When President Trump signed Republicans’ 2017 tax legislation into law, one section in it stood out for its ambitious goal: directing private investment dollars to left-behind communities. The law provides a tax incentive for long-term investment in economically disadvantaged communities that were designated by governors as so-called opportunity zones, subject to federal standards based on the communities’ median income and official poverty rate.
It was a worthy attempt at bolstering development in areas needing greater investment to stimulate the local economy. As The Times reported in 2018, Senator Tim Scott, a South Carolina Republican who championed the provision, explained that he was motivated by his belief that “there’s untapped potential in every state in the nation.”
The problem? Opportunity zones were meant to be a game changer for persistently poor areas, but under the current law, far more money has gone to communities that qualified as poor but were already growing economically.
Today, as Congress considers extending opportunity zones in Mr. Trump’s “big, beautiful” budget bill, many of its members appear to be overlooking this flaw and setting the program up to continue failing the very Americans it was meant to help.
But there’s still time to fix it.
Before the 1980s, lower-income and economically depressed neighborhoods tended to improve over time as the benefits of economic innovation spread to workers and areas across the country. The past 40 years have been a different story: Poorer areas tend not to catch up to better-off areas.
Opportunity zone tax incentives are meant to encourage the private sector to create the scale needed to turn around communities. The idea was that individuals would be spurred by generous tax breaks to reinvest capital gains into new businesses, which would generate economic development in struggling areas and in turn increase jobs there.
While the 2017 legislation prescribed the eligibility criteria and selection process for designating opportunity zones, it did not set guardrails that would guide investment toward job-creating businesses or to persistently distressed areas. Once governors designated the areas that became opportunity zones, any of the millions of Americans with unrealized capital gains were free to invest an unlimited amount in qualified opportunity funds.
Someone can make an initial investment of, say, $1 million in capital gains in an opportunity fund and, depending on how long they retain the investment, pay up to 15 percent less tax on the original capital gains. Subsequent gains on that initial investment are tax-exempt if held in the opportunity fund for at least a decade — a potentially lucrative proposition.
And the money has poured in — a reported $89 billion by the end of 2022, over six times the amount invested in the red-tape-heavy New Markets Tax Credit, a smaller federal program established in 2000 with similar goals of spurring investment in low-income areas, over a comparable period.
But as we and our co-authors outlined in a working paper published in January by the National Bureau of Economic Research, looking at tax return data, the money disproportionately flowed to places that didn’t really need it.
While the opportunity zones that received most of the investment were poor enough to qualify in the first place, they had already been showing signs of economic improvement before the policy took effect. Their populations were growing and home values were rising, and they were already seeing an influx of private investment. Where the opportunity zones policy succeeded, in our assessment, was in speeding up the pace of development in these already growing areas.
Research from the Economic Innovation Group, a think tank that was an early advocate for the opportunity zone law, found that housing supply grew faster in opportunity zones than in other low-income areas that ultimately were not chosen as opportunity zones. Our research also suggests a potentially strong impact on investment in multifamily housing, but that doesn’t translate into the kind of broad economic development opportunity zones were meant to foster.
For example, David Wessel in his book “Only the Rich Can Play” documents the opportunity zone designation of neighborhoods in downtown Portland, Ore., in 2018 despite the downtown already being seen as a prime area to build apartments, office buildings and retail stores. Pretty clearly, some investors took advantage of opportunity zone tax breaks for projects that would have moved forward anyway.
Persistently distressed communities need increased investment in new businesses that will create permanent jobs for the people who live in those communities. The flow of investment into new apartment buildings, however, is an indicator that in a number of cases, areas benefiting from the opportunity zones policy are those that already have ample job opportunities — builders add housing units when a local economy can already support a growing population.
That helps explain why we’ve found that economically stagnant states like West Virginia and Louisiana have received little opportunity zone investment compared with high growth states like Nevada and Utah.
Congress now has the chance to course-correct. The budget bill passed by the House in May takes a step forward by decreasing the median income threshold for a community to be selected as an opportunity zone, from 80 percent to 70 percent of the median income of the broader metropolitan area. It also makes it more difficult for higher income areas to be selected.
But the bill’s drafters have so far missed an opportunity to realign incentives to drive investment to places that need it the most. Instead, they’ve maintained a similar tax incentive structure as in the existing law, thus offering the biggest tax breaks to investments that were already going to be profitable.
For investors, the most lucrative aspect of the policy is that they owe no taxes on the profit earned from long-term opportunity zone investment, so it’s not a surprise that most investment has gone to growing areas. The most profitable investments with minimal risk get the biggest and most reliable subsidies. For example, self-storage facilities, like apartment buildings, promise a relatively safe return on investment because of stable demand, but they don’t create many new jobs that can turn an area around.
There is nothing wrong with making a profit. But we don’t need government handouts in the form of tax breaks for things investors are already lining up to do on their own. These subsidies should be used only when the private return is low but the social return is high.
We recommend three ways for Congress to drive more investment into persistently poor areas.
Congress should amplify tax breaks for initial investments in opportunity zones — especially those that may not yield big profits — while scaling back the tax benefit tied to outsize returns that accrue over the longer term.
Second, Congress should target stronger incentives to the most persistently poor communities. The House bill nods to this idea by enhancing incentives for investment in rural areas. But lawmakers shouldn’t favor rural areas over urban ones.
Third, Congress should steer subsidies toward investments that deliver high social returns — like those that create stable, long-term jobs — without adding bureaucratic hurdles. Enhanced tax incentives could be automatically triggered for opportunity zone investment in sectors such as manufacturing or health care that typically rely on permanent, full-time workers.
Clearly, opportunity zones can work — they’ve have had a meaningful impact in hastening the development of already growing communities. Now we should see if their power can be unleashed for the communities that need it the most.
Kevin Corinth is the deputy director of the Center on Opportunity and Social Mobility at the American Enterprise Institute. Naomi E. Feldman is an associate professor of economics at the Hebrew University of Jerusalem.
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