Politics

Congress Looks to Expand Opportunity Zones, But Should They?

By Rose Laoutaris

Introduction

Last month, Rep. Jim Hagedorn (MN-01) introduced the Expanding Opportunity Zones Act of 2021. This bill would increase the number of low-income communities designated as Opportunity Zones (OZs), “economically distressed” communities that receive tax advantages. These exist in every state, and deferred tax savings range from 25  to 30 percent. The bill would create about 950 new Opportunity Zones across the United States. Additionally, it looks to extend the tax deferral date from December 31, 2026 to December 31, 2029. The bill is cosponsored by Reps. Troy Balderson (OH-12), Ashley Hinson (IA-01), and Jeff Duncan (SC-03).

So far, OZs have been successful in increasing investment in targeted communities. However, there is valid concern that these new investments will primarily benefit investors rather than residents of these communities. While lower upfront taxes and enhanced investment are beneficial to low-income communities, specifically targeting certain areas for special tax benefits in this manner may not have the intended result of improving the lives of residents.

History of Opportunity Zones

Opportunity Zones were enacted through the Tax Cuts and Jobs Act of 2017 (TCJA) in an attempt to spur economic growth in low-income communities. Governors choose communities to be designated OZs, and the Department of the Treasury certifies them.

Since the TCJA was signed into law, 8,764 census tracts have been designated OZs. There are 31.5 million people who live in OZs, and they consist of 57 percent non-white minorities. The average poverty rate among OZs is 27.7 percent, and the average median family income is about $47,000, which is almost $27,000 lower than the national average. Interestingly, 24 percent of all food deserts across the nation can be found in existing OZs.

Opportunity Zones increase economic activity through investment in these designated areas because there are tax incentives for investors. This is accomplished through a Qualified Opportunity Fund (QOF), which is registered with the IRS and required to invest at least 90 percent of its funds in OZs. Once an investor holds their investment in a QOF for five years, they are able to defer capital gains taxes on 10 percent of their original investment into the fund. After seven years, the investor can defer an additional 5 percent for a total of fifteen percent of the original investment. This incentivizes investment in lower income communities with the intention of improving the economy and standard of living in these communities.

OZs differ from other anti-poverty programs, such as transfer programs like food stamps or cash assistance, because raising taxes is not necessary, and it creates incentives for economic activity. These transfer programs do not typically incentivize employment, especially since recipients can become ineligible for benefits once they earn a certain income. Also, for every dollar of taxes raised, there is an additional 50 cent cost to taxpayers.

Impact of Opportunity Zones on Low-Income Communities

Despite having only existed since 2017, the impact of OZs can already be seen. The White House Council of Economic Advisers (CEA) released a report in August 2020 titled “The Impact of Opportunity Zones: An Initial Assessment.” They found QOFs raised $75 billion in private capital, and that this amount can lift about one million people out of poverty, causing the poverty rate in OZs to decrease by about 11 percent.

Additionally, the program may be revenue neutral since the potential decline in poverty will require less need for other government assistance, according to the CEA report.

Concerns About Opportunity Zones

While OZs appear to be bringing more investment and economic opportunity to low-income areas, there are concerns that this program will mostly help investors, not residents of the community, and that it will accelerate gentrification and displace the residents the programs were meant to help.

These concerns are not partisan. OZs were originally authored by Republicans and Democrats, and the above criticisms have been made by right and left-leaning groups, such as The Heritage Foundation and the Urban Institute.

Just because there are more jobs created in an OZ does not mean that low-income residents will be chosen for the jobs or that they will be earning more. Further, with more investment in the community comes higher property value and rent, which residents will struggle to pay if they are not earning any more. There is also worry that the increased investment may cancel out with losses that may occur if investors move to a location with lower productivity.

Additionally, there are concerns about corruption. Not every designated zone is among the most disadvantaged communities. For example, OZs are found in Brooklyn Heights, where the median income is $94,000 per year. Also, some investors who were already in the process of investing in an OZ before its designation were given special benefits in areas like Baltimore’s Port Covington. In fact, 28 percent of designated OZs were in areas with the highest capital inflows before they were OZs. These examples highlight why place-based programs, where politicians decide which areas receive benefits, are not the most efficient and make the case against OZs.

Because the OZ program is new, there is not much data available or conclusions that can be drawn on their overall effectiveness. However, these concerns are still worth attention and consideration.

About the Expanding Opportunity Zones Act of 2021

In response to the COVID-19 pandemic, Rep. Hagedorn introduced the Expanding Opportunity Zones Act of 2021 to increase the number of OZs allowed in each state from 25 percent to 30 percent, creating 950 new OZs. He believes that doing so will help economic recovery after shutdowns due to the pandemic forcing businesses to close their doors across the country.

“My legislation is aimed at promoting investment and development in places like North Mankato,” a low-income community in Minnesota, said Rep. Hagedorn. “Expanding opportunity zones will give countless Americans the chance to succeed and move our nation’s economy forward when we need it the most.”

Should Opportunity Zones Be Expanded?

Investment in economically distressed communities is a good thing, but it needs to benefit the residents. Unfortunately, OZs in their current form are likely not doing this. OZs have only existed since 2017, so there is not much data on what the impact actually is on residents. Since the likelihood of success from this perspective is unknown, expanding them before the data demonstrates good outcomes is not a wise decision.

In the meantime, there are other reforms that can be made to benefit impoverished communities. Lowering taxes across the board, regardless of location, benefits everyone. This was evidenced by North Carolina’s 2013 tax reforms, which lowered the income tax and corporate tax rates in addition to eliminating or not extending 55 tax expenditures, including place-based tax credits. . Tax revenue increased by 13 percent in four years, and jobs increased by almost 10 percent. North Carolina’s tax system went from being ranked sixth worst to thirteenth best, according to the Tax Foundation.

Conclusion

While its supporters may have good intentions, OZs are not the best method of improving economically distressed communities. When politicians decide that certain areas receive certain benefits, there is a great likelihood for error. Until the impact of OZs is known, they should not be expanded, but enacting more tax reforms that are equally applied to everyone may be an effective alternative solution.

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