The Obscure Tax Program That Promises to Undo America’s Geographic Inequality

On April 9, the Treasury Department debuted the first details of a new and far-reaching community-based tax incentive. In 18 states,newly designated zones could see a wave of new investment under a little-known provision of the recent tax overhaul.These opportunity zones are designed to lure investment to the nation’s poorest urban, suburban, and rural communities with a powerful tax incentive. By the accounts of some experts, the program could deliver a vital injection to areas that haven’t yet recovered from the Great Recession. Yet it could also fuel gentrification in those communities where too much opportunity, too fast, has led to rapid displacement.Nightmare scenarios under the opportunity zones program would mean tax benefits flowing to the wrong places or paying for the wrong things: Amazon receiving sweeping federal tax benefits to build HQ2 in D.C.’s Shaw neighborhood, for example, or payday lenders expanding their already substantial profile in places such as Louisville.

Or opportunity zones could just be, as critics contend, more of the same: the latest in a long line of economic development incentives that have failed to deliver. It all depends on how it’s implemented.
“Amazon HQ2 could figure out a way to make this [incentive] work [for the company’s benefit], potentially,” says Brett Theodos, a principal research associate for the Urban Institute. “Which is why zone selection matters so much. If we get places that really need the investment, it’s more likely those benefits are going to accrue to low- and moderate-income people.”Congress created the bipartisan opportunity zones program as part of the tax bill passed last December. It’s an effort to try to rip up the stagnant and uneven pattern of economic development across the country, conditions that are dark and worsening. Even as the Department of Treasury confirms the remaining zone designations—for 32 more states, the territories, and the District of Columbia—leaders are hammering out the terms for “opportunity funds,” vehicles that will allow investors to defer their tax liability by investing equity into a number of different kinds of assets within a community. Final nominations for opportunity zones were due to Treasury on April 20.The test of this program may be two-fold: first, whether cities and states pick the right places to be opportunity zones; and second, whether their federal partners set the proper guidelines for transparency and accountability.

Across the nation, a huge gob of census tracts were eligible to be designated opportunity zones—41,201 in all. (That’s a bit more than half of all the census tracts in the country.) State and territorial governors (plus the mayor of D.C.) were limited to picking just one-quarter of their eligible tracts to be opportunity zones. Unlike with Empowerment Zones, a more top-down Clinton-era predecessor, opportunity zones leave a great deal of discretion to state and local leaders as to where to steer the incentive.
 “We don’t have a lack of capital in the U.S. We have a lack of connectivity,” says Bruce Katz, who until recently served as a scholar for the Brookings Institution. “We have a matching problem. This incentive might accelerate our ability to match up.”
Katz is not a disinterested observer. He recently teamed up with Jeremy Nowak—a fellow at Drexel University’s Lindy Institute for Urban Innovation and Katz’s co-author for The New Localism: How Cities Thrive in the Age of Populism—to launch a consultancy related to opportunity zones. This work is taking them across the country to talk with leaders and investors alike about the program. Consider them matchmakers.In Louisville, for example, that might mean turning an under-used high school into a vocational training facility. That’s one idea for an investment opportunity in Louisville’s historically black, near-downtown neighborhood of Russell, where Katz says he talked about the possibility with a school superintendent. A program to boost on-boarding makes sense for Russell (and for Louisville, and for Kentucky as a whole, and really, for America). The idea is that new investments will work hand-in-hand with other factors—assets, existing programs, benefits, local conditions—to generate new jobs and also produce new skilled workers to fulfill those jobs.
In a month, Treasury will release the final opportunity zones. These designations will last a decade, meaning that decisions by state and local leaders will determine the fate of the federal program. That’s  key in differentiating opportunity zones from the New Markets Tax Credit: Local governments get say. Only one-quarter of eligible tracts will be open to opportunity funds. Local stakeholders’ decisions in choosing between qualifying tracts will be especially consequential.“There’s a lot of variation in how much capital the qualifying census tracts are accessing,” says Theodos, who led a project at the Urban Institute to show where opportunity zones could do the most good (and where they might not). “That means that some places need the incentive more than others, and that ranges of course across place as well. The governors have a lot to choose from, and their choice matters quite a bit.”The program’s authors say that opportunity zones can offset a tilted economy. At a time when inequality is practically a new national anthem, access to capital is especially skewed, geographically. Whole swaths of the nation have seen a decline in large banks lending to small businesses or opening new branches. Smaller and regional banks have struggled to keep up with the majors (or they’ve been absorbed by them). In some places, banking disparities are the result of racial discrimination, while other areas are just being left behind.

At the growth end of the spectrum, venture capital is highly concentrated in a handful of metro areas, and so is high-wage job growth. Sacramento, Philadelphia, Buffalo, and Hartford have lost high-wage jobs to Austin, Nashville, and Denver. Growth in places hit hardest by the Great Recession—in cities such as St. Louis, New Orleans, Rochester, Columbus, and beyond—is mostly confined to low-wage sectors.

“Given the trends we’re seeing in the economy, this is the right time and a necessary time to be reevaluating the policy toolkit that we use to address economic disparity at the community level and the regional level,” says John Lettieri, cofounder and president of the Economic Innovation Group, the think tank that helped to write the legislation. “The toolkit we use now does not equip us very well to deal with the trends that we’re seeing, which don’t look anything like the trends we saw in the 1990s or 2000s.”

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