As he campaigns for re-election, President Donald Trump likes to point to Opportunity Zones as a cornerstone for his administration’s efforts to improve lives in poor communities, and as part of his case that he’s delivering for Black America.
The Opportunity Zones program was one piece of the massive package of tax cuts that the president and a Republican-controlled Congress passed in 2017. The program allows investors to defer or even avoid paying taxes on capital gains — the profits made from investments like stocks and bonds — by investing that money in projects in designated neighborhoods. Profits made from the Opportunity Zones investments are also tax-free, provided the investment is held for a decade.
The nearly 8,700 census tracts that were designated as Opportunity Zones are mostly low-income. In his State of the Union Address earlier this year, the president said that, because of Opportunity Zones, "jobs and investments are pouring into [nearly] 9,000 previously neglected neighborhoods."
“In other words,” Trump said in the speech, “wealthy people and companies are pouring money into poor neighborhoods or areas that haven't seen investment in many decades, creating jobs, energy, and excitement.”
The Opportunity Zones framework came out of bipartisan legislation supported by Sen. Tim Scott, a South Carolina Republican, and Sen. Cory Booker, a New Jersey Democrat. But the program has been criticized for its big price tag ( estimates suggest the program will cost $3.5 billion in lost federal tax revenue), and for poor accountability and design.
Billions of dollars have already been set aside to invest in Opportunity Zones projects. To understand how the program works, and whether it is achieving the mission of improving lives in lower-income neighborhoods, KERA's Chris Connelly spoke with Brett Theodos, a senior fellow and director of the Community Economic Development Hub at the Urban Institute. He co-authored a report that takes an initial look at some of the benefits and pitfalls of the program.
The coronavirus may also be dampening the impact of the Opportunity Zones projects, and exactly how future projects in the zones would be impacted by a potential Biden administration are unclear.
The conversation has been edited for clarity and length.
Christopher Connelly, KERA: What's the goal here? What are the tax incentives in the Opportunity Zones trying to incentivize?
Brett Theodos, Urban Institute: The goal is as simple as it seems at face value: [The program] is trying to drive investment into census tracts, which have been designated as eligible Opportunity Zones. They’re mostly lower income communities. And the hope, at least among some, is that investment would result in benefits for residents who are living there. That's an open question, but at a minimum, the program is seeking to increase investment in community.
Connelly: Do we know whether these “jobs, energy and excitement” that the president describes are actually improving the quality of life for the people who live in those communities?
Theodos: We don't know. The IRS knows how much money is going into zones as reported on tax forms. They have not released that information. What we do know is that there is a real diversity of zones. We have a census tract in Manhattan that's a zone, where the average home value is $2 million. We have a census tract in Youngstown that's a zone, where the average home value is $14,000.
Connelly: Is there any requirement that investments actually produce meaningful improvements in the quality of lives in these neighborhoods, by creating more affordable housing or building grocery stores or other amenities, or creating jobs that have good salaries?
Theodos: There's no requirement for the program that it result in projects that would benefit residents specifically. It's more that the program operates from a trickle down or spillover kind of philosophy. The thinking that more investments simply into a neighborhood would benefit.
And I think there's scenarios where that might be the case, if a census tract doesn't have a grocery store or it doesn't have a gas station. As long as we're not bringing in a new check cashing store, it's conceivable to me that new investment would result in benefits for community residents and jobs.
But conversely, if we're producing high-end real estate in a rapidly appreciating neighborhood, it's harder to imagine how local residents, especially renters would benefit from that change.
Connelly: And there has been concerned that opportunities zones will spur or speed up gentrification, right? That new amenities or housing will drive up rents and drive out the communities who are already living there?
Theodos: I would say I'm not fully convinced that the opportunity zone incentive is actually powerful enough to rapidly accelerate gentrification. I think it's more likely that we'll be subsidizing gentrification that already would have happened and adding an extra sweetener to people who are participating in the process.
Connelly: In terms of Opportunities Zones as an antipoverty tool, as a way to improve lives in communities that have been historically neglected the way the president talks about it, what kind of a grade would you give opportunities on so far?
Theodos: It's hard to imagine that opportunity zones have done much of anything by way of lifting people out of poverty. The incentive is most principally creating real estate multifamily and commercial property. That's not really a wealth generator or even an income generator for that many people.
Got a tip? Christopher Connelly is KERA's One Crisis Away Reporter, exploring life on the financial edge. Email Christopher at cconnelly@kera.org.You can follow Christopher on Twitter @hithisischris.
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