Opportunity Zones: Incentivizing Investment in Low-Income Neighborhoods

Posted April 10, 2019, By the Annie E. Casey Foundation

Charles Rutheiser, Senior Associate, The Annie E. Casey Foundation

In this blog post, Charles Rutheis­er, a senior asso­ciate in the Annie E. Casey Foundation’s Cen­ter for Civic Sites and Com­mu­ni­ty Change, talks about Oppor­tu­ni­ty Zones. He defines what they are, when they were estab­lished and how they could evolve with the help of a fed­er­al tax-incen­tive program.

Q: What are Oppor­tu­ni­ty Zones?

Rutheis­er: Oppor­tu­ni­ty Zones are cen­sus tracts that have been des­ig­nat­ed for a fed­er­al tax-incen­tive pro­gram aimed at increas­ing pri­vate invest­ment in eco­nom­i­cal­ly dis­tressed communities.

There are more than 8,700 of these zones in urban, rur­al and sub­ur­ban areas across the coun­try. Col­lec­tive­ly, Oppor­tu­ni­ty Zones are home to more than 31 mil­lion peo­ple, includ­ing near­ly 7 mil­lion chil­dren. At least 20% of Oppor­tu­ni­ty Zone res­i­dents live below the pover­ty line and more than 50% are peo­ple of col­or.

Q: How did they originate?

Oppor­tu­ni­ty Zones were estab­lished in 2017 as part of the Tax Cuts and Jobs Act. This leg­is­la­tion pro­vides fed­er­al tax exemp­tions on cap­i­tal gains to indi­vid­u­als who are will­ing to invest in real estate projects or busi­ness­es in the des­ig­nat­ed cen­sus tracts.

Q: How were Oppor­tu­ni­ty Zones selected?

Gov­er­nors from each state and U.S. ter­ri­to­ry, as well as the may­or of Wash­ing­ton, D.C., nom­i­nat­ed cen­sus tracts with­in their juris­dic­tions that had at least 20 per­cent of res­i­dents liv­ing below the pover­ty line or that were adja­cent to a low-income area.

Q: What makes the Oppor­tu­ni­ty Zone pro­gram dif­fer­ent than oth­er com­mu­ni­ty devel­op­ment initiatives?

Using fed­er­al tax pol­i­cy to stim­u­late invest­ment in dis­tressed areas is not a new idea. Sim­i­lar ini­tia­tives, includ­ing Enter­prise Zones and Empow­er­ment Zones, first began in the 1990s. These pro­grams, how­ev­er, involved tax cred­its and grant fund­ing that were capped by avail­able fed­er­al resources. Because Oppor­tu­ni­ty Zones are fund­ed by pri­vate investors, rather than allo­ca­tions from the fed­er­al gov­ern­ment, they aren’t sub­ject to such limits.

Q: What will make Oppor­tu­ni­ty Zones a success?

One indi­ca­tor of suc­cess will be whether Oppor­tu­ni­ty Zones actu­al­ly receive the lev­el of invest­ment — $100 bil­lion over the next decade — that the U.S. Depart­ment of the Trea­sury has pro­ject­ed. Anoth­er mea­sure is how these invest­ments are dis­trib­uted among the var­i­ous zones. Some fear that only a small share of cen­sus tracts will benefit.

But the ulti­mate suc­cess of Oppor­tu­ni­ty Zones won’t be deter­mined sole­ly by how much mon­ey goes where. Rather, it will hinge on the kinds of projects these dol­lars sup­port and the ben­e­fits that res­i­dents see from them, such as qual­i­ty jobs, more afford­able hous­ing options and greater invest­ment in local busi­ness­es. Suc­cess will also hinge on min­i­miz­ing the neg­a­tive effects — such as dis­place­ment — that are often asso­ci­at­ed with growth.

To achieve suc­cess, local lead­ers must estab­lish con­crete goals and devel­op track­ing sys­tems to mea­sure progress. Bal­ti­more and Atlanta — two cities where the Casey Foun­da­tion has a spe­cial con­nec­tion and a long-term com­mit­ment to fam­i­ly well-being — have already begun this process.

Bal­ti­more City offi­cials recent­ly released a frame­work to guide com­mu­ni­ty devel­op­ment projects and launched sev­er­al efforts that will com­ple­ment Oppor­tu­ni­ty Zones, includ­ing a Neigh­bor­hood Impact Invest­ing Fund and an Afford­able Hous­ing Trust Fund. It is one of few cities in the coun­try, along with Atlanta, that has a full-time ded­i­cat­ed Oppor­tu­ni­ty Zone coor­di­na­tor who match­es poten­tial projects with investors.

Q: How can phil­an­thropy make Oppor­tu­ni­ty Zones work for chil­dren and families?

Max­i­miz­ing the ben­e­fit and mit­i­gat­ing the risks that Oppor­tu­ni­ty Zones pose for low-income com­mu­ni­ties is the col­lec­tive respon­si­bil­i­ty of mul­ti­ple stake­hold­ers — includ­ing fed­er­al, state and local gov­ern­ments, investors, fund man­agers and inter­me­di­aries — and can­not be achieved by any one organization.

That said, foun­da­tions can play sev­er­al impor­tant roles, both togeth­er and indi­vid­u­al­ly. They include help­ing to con­nect mis­sion-ori­ent­ed investors with projects that ben­e­fit low-income res­i­dents; build­ing the capac­i­ty of res­i­dents to advo­cate for projects they want; shar­ing best prac­tices; and — per­haps most impor­tant­ly — sup­port­ing efforts to track invest­ment and impact.

Learn more about Casey’s com­mu­ni­ty devel­op­ment efforts

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