State and local leaders nationwide were surprised to learn that the Tax Cuts and Jobs Act, signed into law at the end of 2017, delivered them the most ambitious economic development investment incentive enacted since the Clinton Administration.
The new law empowers governors of every U.S. state and territory to designate “Opportunity Zones,” comprised of low-income community census tracts, where certain investments will receive a federal tax benefit.
Opportunity Zones were derived from legislation, first introduced in 2016, called the “Investing in Opportunity Act,” which attracted broad bipartisan support in the House and Senate, but received relatively scant national attention compared to the more high-profile aspects of tax reform. Now, states are racing to implement the new initiative.
The primary goal of Opportunity Zones is to encourage long-term equity investments in struggling communities, many of which have been excluded from the benefits of the national economic expansion in recent years. The recent stock market boom and prolonged period of record corporate profitability have resulted in a massive stockpile of unrealized capital gains wealth — over $6 trillion in corporate and individual holdings as of the end of 2017, according to our analysis of Federal Reserve data.
Because of Opportunity Zones, investors are now incentivized to reinvest those dollars into capital-starved, low-income communities. And, because investors are exclusively using their own capital without any up-front subsidy, there is no cap on how much capital can be put to work rebuilding communities. It is a nationally scalable incentive.
The Opportunity Zones concept is premised on the need for an economic development tool that is flexible enough to finance a broad spectrum of needs in a wide array of places — small towns and urban cores alike. After all, no two low-income communities have the same set of needs.
Previous efforts to spur investment in struggling areas were too often limited by a narrow use case or an overly prescriptive, top-down approach that left no room for local experimentation.
In contrast, the Opportunity Zones incentive was designed with the flexibility to ensure that communities can pursue the best possible mix of investments in new and expanding businesses, infrastructure and energy projects, commercial real estate, affordable housing, and more.
Still, state and local leadership is essential for Opportunity Zones to reach their potential. So how can mayors and governors, whose own budgets are stretched thin, maximize the impact of this incentive and ensure it succeeds where other well-intentioned programs have failed? Here are a few guiding principles mayors and governors should keep in mind:
Be strategic: Private investment is a critical ingredient in the success of any local economy. But capital alone is not a strategy, and it takes more than simply designating a struggling community as an Opportunity Zone to ensure real, sustainable progress is made. That’s where state and local leadership comes in.
What other policies are needed to help communities thrive? Are local zoning, permitting, and licensing creating barriers to growth and mobility? Are workforce development programs aligned to support the new companies and projects taking root in the zones?
Leaders should treat Opportunity Zones designations as the first step in a holistic policy reform effort. And every governor should designate a senior official as the point person for Opportunity Zones in his or her state to ensure strong accountability and coordination of resources.
Focus on entrepreneurship: The best way to build a stable economy with broad access to opportunity is to foster a thriving entrepreneurial ecosystem. Research by the Kauffman Foundation and others shows that new businesses account for the vast majority of net job growth each year. The birth of new businesses sets off a chain reaction in the economy that boosts competition, innovation, and productivity.
Unfortunately, the U.S. is experiencing severely depressed rates of entrepreneurship in the wake of the Great Recession, and low-income areas have been hit especially hard by this trend. That is why local leaders should be especially focused on prioritizing startups in their Opportunity Zone development strategies.
Entrepreneurs often struggle to get access to capital, which forces many of them to move their business to be closer to their investors in thriving places like Boston, New York City, and Silicon Valley. The Opportunity Zones can help stop the brain drain by incentivizing entrepreneurs to start — and scale — their companies in places that desperately need them.
Convene and collaborate: Investors will be attracted to places that with robust local support networks, and mayors and governors are uniquely positioned to reach across sectors to ensure local stakeholders are working together towards a common goal. Successful Opportunity Zones will require long-term, mutually reinforcing efforts between the public, private, and philanthropic sectors.
Educational institutions, community organizations, foundations, major incumbent businesses, small business support centers — all of these and more must be recruited into the effort to build local capacity and inform the development long-term development strategy.
Enable an open data platform: States should be creative in making data about their Opportunity Zones available to investors and researchers. For investors, having an online portal where information on local needs, qualified investments, and complementary state and local incentives is essential. Additionally, tracking the inflows of investments and their local impact will help researchers gain valuable new insights into which local models work the best.
The fate of Opportunity Zones ultimately won’t be determined in Washington. Instead, Congress has placed a powerful tool in the hands of governors and mayors, who must ensure it is deployed thoughtfully to reinvigorate struggling communities and foster economic dynamism. In the intense competition for private capital, those local leaders that fully realize the potential of Opportunity Zones will be able to deliver transformative change for their communities.
The Tax Cuts and Jobs Act of 2017 represents the most significant changes in tax law in over 30 years! When was the last time your CPA or tax preparer offered you tax strategies to help you be more prosperous in your business? Give us a call today at 636-394-5524 and let us help guide you through the complexities of these new rules.