Just weeks before the midterm elections, the Trump administration announced details of tax breaks designed to help spur investment in economically distressed neighborhoods.
But while investors and real estate developers can expect to see immediate tax benefits from the new rules, it won’t be clear for a while how effective the program will be in helping voters in the neighborhoods targeted for tax breaks.
The new program targeting so-called “opportunity zones” was included in the $1.5 trillion tax overhaul enacted late last year. Republicans, who are defending majorities in the House and Senate this November, had hoped to stake their campaign messaging to the tax cuts. But the measure failed to resonate with voters on a large scale.
The idea behind the investment and incentive program isn’t new. State and local governments have used tax incentives for decades to create enterprise zones to attract investment.
The new rules announced Friday outline a series of tax breaks for development in some of the poorest communities in the country, that are home to nearly 35 million Americans.
- Based on recent Census data, the designated census tracts had an average poverty rate of over 32 percent, nearly twice the national average.
- Median family incomes average 37 percent below the area or state median, and unemployment rates were nearly 1.6 times higher than average.
- These targeted Opportunity Zones are also twice as likely to be located in a county that had reported a poverty rate of at least 20 percent for 30 years.
The plan has already drawn strong interest from investors. Last month, Treasury Secretary Steven Mnuchin predicted that the new program would generate more than $100 billion in fresh capital for projects in targeted neighborhoods.
Investors in these designated zones stand to gain from generous tax benefits for qualified projects. Under the new rules, capital gains generated through a certified opportunity zone fund will not be taxed through the end of 2026 or when the investment is sold, whichever comes first.
Any gains from the fund are permanently shielded from taxes if the investment has been held for 10 years. In addition, the initial investment will be discounted by up to 15 percent for tax purposes after seven years.
The benefits for the residents of these opportunity zones, though, are harder to measure. A lot will depend on the details of the type of projects that qualify for these tax breaks.
Proponents of these programs argue that they help revive neighborhoods that have otherwise been passed over by investors and developers. But critics have argued that they represent tax giveaways to developers of projects that would be profitable without the incentives.
“There are very few guard rails on this investment,” said Jesse Van Tol, CEO of the National Community Reinvestment Coalition, a group of community organizations that promotes lending to underserved areas. “There’s very little in the way of ensuring that the social impact of what comes out of this is beneficial to low-income communities.”
One of the broadest studies of the economic benefits of enterprise zones was done by researchers at the W.E. Upjohn Institute for Employment Research. In their 2002 study, Alan Peters and Peter Fisher looked at the performance of 75 enterprise zones in 13 states.
Their overall assessment was “negative,” in part because of the wide variety of criteria used to designate projects for incentives. The enterprise zones they studied often fell short in creating jobs for residents of targeted neighborhoods because “the majority of jobs were taken by commuters from outside the enterprise zone.”
And they found that these tax breaks usually ended up costing more money than they generated in added tax revenues.
“Although there is a lot of business turnover in enterprise zones, zone incentives have only a minimal impact on new investment,” they wrote.