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By: AIF Staff

Last week, former Speaker of the House and American Idea Foundation President Paul Ryan moderated a conversation with elected officials, on-the-ground community leaders, and researchers about the development of Opportunity Zones. Opportunity Zones, which were part of the Tax Cuts and Jobs Act of 2017, are a poverty-fighting tool designed to stimulate investment and development in economically disadvantaged areas across the country through the use of tax incentives. 

The virtual discussion provided an update on the progress being made and the challenges being faced by policymakers and community leaders as Opportunity Zones have started to germinate. Consistent with the American Idea Foundation’s mission, the panel showcased how Speaker Ryan is serving as a connector between policy makers, policy and analytical experts, and on-the-ground leaders. Joining Speaker Ryan in conversation were: 

• Congresswoman Terri Sewell of Alabama, who is working to improve Opportunity Zones on Capitol Hill, ensuring they meet their mission of revitalizing communities. 
• John Persinger, CEO of the Erie Downtown Development Corporation who is currently spearheading the development of a promising Opportunity Zone in Erie, Pennsylvania.
• John Lettieri, President and CEO of the Economic Innovation Group (EIG), who is adding intellectual analysis and key perspectives on the best practices for those involved with Opportunity Zones.
• Patrick McKenna of Catalyst Opportunity Funds, who provides analyses for investors so they can maximize the benefit for both businesses and communities in Opportunity Zones. 

The Foundation has included excerpts of all of the panelist’s contributions (Lettieri and McKenna, and Sewell), and included below are some highlights from John Persigner, who is helping rejuvenate Erie, Pennsylvania.  

Video of the Virtual Panel is accessible here: 

In summarizing the challenges and the progress being made in Erie, PA, John Persinger detailed how this policy is spurring development and making a real impact:

“At the Erie Downtown Development Corporation, we are working in one of the poorest zip codes in America. The median income in our area right here is $10,631 so as you can imagine, there are individuals who have live a different lifestyle than every experience that you and I and probably everyone else participating in this webinar has experienced. I don’t think they’re understanding that [change] is coming from Opportunity Zones. For their perspective, they want [to be] optimistic about the changes that are to come. 

“To give you two concrete examples: As one part of our plan, we acquired and tore down a McDonald’s. I know you were a former McDonald’s employee but the McDonald’s in Downtown Erie, you would walk in there and there are people who were overdosing. It was a problem, right around people who are trying to live down here and so that was a problem we had to get rid of. Second, the individuals who are living down here don’t have a stable supply of fresh, healthy food. We are in a USDA-designated food desert. Your options are to go to the Dollar General that is a few blocks away or to go to a corner store and get some boxed items. They don’t have a fresh-food grocery store down here so, that is one of the things that we are going to bring to downtown thanks to Opportunity Zones. 

“We have five historic properties on a block that overlooks our main parking downtown. These properties are about a total of 100,000 square feet and have been vacant for decades, and they’re blighted. One used to house a former biker bar and what we are doing is turning that into a culinary arts district. There’s going to be a fully operating grocery store. There’s going to be a Food Hall with nine new businesses and there’s going to be a culinary incubator so the individuals who live in this community are not only going to have access to a fresh supply of healthy food but they’re also going to be able to tap into the jobs that are going to be created down here.”

Speaker Ryan asked Persigner about how Erie partnered with the community and the private sector to launch its rejuvenation campaign: 

“What’s great about Opportunity Zones is that it leaves it up to the local actors on the ground to fund the projects that need the capital. There’s no government timeline. There’s no funding cycle. There’s no application cycle. It is really up to the investors and the shovel-ready projects, so this is what we needed to turbo-charge our revitalization of downtown. There are a lot of people that have been a part of this process: The city [of Erie] for getting the comprehensive plan done; the private sector and raising the initial capital so we could get our work done; we work very closely with our Congressman, Mike Kelly, and our two Senators and our state elected officials. We work closely with a lot of outside groups like EIG and the Sorenson Impact Center who have helped us learn from other communities. There’s been a lot of teamwork. It has been four years in the making to get to this point of where we’re deploying capital, [and it was] a big, bipartisan, community effort to get to this point.”

In closing, Speaker Ryan summarized why this conversation matters in his concluding thoughts:

“The great promise of America is that the next generation is better off than the previous generation. For too many people in too many communities that promise seems to be breaking. 

“Opportunity Zones have the potential to restore that promise by providing private sector capital to neighborhoods and communities that have been underserved for too long. We’re seeing that success already, and our panelists today are doing the hard work to ensure that the promise of Opportunity Zones is fulfilled.”

The hard work is ongoing to ensure Opportunity Zones mind their mission and are utilized as tools for revitalization and rejuvenation, not gentrification or displacement. By providing unprecedented amounts of investment and resources to help communities build themselves back from the ground-up, Opportunity Zones have tremendous potential. However, that potential will only be realized if lawmakers work collaboratively across party lines and strategically with local leaders and investors. Opportunity Zones cannot and should not primarily be a passive parking space for investors’ capital, rather these tax incentives should actively support the communities and the residents in them to improve outcomes and the overall quality of life in areas that have long been distressed. 

The American Idea Foundation, led by Speaker Ryan, will continue to do its part so this public policy increases opportunities for residents to fulfill their potential and realize their version of the American Dream. 

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.