Opportunity Zones for Equitable Development Projects, the authors note that while investment is flowing to these communities, it is not yet translating to optimal levels of “equitable community development.”
Of particular importance, the Urban Institute’s report finds that Opportunity Zones are currently providing the “biggest benefits to projects with the highest returns, which are rarely aligned with equitable development.”
Though investment is coming into these distressed areas, projects that do not have an immediate return on investment and that are more geared toward community development are struggling to attract capital. The report noted: “OZs are helping spur the evolution of a new community development ecosystem, engaging both project developers and investors who have limited historical engagement in community development work. Despite this catalytic effect, however, we also see that many mission-oriented actors are struggling to access capital.”
As lawmakers consider modifications to the tax treatment of Opportunity Zones to ensure that communities are effectively developed, the creation of jobs and operating businesses must be front and center. Access to good-paying, stable jobs is vital to the long-term health and well-being of people living in these communities. As the report highlights, this is an area that needs to improve as Opportunity Zones germinate. The authors noted that “the vast majority of OZ capital appears to be flowing into real estate, not into operating businesses, because of various program design constraints and the undesirability of selling equity from both the business owners’ and the investors’ perspective.”
As Opportunity Zones develop, lawmakers, investors, and community leaders need to make sure that operating businesses are prioritized, as these specific types of investments – more so than real estate – will increase economic prospects for local residents and have a noticeable impact on their quality of life.
The Urban Institute report also recommended a number of other principles that policymakers should consider when viewing Opportunity Zones from a community-development perspective. The authors’ recommended policymakers pursue changes that:
- “Better support investment in small businesses.” As just mentioned, legislators and leaders in Opportunity Zones need to ensure that incentives are aligned to generate support and investment for small businesses as these types of businesses will be critical to revitalizing these communities in the long-run.
- “Size the incentive based on the impact.” If Opportunity Zones are going to support and stimulate community development, lawmakers should look at creating benefits for projects that have a deep community impact, rather than just a high return on investment. By prioritizing the impact of a project on the surrounding area, as opposed to just prioritizing a rate of return, Opportunity Zones could see an influx of investment dollars to a different set of organizations which help communities thrive.
- “Broaden who can invest.” As Opportunity Zones mature, policymakers should consider expanding those who can benefit from the unique tax treatment in these areas. Currently, the universe of Opportunity Zone investors is somewhat limited to those with capital gains and as the authors’ note, creating a refundable tax credit might increase the pool of potential Opportunity Zone investors.
- “Support mission-driven funds that are accountable to the community.” The authors also encourage policymakers to look at ways to encourage “equity investments in groups such as community development financial institutions (CDFIs), which have a long track record of making substantial investments in low-income communities.”
Senator Scott’s speech at the Republican National Convention made clear that expanding economic opportunities can change not just one person’s life, but an entire family’s life. If policymakers get laws right, reforms can improve the trajectory of entire communities.
The White House’s initial assessment of Opportunity Zones makes clear that even in the short-term, this law is making a tangible difference by spurring investment in distressed areas of the country, increasing home values, and reducing poverty. The Urban Institute’s analysis makes clear that more must be done for Opportunity Zones to live up to their true potential and to help communities grow and thrive.
The American Idea Foundation will continue to work with policymakers, investors, and stakeholders in communities to ensure that Opportunity Zones deliver on their promise and serve as a catalyst to allow more people to realize their version of the American Dream.