Development and its funding remain a perennial challenge facing any urban area. Economic Opportunity Zones, a new program found in the Tax Cuts and Jobs Act, may help in allocating private funds for development. In brief, Economic Opportunity Zones are low-income census tracts nominated by state governors and certified by the US Treasury Department.
The program allowed governors to identify only one-quarter of low-income areas as Opportunity Zones. Projects located within that zones are eligible for investment that shelters capital gains from taxation. An investor must put money into an Opportunity Fund that invests at least 90 percent of its capital in Opportunity Zones. If an investor holds on to the fund for ten years, he can withdraw his money and avoid paying capital gains on that sale.
However, little data exists to support or dispute the efficacy of this program. Before the program is renewed, decision makers must obtain comprehensive data to show that opportunity zones make sense. That’s in the future. Currently, we should explore what we need to ask of our ever-expanding metro zone to make development feasible, equitable, and respectful of our Front Range community.
Land of Opportunity
Before the recent Tax Cuts and Jobs Act, Senators Corey Booker and Tim Scott, in collaboration with several representatives in the House, advanced a plan to recapitulate capital gains in an investment scheme to benefit development in underserved, and largely urban, areas. Unable to pass their bill during the last presidential election cycle, they succeeded in adding it to the tax bill.
The bill required state governors to propose poverty-stricken areas for designation as Economic Opportunity Zones, which were eligible to receive direct investment through funds set up to benefit those seeking a tax shelter for capital gains on an investment.
Behind the legislative sponsors is an organization called the Economic Innovation Group, a bipartisan lobbying firm that seeks to provide data-driven plans to bring jobs, investment, and economic growth to US communities.
According to their website, they are interested in “bringing geographic inequality into the national conversation, analyzing the impact of the decline in entrepreneurship and economic dynamism, and exploring the future of the economy.” A quick glance at their projects suggests a dim view of the recovery from the late recession.
Unsurprisingly, the EIG is concerned about rising inequality in developed societies. The organization introduced in 2016 the Investing in Opportunity Act, which led to the creation of the Opportunity Zones. It would later find a place in the Tax Cuts and Jobs Act.
The idea behind an Economic Opportunity Zone is to fund productive economic activity. The EIG estimate that approximately $6.1 trillion are available for reinvestment into Opportunity Zones; US households, are reckoned to hold $3.8 trillion alone, with the reaming figure coming from potential corporate reinvestments. Granted, existing investments must be sold at a gain to free that capital to flow into Opportunity Zone funds.
In operation, Economic Opportunity Zones are relatively simple. Speculators who sell an investment for a gain must pay capital gains taxes on the profits made from any sale that nets a gain for the investor. This tax is often perceived as hefty, and so investors have incentive to seek a shelter for those profits.
Rather than tax the profits and contribute the funds to the common purse, the national government has established Economic Opportunity Zones to channel investment funds into economically distressed areas. In theory, investors will put their earnings into these private investment funds and provide capital and therefore growth to projects in the zones.
Currently, there are funds established on the East Coast to finance existing projects, though a search for such services in Colorado proved inconclusive. Colorado has its own set of Opportunity Zones, which seem targeted to shore up urban development, and also to promote investment to develop communities in rural areas.
In Fort Collins, the area near the old airport has been designated as an Opportunity Zone. However, the city’s website does not indicate any new proposals for development in that area. It’s difficult to assess the current and future impact of this project on our community.
Not So Fast
Do Opportunity Zones work? Much of the economic criticism of Opportunity Zones comes from thinkers on the left, who view pro-market policies with skepticism. Regulators must target the right areas in order to maximize the benefits to the poor.
Similar programs that have promoted investment in low income census tracts have returned mixed results, with only modest gains in wealth among the native inhabitants in those areas. The Brookings Institute observes that precious little data exists to evaluate place-based programs. Metrics must be established across the Front Range to determine what impact, if any, such policy has on development.
Harnessing the potential of the entrepreneurs within the affected area is vital to the efficient function of any sort of direct investment program. In this case, how funds are used, and what businesses benefit, are left largely to market forces. Local regulatory reform should accompany any investment.
Given the relative dysfunction of our government across echelons, and the pernicious impact of not in my backyard attitudes, such a reform is unlikely. As a development scheme, Economic Opportunity Zones do little but provide capital. We should not think of a program of direct investment as a comprehensive development package.
Aside from ideological criticism, most reasonable opposition to Opportunity Zones is based on simple pragmatism. If this sort of direct investment doesn’t work, then government has essentially established a tax shelter to encourage rent-seeking behavior. At worst, this sort of external investment in poor communities could increase inequality within those communities. Commonly referred to as gentrification, income and opportunity inequality will interfere with raising the status of the community and increase the effects of poverty on the losers.
No Easy Answer
Legally enabled gentrification, made possible by the flow of outside funds entering a poor area, is of greater concern. Income inequality experienced by longtime residents of an area is a likely long-term impact. Gentrification is an inevitable side effect of any development scheme.
Rising property values, driven by better homes and business, will also result in a rise in property taxes. The question is whether or not a rising tide raises all ships. Experience shows us that in the short term, it doesn’t do so equally. Inequality is a consequence of an effort to develop an area.
Managing inequality through regulation, educational opportunity, and continued economic growth is a complex and far-reaching task and one that Opportunity Zones aren’t designed to address. It’s easy to try to pin income inequality in our society to single programs or phenomena, but a multitude of policy, economic, and cultural factors feed inequality.
Our effort is better spent addressing larger trends and evaluating why certain areas are left behind. We must avoid a situation where established inhabitants are relegated to a position of disadvantage while paying the increased taxes to support the influx of outside businesses, while new businesses, which could headquarter anywhere, move to Colorado to take advantage of tax incentives while not creating new, high-quality jobs.
As the Front Range continues to develop, inequality will remain a problem that threatens political stability, upon which business success is built. Our development along the Front Range should proceed according to a plan that is respectful of the liberties of its people and the health of the environment. Investment is an important part of that plan, but not a chief concern; ultimately, money is a low barrier to investment.
We need a comprehensive and easily understood plan for development in our Front Range community. Previously, cities have made a good attempt to keep up with population and economic growth, but crowding will soon create real problems for mobility and infrastructure issues will undercut productivity.