“Our elected leaders can bring about meaningful improvement in the economies of particular places through policies that address what we’ve learned from the shortcomings of the Opportunity Zone incentive and other similar laws.”
States and the federal government have adopted a slew of tax incentives in recent decades to bring jobs and capital to urban and rural areas where employment and wealth have fled. The most recent federal incentive—Opportunity Zones—part of the 2017 Republican tax bill, brought the promise of funding for small businesses in struggling areas. The result, however, was a windfall for wealthy investors who heaped capital into existing lucrative commercial real estate projects in gentrified and rapidly improving parts of the nation’s thriving metropolitan regions. The left-behind parts remain left behind.
But it does not need to be that way. We can have better economic development policies that benefit communities most in need of capital. Our elected leaders can bring about meaningful improvement in the economies of particular places through policies that address what we’ve learned from the shortcomings of the Opportunity Zone incentive and other similar laws. We can ensure these programs reach those who need them the most by reforming the existing incentive, focusing more on specific uses like affordable housing, and encouraging community-based organizations to participate.
First, Congress can (and should) improve the existing Opportunity Zone incentive to make it more transparent, more focused on areas truly in need of capital, and more restrictive in terms of what investments merit incentives. In April 2022, a bipartisan group of senators and members of the House of Representatives, led by U.S. Senators Tim Scott and Cory Booker, announced a reform bill that advances a number of these improvements. Specifically, the bill would: sunset designated zones that are not impoverished; add reporting requirements for investors taking the incentive; explore ways to encourage smaller-dollar investments; support state-level and community-level innovation, and extend the current incentive for two years.
This bill has several obvious strengths. Transparent reporting, for example, will offer policymakers and the public the ability to assess for themselves whether the beneficiaries of incentives are offering something valuable to the public that merits such an incentive in the first place. Also, sunsetting designations for low-poverty Opportunity Zones is wise since those areas are already attractive to investors. But the proposed bill can go further. Since the Opportunity Zone was implemented over the past four years, we’ve learned more that can further improve place-based economic development policy.
Congress and state legislatures should focus place-based economic development policy on particular uses. The Low-Income Housing Tax Credit is a model. Adopted by Congress as part of a 1986 tax reform bill, the Low-Income Housing Tax Credit is responsible for creating 2.3 million units of affordable housing. While the Low-Income Housing Tax Credit is certainly not without its challenges, it shows how focusing on a particular use—affordable housing construction—can lead to positive outcomes.
The Opportunity Zone incentive, for instance, could include a requirement that for real estate-related projects, a percentage of units must be affordable. Sen. Ron Wyden of Oregon put forth a bill that limits Opportunity Zone incentives for real estate projects to those that include affordable housing. Such a requirement could be added to the current proposed Scott-Booker-led reform bill.
Finally, whether or not the reader believes that residents of Opportunity Zones can add meaningfully to selecting and funding incentive investments, from a fairness and justice perspective, there ought to be more meaningful ways for neighbors to participate in projects financed by incentive investments. The Scott-Booker bill attempts to bolster participation by encouraging smaller-dollar investments and state-level and community-level funds. But there is another guide from which we can glean wisdom.
The New Markets Tax Credit, a Clinton administration-era tax incentive that the Biden administration has proposed to make permanent, supports real estate development in designated low-income census tracts. This credit, currently funded at around $5 billion per year, requires the participation of a mission-based entity called a certified Community Development Entity, which, by its mission, must involve the participation of community stakeholders. While some Community Development Entities are formed by large financial institutions that are not necessarily broad-based in their program design, the involvement of the nonprofit organizations adds a layer of participation currently lacking in the Opportunity Zone incentive.
In Washington, D.C., and state capitals, it is critical that lawmakers reform economic development policies to support under-resourced communities better. The discussion in Washington and in state capital cities about economic development policy in the places that most need them must include reforms.
Place-based economic development tax incentives can be effective when the project uses (such as affordable housing or grocery stores in food deserts) are well-aligned with public needs, transparent concerning reporting and implementation, and when they engage stakeholders through participation. We can have effective place-based economic development policies—but to do so, our elected representatives need to better craft tax incentives to achieve more meaningful outcomes.
Edward De Barbieri is an associate professor at Albany Law School where he teaches courses in housing and community economic development law and co-directs the Community Economic Development Clinic.