The Opportunity Zone program, part of the 2017 Tax Cuts and Jobs Act, has been touted as a key tool in revitalizing distressed communities. The Trump administration argues that giving tax breaks to investors to incentivize investments in certain struggling geographical areas will in turn benefit these communities and their residents.
Critics of the Opportunity Zone program, however, argue that such trickle-down approaches do not work, and that this latest tax break only adds to the tax giveaways for the rich. Moreover, they point to evidence that the program is geared exclusively toward the wealthy and could even harm the residents and communities it is meant to serve. Proponents, on the other hand, have touted new projects—the result of incentivized investment—that could benefit distressed communities. Which side is ultimately correct depends on the U.S. Department of the Treasury’s guidance on how to implement the program. Its most recent set of rules, however, make clear that the Opportunity Zone program will not be a tool for economic development. If it was, Treasury would have imposed strict guidelines that ensured the projects funded through the program are those needed and vetted by targeted communities. However, the loose rules and favorable eligibility requirements in Treasury’s new guidelines will ensure that the Opportunity Zone program is just a tax shelter for the wealthy to park their capital gains.
Treasury’s goals are clear in the second set of program regulations
On October 19, 2018, the IRS released its first set of guidance on the Opportunity Zone program, which did not impose strict rules. Unfortunately, these regulations spoke only to the business aspects of the program and did not address any of the concerns that pertain to the communities the program will serve. Community advocates hoped that the next set of guidelines would fix this shortcoming and address community concerns, including the potential for gentrification resulting from displacement.
On April 17, 2019, Treasury released the second set of program guidelines, and businesses and groups that had lobbied for flexibility in claiming the tax breaks were generally pleased. The new regulations clarified many issues for investors, including how a qualified operating business is defined. The new rules also allow a choice of three so-called safe harbors—places where investors can put realized capital gains prior to investing that capital in a project—for meeting the statutory requirement that at least half of a qualifying business’ income come from a trade or business in the designated opportunity zone. It should be noted that the legislation gave Treasury the authority to promulgate regulations to prevent abuse, but the department failed to heed public comments urging it to explicitly define abuse of the program—which could have helped curb investments that negatively affect zone residents.
As it now stands, there is nothing in the new rules that ensures investors have any, let alone meaningful, engagement with distressed communities. There is nothing in the rules that ensures private capital will be deployed beyond a few major metropolitan areas. Additionally, another major issue that was not addressed is the certification process for the Qualified Opportunity Funds (QOF), which are the vehicles by which capital gains are rolled over and then used to invest in the distressed communities. Treasury stipulated in earlier regulations that QOFs can self-certify and that this process does not have to occur before the establishment of the fund. But as the nonpartisan Joint Committee on Taxation stated, Congress intended a certification process along the lines of the New Markets Tax Credit process—which requires precertification and includes a number of community-related requirements, such as a mechanism for community member oversight and input. On the contrary, Treasury is denying communities an oversight role and allowing any investors—with any purpose in mind, including a purpose that contravenes the well-being of the community—to self-certify.
A clear-eyed read of the second set of guidelines makes evident that communities’ concerns have once again been left by the wayside. Yet another major disappointment with the new rules is the lack of reporting requirements for funds—a concern many expressed in public comments and at the IRS hearing. Requiring that funds track and report metrics—such as employment of local residents; expansion of affordable housing; or contracting with local businesses, including those owned by women and people of color—is critical for the program’s evaluation. These sorts of data would help show where the money is flowing and the types of projects that the capital is funding. Treasury has issued a call for comments on data collection but will not implement any changes until at least the next tax year.
Conclusion
The Center for American Progress believes that any project funded through the Opportunity Zone program should have as its primary mission the improvement in the economic status of the current residents in the designated opportunity zone. This means better housing, better job opportunities and job quality, better educational options, better health outcomes, and improved infrastructure for those already living in the zone. Projects that improve any of these outcomes fit within the mission of equitable economic development.
However, it is naive to believe that the investment community will concern itself with equitable economic development. As currently configured, the Opportunity Zone program provides tangible benefits to investors but only theoretically benefits existing residents in the community. Therefore, it is incumbent on government officials to put in place equity guardrails and provide inducements to align the incentives of investors and developers with the needs and desires of the community. Unfortunately, this task now falls on state and local officials and on Opportunity Zone coordinators, in order to fix what Congress and the Department of the Treasury have failed to do.
Olugbenga Ajilore is a senior economist at the Center for American Progress.