There is a lot of talk among policymakers and advocates about how to help economically distressed communities and how a tax incentive such as “opportunity zones” will improve these areas. Supporters of the opportunity zone incentive argue that an infusion of private capital is all that is needed to put distressed communities on an upward economic trajectory. What proponents of the incentive miss is what created these distressed communities in the first place. Certain communities did not become distressed by some invisible hand but as the result of intentional policies including, for example, forced displacement under urban renewal and institutional structures such as redlining. These policies and structures—defined as structural racism—helped to form these distressed communities, which tend to be overwhelmingly communities of color. Therefore, any solution that does not account for structural racism will produce ineffective outcomes because it will leave the underlying issue unaddressed. This is exactly the problem with opportunity zones.
The opportunity zone incentive was established as part of the Tax Cuts and Jobs Act of 2017 to spur economic development in low-income neighborhoods through the use of favorable tax treatment of realized capital gains. Framers of the bill argued that the incentive would encourage private capital to flow to those areas, claiming that these communities only need an infusion of funds to improve economic outcomes. However, the policy’s design centers on the investment community—not on the residents in the designated census tracts. There are many additional problems with the program’s design that also stem from the bill’s framers ignoring the very people they are supposed to help. If the framers had actually targeted the existing opportunity zone residents, they would have put into place guardrails to ensure equitable economic development. Unfortunately, that wasn’t the case.
Moreover, the opportunity zone incentive is not the only program that relies on markets to solve systemic poverty. Other examples include empowerment zones, promise zones, and other so-called place-based policies that look to private sector investment to uplift distressed communities yet fail to address the underlying issue of structural racism. Any solution to the problems in these communities must target the groups that have been systemically excluded from accessing resources.
The opportunity zone incentive seeks to revitalize communities by guiding realized capital gains from markets and directing them to investment projects in specifically designated U.S. census tracts. This approach falls within the concept of place-based policies, where government policy targets specific areas for development. Research on place-based policies is extensive and covers a variety of policies both in the United States and abroad. Economists David Neumark and Helen Simpson provide a review of the literature, and the authors cover both the theoretical arguments and empirical evidence on place-based policies.
The theoretical justification for place-based policies hinges on the notion that externalities occur from the spatial location of individuals, firms, or industries within a region. That is to say, the clustering of individuals, firms, or industries provides an added value to a region’s level of productivity that would not have occurred without this critical mass. These externalities provide spillover benefits toward neighboring communities. For example, innovations will occur faster in a region with a cluster of firms producing related products than in a region with just one firm.
In practice, however, these programs are not effective for employment growth or poverty reduction. For example, empowerment zones offered business tax credits for hiring and block grants for infrastructure investment or training. However, research by economists C. Lockwood Reynolds and Shawn M. Rohlin found that the zones had no effect on local hiring, and any benefits realized went to landowners. The results are not surprising given that in developing these sorts of policy approaches, policymakers remain in denial of the structural barriers that have and continue to impede economic growth in certain communities. Hiring discrimination is still evident in the job market, and demographic disparities exist in training programs. The following section provides a brief description of the barriers that have limited these communities.
The Kerner Commission report and structural racism
While the history that created distressed communities in the United States can be traced back to the Reconstruction period, a more contemporary reason can be found in the later civil rights era. In response to civil unrest that erupted during the summer of 1967, President Lyndon B. Johnson convened a commission to study what had happened; why it happened; and what could be done to fix the problems. On February 29, 1968, the National Advisory Commission on Civil Disorders, also known as the Kerner Commission, issued a scathing report that called into question the efficacy of existing American structures and institutions. The report argued that African Americans have been excluded from economic progress due to “pervasive segregation and discrimination.” It placed the blame squarely on white racism for the conditions that led to the riots. While not stated explicitly in the report, the Kerner Commission defined what has come to be known as structural racism—specifically, the systemic disenfranchisement of African Americans. The issues that African Americans faced and which led to the myriad riots of the mid- to late-1960s were not problems on an individual level; rather, they were the fault of a society and system that put a structure in place that limited economic opportunities for African Americans. Unfortunately, President Johnson rejected the report’s conclusions and did not implement any of its recommendations.
More than a half-century later, the problems identified by the Kerner Commission remain the same. In fact, it could be argued that the problems outlined in the report have been exacerbated due to the consequences of race-neutral policies or the lack of adequate policy. The work of economist Darrick Hamilton has shown, for example, that there are penalties at the intersection of race and gender in the labor market. Therefore, remedies such as job training or education subsidies that don’t account for these penalties will not close wage gaps. Many grievances that the commission found are still true today. These grievances include unfair targeting by law enforcement; separate and unequal education; diminished support from federal programs; and continuing discrimination in the housing market. Structural racism can be seen manifest in specific instances such as the water crisis in Flint, Michigan, or the lack of heat in Baltimore schools.
Ignoring structural racism will limit the effectiveness of any capital investment in disadvantaged communities. First, capital may not come into these areas: Due to redlining and segregation, these communities do not provide the profit opportunities that will attract investors, and no tax incentive will change that. Second, capital investment likely will not fund the projects needed to combat the continuing problems plaguing these communities. Instead, capital investment will go to projects that will yield the largest return such as luxury condominiums—not community centers. Third, capital investment will fund projects that will not only fail to help existing residents but will actually price them out and lead to displacement.
The opportunity zone incentive attempts to solve the first issue but does not engage the second or third. Capital cannot be the sole solution for distressed communities; the only goal of private capital is to maximize profit—not to uplift struggling communities or improve the economic outcomes of their residents. The celebrated growth of the middle class during the 20th century was not the result of private capital investment but specifically of federal policy through government-sponsored programs such as Federal Housing Administration loans and the GI Bill. However, these programs mostly excluded everyone other than white men from the benefits.
There have been many articles written that delve into the reasons why certain communities are distressed. These articles, in seeking to understand the problem, too often miss or ignore the fact that structural racism is at the heart of why distressed communities are distressed—a reality that has been true throughout America’s history.
Just as in the past, barriers prevent resources from flowing into disadvantaged neighborhoods. No market mechanism nor any amount of private capital will break down those barriers. Only intentional and deliberate government policies to remove those barriers and support existing residents will work. This can be achieved in a number of ways, including by enforcing the Fair Housing Act and reinstating the Affirmatively Furthering Fair Housing tool, which would reduce racial segregation; strengthening the Consumer Financial Protection Bureau, which would lower barriers to gaining wealth; or through direct capital infusion by the federal government to build wealth in distressed communities. But more importantly, there needs to be a radical rethink of what economic development means, which in turn would inform the development of a new framework for creating policies that ensures equitable economic development.
Olugbenga Ajilore is a senior economist at the Center for American Progress.