Opportunity Zones! Are they good or bad?
The answer to that question may depend in part on whether or not you buy the premise that tax incentives are the most effective way to successfully uplift economically depressed areas. And even if you do, at this moment, a lot hinges on the final rules governing the program, which was unveiled as part of the 2017 tax reform as a way to lure investment to neglected neighborhoods and left-behind cities. It also depends on exactly how local governments choose to implement it.
In a new brief, the Urban Institute’s Brett Theodos and Brady Meixell use the case of Cook County, Illinois, to illustrate how local leaders could get the most out of their brand-new zones. Their big takeaway: Understanding the nuances between the selected areas will go a long way in maximizing the benefits of this program.
Let’s take a quick recap of the highlights to understand where we’re at now: In 2017, Congress passed a tax law that created this program, asking governors of each state and territory (and in the case of D.C., the city’s mayor) to choose roughly 25 percent of the eligible tracts in their jurisdictions. The Department of Treasury has gone ahead and approved these opportunity zones.
Theodos and his colleagues have previously found that these selections have lower incomes and higher poverty and unemployment rates compared to the eligible tracts not selected. That’s good, because that demonstrates that these are areas that actually need investment. What is not clear is whether this investment will always create benefits for local communities. If some of these low-income areas are more susceptible to displacement from gentrification, for example, it may be the case that certain types of investment just end up driving up cost of living and price out the existing residents.
In fall of 2018, the Internal Revenue Service opened up its first set of regulations on opportunity zones for feedback. But even though these regulations aren’t finalized, investors are already bundling their capital gains into “opportunity funds,” which direct them toward housing, small businesses, transit, and other assets within opportunity zones. So now, the ball is in the court of local stakeholders. Many questions remain: Will the money end up deepening inequality within cities? Could it be a boon for payday lenders, billionaire developers, Big Tech companies like Amazon, and all sorts of other characters who don’t need the money? And for places like Chicago, will the incentive succeed in luring investors at all?
“You look at the Youngstowns and the Flints… and many of them are going to need to do more to make even the existing incentives attractive to investors,” Theodos said. “Absent public and philanthropic intervention, the cool market neighborhood and cities could largely be passed by and not get much if any way of opportunity zone investment.”
Even among opportunity zones in the same city, market forces are driving investor decisions. The brief takes a deep dive into the characteristics of Cook County’s opportunity zones to illustrate what these differences may look like. The county chose 29 percent of the 620 eligible census tracts in the South and West Side of Chicago—and outside of it, in Southern Cook County. These are typically majority African-American areas. On average, they have a 41 percent average poverty rate and a 27 percent unemployment rate; the median home price is $140,000. In other words, they could use some attention. And the first big recommendation the brief mentions is the need to meaningfully engage these communities to make sure the attention they get is the type they’re looking for.
The UI researchers also score each eligible tract on a scale of 1 to 10 (lowest to highest) based on the investment it has previously attracted towards commercial projects, small businesses, and housing. This scale gives a sense of the where the investor interest lies for each neighborhood. As it turns out, 60 percent of the designated zones in Cook County scored lower than 5. But the researchers also note that 20 percent scored ranked 8 and up on that index. In other words, when it comes to access to capital, a large degree of variation exists among designated zones.
Finally, the authors examine how quickly these zones have experienced socioeconomic change between 2000 and 2016 to get a read on which ones are already gentrifying. Of the 181 zones, only 5 have experienced notable changes—a rate far below that in comparable urban areas. Of course, this measure doesn’t capture where gentrification may occur in the future.
Ultimately, what this analysis shows is that each zone requires a tailored strategy. In a neighborhood that is already very attractive to investors and is likely to gentrify rapidly, it might be better to tamp down on speculative interest, Theodos said, because the goal is to preserve affordable housing. In the case of new developments, it may be wise to leverage existing mechanisms like community benefit agreements, land trusts, and affordability requirements to make sure the benefits flow to the people they are intended for. With a less-attractive neighborhood, local stakeholders may have to sweeten the pot further to spark investor interest.
“It really is important that cities, counties, philanthropy, and [Community Development Financial Institutions] understand what they’re trying to get in a particular neighborhood, what that neighborhood needs, how the existing tools intersect with this incentive, and what new tools are needed to either further incentivize opportunity,” Theodos said.
Perhaps one of the biggest challenges when it comes to implementing opportunity zones is the lack of built-in reporting and monitoring requirements at the federal level. Absent that, UI recommends that local governments code some of their own into the building permit application process. Given that the bulk of opportunity zone investments will go towards real estate, it may capture at least some of how the program is working.
Local governments are, of course, constrained by the rules they get handed by the feds—but they are not powerless. “They have important leverage points and we tried to lift those up; ” Theodos said. “They will matter.”
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