Will ‘Opportunity Zones’ Help the Rich, the Poor or Both?

(Bloomberg) -- Buried in the Republican tax overhaul that President Donald Trump signed into law in late 2017 are incentives for investors who fund businesses or develop real estate in new “opportunity zones.” Banks, private equity firms, insurance companies and wealthy individuals are now rushing to take advantage. Critics have raised questions about whether the tax breaks will spur development in places that really need it or just stimulate growth in communities that were destined to see investment anyway. Amazon’s new headquarters in New York City, for instance, will be located inside one.

1. What’s an opportunity zone?

It’s a U.S. census tract that meets the law’s criteria for high poverty or low incomes and has been nominated by its state for inclusion. More than 8,700 of all census tracts -- about a tenth -- have won designation as opportunity zones. They’re found in every state, in Washington, D.C. and in U.S. territories like Puerto Rico. Some of the rural zones span giant swaths of land out West, while some urban zones are just a few square blocks.

2. Why so many?

Economic growth in the U.S. has been uneven. A handful of cities are booming, while much of the country -- from rural counties to aging Rust Belt towns -- get left behind. Giving investors an incentive to plow some of their $6 trillion in unrealized capital gains into these distressed communities could help jump-start growth, create jobs and lift incomes. Nearly all of the opportunity zones have poverty rates north of 20 percent or family incomes that are lower than 80 percent of the state or metro median.

3. What’s the problem?

There’s a debate over whether investors will pile into places that were already seeing development. An analysis by the Urban Institute found that most of the zones are in fact hurting -- fewer than 4 percent had experienced an influx of wealthier, college-educated people that would signal gentrification. But in Washington, D.C., about a third of the tracts have seen significant socioeconomic change. And the New York City opportunity zone where Amazon plans a new headquarters-- with waterfront views of Manhattan -- is one of about 200 zones that are adjacent to low-income areas without being low-income themselves. Critics also note that there’s no requirement that investments in opportunity zones benefit the community.

4. Whose idea is this?

It was hatched in a 2015 white paper by Jared Bernstein, who was an economic adviser to Joe Biden when he was vice president, and Kevin Hassett, who is now chairman of the Council of Economic Advisers for U.S. President Donald Trump. They wrote it for the Economic Innovation Group, a think tank co-founded by Sean Parker, the Napster creator and first president of Facebook Inc. A group of Republicans and Democrats introduced bills in the House and Senate to create opportunity zones in 2016, but the measures never reached a floor vote. One of the sponsors, Senator Tim Scott, a Republican from South Carolina, successfully pushed for a modified version that was tucked into the tax overhaul.

5. What are the tax breaks?

Essentially, the plan gives investors two different sweeteners: First, they can defer and reduce capital gains they’ve earned elsewhere by investing those proceeds in an opportunity zone. Second, they pay no capital gains on any opportunity-zone investment they hold for at least a decade.

Will ‘Opportunity Zones’ Help the Rich, the Poor or Both?

6. Who decided where the zones are?

After the tax law passed, governors were given 90 days to nominate a quarter of the eligible zones in their state. Many tried to strike a balance between areas that were in greatest need and places that would be more likely to attract investments. The results included some surprising picks, including the arts district in Los Angeles. The U.S. Treasury Department then certified the selections.

7. Wasn’t this tried before?

Not exactly. There have been past efforts at spurring economic development in distressed areas, like the Empowerment Zones that were created during the 1990s. Many of these efforts fell short because of weak incentives and too much complexity. The backers of opportunity zones say the new incentives are simpler, more flexible and significant enough that investors will use them.

8. What will the zones cost?

When the bill was being considered, the Joint Committee on Taxation told Congress that the opportunity zone tax breaks would cost about $1.6 billion through 2027. But the figure would rise after that, as developers claim capital-gains exemptions on the sale of projects in opportunity zones held for more than a decade. Since the program is open-ended, the final tally will ultimately depend on how much money investors plow into opportunity zones and the gains that they realize.

The Reference Shelf

  • FAQ from the IRS on opportunity zones and a report from the Congressional Research Service.
  • Federal Reserve Bank of St. Louis’s Opportunity Zone Explorer.
  • A Pew report on how investment may bypass rural communities.
  • Bloomberg Businessweek on the potential and peril of opportunity zones.
  • Forbes cover story on how opportunity zones became law.

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