States Spur Economic Development with Smart, Sincere and Measurable Opportunity Zone Strategies
Following the passage of the Tax Cuts and Jobs Act of 2017, governors, with support from federal agencies, established opportunity zones (OZs) in disadvantaged areas across their states. OZs are intended to kickstart local economies by providing incentives to invest in a wide variety of projects for community revitalization. While OZs are a useful tool for states to achieve this objective, they carry with them the possibility of unintended consequences such as widening the urban-rural divide and exacerbating gentrification. States are now developing policies to maximize the utility of OZs and avoid any drawbacks.
Background
Investors receive a host of lucrative tax incentives by investing unrealized capital gains in OZ projects such as real estate, public infrastructure and local businesses. Each zone includes communities with potential for growth and communities lacking resources. Forty percent of the zones, including many of those lacking resources, are in rural areas. Various stakeholders are inventorying the Qualified Opportunity Funds (QOFs) that are being created; for example, the National Council of State Housing Agencies has identified more than 150 QOFsto date, representing millions of dollars in potential funding. However, the investments will not necessarily benefit rural areas, or even urban areas in need, without state incentives that level the playing field with the most attractive OZ locations for investment.
Challenges for Rural Communities
Despite OZs being framed as a solution for economic hardship and being “greenlit” by the White House, states are struggling to attract investments to their rural communities. This is due, in part, to a lack of resources in rural areas relative to urban ones. At the National Governors Association (NGA) State Summit on Opportunity Zones in Maryland this June, state officials and stakeholders agreed that concentrated investment in urban centers could adversely impact adjacent neighborhoods or draw dollars away from rural areas, exacerbating the urban-rural divide.
Governors can supplement OZ incentives by developing targeted policies and promoting state-level legislation to ensure a balanced distribution of investment between rural and urban communities. Certain states have begun developing additional incentives intended to catalyze economic growth in rural zones. As an example, Wisconsin is offering a tax credit for housing projects in OZs, with a higher tax credit for projects based in rural OZs. Some states are choosing to strengthen the connection between urban and rural communities, while others are focused on intergovernmental relations and sponsoring events so the state can engage community leaders. In southeastern Ohio, a large public research university is providing technical assistance to the OZs in the surrounding rural region. By leveraging anchor institutions such as schools, hospitals and community foundations, governors and QOFs can reach out to community members with a stake — both financial and sentimental — in the community’s success. Tapping high-net-worth individuals in small communities can also help yield the initial gains needed to draw in larger investors, thereby ensuring sustainable growth over time.
Addressing Possible Urban Displacement
Opportunity Zones are often viewed through a skeptical lens not only due to the disadvantage rural communities face in attracting investors, but also because of the negative impact large investments can have in urban neighborhoods. Real estate investments in low-income neighborhoods could increase the cost of living and eventually price families and businesses out of neighborhoods in which they have lived for decades. However, if states and cities collaborate and creatively implement incentives that benefit low-income residents and entrepreneurs rather than displace them, OZs could prove to be a dynamic economic engine, providing the tools needed for whole communities to thrive. Kentucky, for example, is holding workshops where local business and community leaders can learn about the pool of available funding and have their OZ-related questions answered.
Potential for Positive Action
The solutions being deployed to attract and equalize investments vary across states and are often tailored to what regional resources are available. NGA’s summit showcased state innovations and best practices to date and offered a call to action that will be echoed at future regionally oriented forums. States can learn from one another on how to maximize the benefits of opportunity zones and minimize negative consequences. As with any such strategies, states are working to ground their OZ initiatives in data and evidence which will enhance their effectiveness regardless of the still-pending federal data requirements. OZs present a unique chance for state and local governments to jumpstart sustainable economic growth through smart, sincere, and measurable polices, to transcend the urban-rural divide, and to empower families and businesses to remain in their own neighborhoods and thrive.
Elliot D. Berg is an Economic Opportunity Scholar with the National Governors Association’s NGA Solutions: The Center for Best Practices
