Governors' offices across the country are scrambling to meet the March 21 deadline to give the U.S. Treasury Department their nominations for communities to take part in the new Opportunity Zone program. Created by last year's tax bill, it offers investors tax breaks in exchange for investing in high-poverty communities. Governors can nominate up to a quarter of their state's low-income census tracts, with Treasury expected to rubber-stamp the choices.
The program focuses on capital gains taxes paid on profits made selling investments like real estate or stocks, which are normally taxed at 20 percent plus a 3.8 percent surtax. Investors who roll their capital gains into an Opportunity Fund invested in the designated zones will be able to defer and reduce tax payments and avoid some taxes altogether.
Proponents say the program will free up some of the estimated $6 trillion in unrealized capital gains in stocks and mutual funds alone held by individuals and businesses while bringing needed investment to communities in need. The so-called "O-Funds" can invest in a wide variety of assets, from stocks of new companies to real estate. Kevin Hassett, chair of Trump's Council of Economic Advisers, told the New York Times that "if it's successful, we'll look back 10 years from now and say this was one of the most important parts of the tax bill, and one we didn't talk nearly enough about."
The Opportunity Zone program was first championed as standalone legislation by a bipartisan group of federal lawmakers led by U.S. Sen. Tim Scott, a South Carolina Republican, and was rolled into last year's tax bill passed by Congress and signed by President Trump. It's part of what Scott calls his "Opportunity Agenda" offering conservative solutions to socioeconomic problems like poverty and unemployment.
But the program wasn't Scott's idea: It's the brainchild of the Economic Innovation Group (EIG), a think tank and advocacy group launched in 2013 whose founder and chair is Sean Parker, the founding president of Facebook and co-founder of the defunct Napster file-sharing service. EIG's founders also include Silicon Valley investor Ron Conway, Quicken Loans founder Dan Gilbert, and Ted Ullyot, who served as Facebook's first general counsel and worked in the George W. Bush White House and as chief of staff for former U.S. Attorney General Alberto Gonzales.
EIG developed the Opportunity Zone concept in 2015, releasing a paper co-authored by researchers with the liberal Center on Budget and Policy Priorities and the conservative American Enterprise Institute. Noting that large-scale public investment is unlikely for political and fiscal reasons, the paper called for incentives to open the door to private-sector investment in communities it designates as "distressed." Between 2015 and 2017, EIG spent over $2.8 million on lobbying at the federal level, with much of that focused on promoting Opportunity Zone legislation, according to the Center for Responsive Politics' OpenSecrets.org database.
"In spite of years of national growth, tens of millions of Americans live in communities that have seen no meaningful recovery from the Great Recession," EIG said in a statement following the U.S. Senate's approval of the program. "Tax reform is a uniquely important opportunity to ensure the tax code facilitates broader access to capital for entrepreneurs and businesses in struggling areas."
But depending on how the funds operate, the program could end up serving as a tax subsidy for gentrification — the largely urban phenomenon in which affluent people move into predominantly poor communities, causing jumps in housing prices that can displace longtime residents. Adam Looney of the Brookings Institution points out that the Opportunity Zone subsidy is based solely on capital appreciation, not employment or local services, and includes no provisions to help current residents stay or to promote inclusive housing.
"Supporters say this will help revitalize distressed communities," he wrote in his recent analysis of the program, "but there is a risk that instead of helping residents of poor neighborhoods, the tax break will end up displacing them or simply provide benefits to developers investing in already-gentrifying areas."
That could have a significant impact on the South, which is home to more than half of the Americans living in distressed communities and where some cities are already struggling with gentrification. For example, a 2015 Governing magazine analysis of the 50 largest U.S. cities found that of the 10 with the highest gentrification rates between 2009 and 2013, three were in the South: Atlanta; Virginia Beach, Virginia; and Austin, Texas. Other Southern cities with at least 20 percent of eligible census tracts gentrifying over that period were Fort Worth, Texas, and Nashville, Tennessee.
In addition, not all of the money from the Opportunity Fund has to flow to low-income areas: The program has a special rule allowing governors to substitute up to 5 percent non-low-income census tracts in their nominations as long as those tracts are adjacent to nominated low-income tracts and median family income doesn't exceed 125 percent of the adjacent qualifying tract's. The rule was created to help governors assemble economically meaningful zones from individual census tracts.
Given how the program is structured, it will fall to governors working in concert with local officials to guide investments wisely.
"In an optimistic scenario, the tax benefits might encourage purchasing and rehabilitating residential property or expanding local businesses," Brookings' Looney observed. "But the value of the tax subsidy is ultimately dependent on rising property values, rising rents, and higher business profitability. That means a state's Opportunity Zones could also serve as a subsidy for displacing local residents in favor of higher-income professionals and the businesses that cater to them — a subsidy for gentrification."