Opportunity Zone Communities May Require Additional Investments

The opportunity zone program promotes long-term investment in low-income communities by allowing incentives for investors who develop projects in economically distressed areas.

The opportunity zone program promotes long-term investment in low-income communities by allowing incentives for investors who develop projects in economically distressed areas. Shutterstock

 

Connecting state and local government leaders

Experts said the program could benefit from more structured oversight.

The new federal opportunity zone program could turn into a boon for disadvantaged communities, but much depends on funding oversight and additional investments in downtrodden places.

“I don’t want us to think somehow that this is the silver bullet that will solve the problem,” U.S. Rep. Dan Kildee, a Democrat from Flint, Michigan, said Tuesday during a roundtable discussion about the program. “It is potentially a good resource, but it only can work if it’s coupled with other human investments and human capital.”

Opportunity zones, created as part of the Republican tax cut bill signed into law by President Trump late last year, promote long-term investment in low-income communities by allowing incentives for investors who develop projects in economically distressed areas. Investors who direct money to qualifying areas can receive cuts on their capital gains taxes after the assets are owned for a certain number of years.

States and territories nominated census tracts to be designated as qualified opportunity zones to make them eligible for the program. To qualify, a census tract must have a poverty level of at least 20 percent or a median family income that does not exceed 80 percent of the statewide rate or the metropolitan area family rate.

That gives states a fair amount of control over where investments can be made. All 50 states have submitted areas for designation, and the Internal Revenue Service and the Treasury Department announced this month that they'd approved opportunity zones in each state, along with the District of Columbia. Roughly 20 percent of those are in rural areas, and most have higher-than-required rates of poverty and lower-than-required median family incomes.

“I was a bit encouraged that the tracts seem to be trending toward communities that really need the investments,” said Matt Josephs, a roundtable member and senior vice president of the Local Initiatives Support Corporation.

But the program could benefit from more structured oversight from federal officials, Josephs said, particularly as it relates to the specifics of the local investments.

“There are no guardrails in place to steer investments into what is going to benefit communities the most,” he said.

That matters, because capital investment alone isn’t enough to revive a community, said panelist Aron Betru, managing director of the Center for Financial Markets at the Milken Institute.

“The flow of capital is merely a means, it’s not the end at all,” he said. “The last thing I want anyone to think is that just because money is flowing, everything’s going to work out. That’s really not the case.”

Creating job growth is key to allowing individuals to accumulate wealth and achieve financial independence, which in turn is crucial to the health of a community, Betru said. About two-thirds of job creation occurs in the small-business sector, for example, but it’s unclear whether investors will direct their money toward that type of endeavor.

Still, capital investment is important for impoverished communities, Kildee said. But many of those communities also have infrastructure and capacity issues that will ultimately need to be addressed to ensure long-term success.

“When I see this opportunity, I do think there’s great merit in it, but I think it will have disproportionate impact based on the capacity of those places,” he said. “We can’t ignore that and assume that moving capital only … is going to be a panacea for places that have structural problems that have to be addressed.”

Tuesday’s discussion was part of a series of roundtables held under the banner of Kildee’s “The Future of America’s Cities and Towns” initiative, which includes policy talks around the country with elected officials and public policy experts to “focus on the unique challenges and opportunities facing many older, industrial communities like Flint, Michigan.”

Kate Elizabeth Queram is a Staff Correspondent for Government Executive’s Route Fifty and is based in Washington, D.C.

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