Validating Reforms that Expand Opportunity

By: AIF Staff

As the American Idea Foundation has previously detailed, Opportunity Zones are economically distressed census tracts that are eligible for preferential tax treatment. They were created as part of the 2017 Tax Cuts and Jobs Act and are designed to incentivize long-term investment in low-income and economically disadvantaged communities by offering a deferral of capital gains taxes for investors.

Last month, a handful of House Democrats attempted to amend an annual appropriations bill to prevent the Internal Revenue Service from using funds to oversee the development of the nearly 8,800 Opportunity Zones around the United States. This stunt, if successful, would have been a mistake – one that would have had real consequences for the people living in these zones.

To be clear, since Opportunity Zones became law, legislators from both parties have attempted to improve the oversight over these areas to ensure they meet their intended purpose of truly helping individuals and communities in need. Debates about how to refine and improve Opportunity Zones are welcomed, as many reforms are well-intentioned. However, attempts to end the Opportunity Zone program outright or to defund them are not only short-sighted, but also would harm the very individuals that legislators claim to want to help.

Rather than attempt to score partisan, political points, legislators should be united in making Opportunity Zones work. Opportunity Zones hold the potential to revitalize economically distressed areas and bring good-paying jobs, additional housing, better educational opportunities, much-needed infrastructure improvements, and critical investments to areas that need it. There are many good ideas – from both Democrats and Republicans – about how to expand economic opportunities and fight poverty, but Opportunity Zones should be given the chance to succeed. This critical tool for revitalization should not be reduced to a political football.

The main reason that policymakers should give Opportunity Zones the chance to germinate? They’re working. Communities are beginning to see real results from public and private partnerships. Investment is flowing into communities and meaningful improvements are beginning to occur. One promising example is found in Erie County, Pennsylvania.

Nestled on a Great Lake near the U.S.-Canada border, Erie, Pennsylvania is the epidemy of a small, Midwestern city. Erie has a rich industrial and manufacturing history and is currently attempting to modernize, transform, and diversify itself to meet the demands of the 21^st century economy while also holding tight to the values that make it so unique.

As Forbes noted: “Battling outsourcing, automation, and seismic shifts in global supply chains, the once-thriving industrial city became a parable for the socioeconomic decline of America’s manufacturing heartland. A 2017 report described Erie in stark terms, concluding that nearly half of all Black residents live in poverty, and that the median Black worker in Erie makes a mere 43% of median white worker’s earnings.” Further, in 5 of Erie’s 8 Opportunity Zones, “more than 35 percent of families had income below the federal poverty level. In the other three, the poverty rate for families was above 20 percent.”

But now, thanks to its use of Opportunity Zones, Erie is on the rise. A video produced by the local Chamber of Commerce, “Erie Amazes,” highlights how the city is primed for revitalization.

Erie is turning itself around one building, one block, and one neighborhood at a time. It is a prime example of how innovative, local leadership, when combined with sound, federal policies can make a difference and improve people’s lives.

In February 2020, the Erie Regional Chamber and Growth Partnership presented their  “Reinvestment Roadmap” at the White House. The presentation makes clear that by effectively utilizing Opportunity Zones and partnering with relevant federal government agencies, Erie is massively accelerating its revitalization.

The White House Opportunity and Revitalization Council succinctly defined the mission of Opportunity Zones, saying: “Private capital and public investment will stimulate economic opportunity, encourage entrepreneurship, expand educational opportunities, develop and rehabilitate quality housing stock, promote workforce development, and promote safety and prevent crime in economically distressed communities.”

And as the presentation by Erie’s Chamber makes clear, the city has big plans to leverage the benefits provided to investors via the Tax Cuts and Jobs Act to improve their infrastructure, transportation systems, educational offerings, business development pipelines, and make the community cleaner and safer. All of these will enhance resident’s quality of life.  

To be sure, Erie’s plans are ambitious, but they are already beginning to come to fruition thanks to the city’s belief in its people and its citizens. As the Washington Examiner’s Salena Zito recently wrote: “To anyone who has said it would be impossible to transform one of the poorest ZIP codes in the country into a role model for achieving economic prosperity…. They have definitely underestimated the determination of Erie’s local civic, foundation, and business leaders to not give up the ship.”

In 2019, according to the Economic Innovation Group:

“Fortune 500 company Erie Insurance, the city’s largest employer, announced its new $50 million Opportunity Fund. The first investment will support the creation of a food hall for nine local vendors…The food hall will anchor a broader $30 million transformation of the city’s North Park Row into a culinary arts district, which project sponsors Erie Downtown Development Corporation anticipate will create approximately 240 jobs.”

And because of this local commitment to rejuvenation, at the end of June 2020, Boston-based Actaris Impact Investors announced a $40 million investment in Erie’s Opportunity Zone. The hope is other capital will soon follow as investors see the potential of Erie’s workforce and the comradery of the community to improve itself. As Forbes explained:

“Erie is currently home to some $750 million in ongoing investment. The EDDC and Erie Regional Chamber and Growth Partnership are working to get even more capital into the areas where it will have the biggest impact. The first phase of EDDC’s plan will add more than $100 million in investment into downtown Erie through 2022. In that time EDDC hopes to triple the number of businesses within the development, raise job numbers from 90 to over 425, and multiply the number of residential units by more than ten.”

To be clear, the goal of Opportunity Zones is not to gentrify Erie or displace the very people that are so connected to the city’s history. The hope is to build Erie up from within, with a rising tide lifting all boats. As John Persinger, the head of the Erie Downtown Development Corporation, told the Wall Street Wall Street Journal: “When people raise fears of gentrification, I say we can’t afford to lose one more person. We don’t want to push anyone out. We want to bring more people in and raise the quality of life for everyone.”

The story of Erie makes clear that Opportunity Zones will take time to develop. They will require significant buy-in from local leaders, community organizations, and federal officials. But the promise and the potential to rejuvenate these 8,700 areas in our country is too important to be derailed by partisan fighting in Washington, DC.

Thanks to Opportunity Zones, Erie has the ability to amaze and become a model for the rest of the nation. Policymakers just need to focus on supporting these local efforts, not undercutting them.

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.”

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. 

By: AIF Staff

This week, American Idea Foundation President Paul Ryan spoke at the National League of Cities’ 55^th annual Congressional City Conference in Washington, DC.

In front of more than 2,000 local officials, city leaders, and community partners, former Speaker of the House Paul Ryan talked with League of Cities CEO and Executive Director Clarence Anthony about the steps that elected leaders can take to expand opportunity in urban and rural areas.

Ryan discussed the work being undertaken by the American Idea Foundation and how it can help city leaders and their citizens tackle the pressing policy challenges of the day. Excerpts of Speaker Ryan and Clarence Anthony’s wide-ranging conversation follows.

Q. Since you retired, you’ve had a job with the American idea Foundation which is focused on fighting poverty and increasing economic opportunity. Can you tell us a little bit about the Foundation and the work that you’re doing?

A. Yeah, I founded this Foundation after I retired and I was inspired by my mentor, who was a guy named Jack Kemp. Jack was my boss and he’s the one who got me involved in politics. I was this young economics guy, running around America with him going to places like Cabrini Green and Robert Taylor homes down in Chicago. I spent a lot of time working on housing policy and long story short, the issues that I worked on and that were my passion in Congress were budgets and the rest, but also poverty alleviation.

And so, I spent a good chunk of time with friends of Jack’s, like Bob Woodson, running around America, working on poverty policies. And so, I decided to start a Foundation, the American idea Foundation, which is based on the idea that the condition of birth doesn’t determine the outcome of your life. It focuses on center-right poverty solutions.

There are a few laws that I’ve pushed into law in 2017 and 2018. I want to make sure that these laws are well executed: Opportunity Zones, Social Impact Bonds, the Evidence Act. I want to make sure that those laws are well executed. And so, there are some new poverty solutions that I really believe can move the needle on fighting poverty far more effectively, using the new tools that we have in law today than we ever did before.

I spent a great deal of time on these issues. There are some proven models of success that need to be built up and scaled up so they can be replicated, and then we can really put a dent on deep poverty, on deep intergenerational poverty. That is where I think the focus ought to be, because if we can get deep poverty, we can fix a lot of the other types of poverty situations.

Q. One of the initiatives that a lot of the local leaders are implementing and dealing with are Opportunity Zones and I think the challenge is looking at the growth and development in some communities and gentrification and displacement. So, what do you think about that balance between implementation and the idea of Opportunity Zones?

A. So, I have worked on this idea for over twenty years. Jack Kemp used to call these Enterprise Zones and we tried to push this into law in the early 1990’s.

It got to a point where when I was Speaker and we were doing tax reform in 2017, Tim Scott had this great bill. It was Tim Scott and a guy named Pat Tiberi who had a bill that was basically the concept that we’ve always believed in. From our perspective, reducing rates on capital to go into the poorest communities is a really smart way of getting capital into communities. When the score came back — score meaning the cost estimate of this bill, while we were putting the tax reform package together and we had a lot of decisions we had to make fairly quickly, we said this goes in there….

We were thinking to ourselves and I remember this conversation. We have to make sure that this is not just a tool for regentrification, where it’s just real estate comes in and pushes poor people out of the areas, but instead this is a tool for revitalization.

So, what my Foundation works on is to make sure that the Opportunity Funds that are being erected out there understand the mission of Opportunity Zones. The mission, and the reason people like me put this in law in the first place, was to get all this private capital that’s out there and put it into the poorest communities in the country and use it to revitalize those areas. And so, that means you have to partner with local, on the ground, poverty-fighters and groups that will help these funds to revitalize the people within them. It’s job training and jobs and we want it to go from just real estate, which we knew real estate would be the first wave of investment, but we want to go to retail, light-manufacturing, and other employment-density industries to come into these areas.

And sure, there will be allegations of “tax shelters,” I guess I would say, but the point of this is we want the tax shelter in the poorest communities so people put their money in these areas. So, we really believe that this idea has great potential to bring a lot of capital to the poorest communities in rural and urban America, and to revitalize. What we need to do is make sure that on the ground it is executed well, and that the investors themselves understand and mind their mission, which is to revitalize these communities.

Q. There’s another issue facing American cities which is substance abuse, whether it is opioids, heroin, or all kinds of abuse. Under your leadership, you shepherded a lot of legislation around these issues, what advice would you give to local leaders as money is coming to the cities to deal with substance abuse?

A. It was amazing how fast this problem sprung up. If you asked somebody in 2006, what an opioid was in Congress, they probably wouldn’t know what you’re talking about. This problem came so fast.

We put the biggest, single response to a drug epidemic in place ever. It really started with President Obama’s Administration and we finished this last session. The quick answer [for cities] is to come up with evidence-based solutions so when you’re deploying this capital and these dollars in your communities, it is going to programs that have rigorous statistical oversight. That, and track your evidence so that you can show what works and demonstrate that you can have good success rates.

So again, at my Foundation, we want to focus on evidence. One of the laws I passed with Senator Patty Murray was the Evidence Act, which promotes evidence-based policy on poverty programs to figure out how to measure what works and to be able to release all the data on the poverty programs in a way that respects privacy. This way, you can track the outcome of poverty programs and the same goes for combatting opioid abuse. We want to get real metrics and real data and real evidence on what works and what doesn’t work. That’s the key.

Because when we find programs that have been proven to be successful, then you can replicate and disseminated across the country. Federal legislators don’t want to hear: “Just send more money to this program that anecdotally does this and that.” They are going to want to hear this program has been proven, over these other programs, to be the one that is statistically proven to have the most bang for the buck and that will be more successful.

We now have brand new analytical tools that are being deployed to actually do that kind of tracking and that’s why I say, I think we can really move the needle on some of our biggest persistent problems because of data science we have. We have a newer ability through evidence and data to be able to actually fix a lot of these problems, and that’s the key for fighting opioid abuse. Let’s build models that can work and be replicated using statistics to prove our point.