Tax Law Creates New Opportunity Zone Program; Planners Must Act Early
The 2017 tax reform legislation, the Tax Cuts and Jobs Act, established an important new community development incentive program. Known as Opportunity Zones, the program aims to channel long-term capital into investments in distressed communities.
Although the Opportunity Zones program is the first new community development tax incentive program since the Clinton administration, the provisions flew somewhat under the radar with the attention of most advocates on preserving existing tools, such as Private Activity Bonds and New Markets Tax Credits.
The launch of Opportunity Zones begins immediately with a looming deadline — March 21, 2018 — for initial zone designations. Local officials and planners need to move quickly to understand the program and engage in the process of identifying zones and planning for how best to use and leverage this new incentive.
The program allows state governors to establish Opportunity Zones where new Opportunity Funds would make targeted investments. Opportunity Funds would allow investors to get a tax deferral and other tax benefits on the reinvestment of unrealized capital gains. The program does not use traditional tax credits or other direct public subsidies.
Deadline for Zone Nominations
The launch of the program comes with some quick deadlines. Based on initial federal guidance, governors have until March 21, 2018, to designate Opportunity Zones. Governors can, and likely should, request a 30-day extension for making those initial zone determinations.
Opportunity Zone designations would last for 10 years. States that do not make designations by March 21 or request an extension will be deemed to have opted out of the program.
To qualify for the designation, a zone would have to be a low-income census tract (defined as a minimum 20 percent poverty rate and median family income no greater than 80 percent of the area median income) or a census tract contiguous to a low-income tract (provided the area does not exceed 125 percent of the median family income of the contiguous census tract).
Those contiguous tract designations are capped at 5 percent of the total. Enterprise Community Partners has developed a helpful interactive mapping tool to help communities and policymakers understand who is eligible.
However, just because a census tract meets the requirements it is not automatically designated. Governors can only select up to 25 percent of the eligible tracts in the state for designation. This is intended to encourage more concentrated areas for investment and development.
New Approach to Community Development Incentives
With changes in the corporate tax rate potentially reducing demand for tax credit-based community development programs, Opportunity Zones have the potential to fill an important gap. Proponents of the idea point out there is a significant pool of unrealized capital gains available for investment and the use of designated funds should ease the path of investors to roll these holdings into investments in targeted communities.
Essentially, investors can defer and reduce their capital gains tax liability and face no capital gains on Opportunity Zone investments held for at least 10 years.
The program marks a departure from recent approaches to spurring investment in distressed communities. It does not focus on attracting or creating incentives for individual companies or projects through tax credits, subsidies, or grants. Instead, the focus is on influencing investors and bringing capital sitting on the sidelines in the financial system into community development.
Moreover, the program differs from others in that Opportunity Funds can invest in a diverse array of assets, including business equity, real estate, infrastructure, and housing. According to one of the program's architects at the Economic Innovation Group, "a single fund can invest in all aspects of a mixed-use neighborhood development plan."
While the law creates no specific role for local officials in the program, the design of Opportunity Zones requires good planning for designated zones to channel new investment and coordinate development.
Although the program is new, the idea behind it has been around for a few years and has attracted bipartisan support. Separate legislation to establish the program had been introduced by Sens. Tim Scott (R-S.C.) Cory Booker (D-N.J.) and Reps. Pat Tiberi (R-Ohio) and Ron Kind (D-Wisc.).
Cities, states, and investors are still awaiting details finalizing the new program. But the looming zone designation deadline means communities need to act now.
Resources
Several organizations have useful resources available, including a toolkit from the Economic Innovation Group and a webinar from Enterprise. Make sure that your community is working on the designation process with state officials and planning for how best to leverage new Opportunity Zones.
Top image: Detail of U.S. map with areas eligible to apply for Opportunity Zone designation colored in dark blue. Areas not eligible are in yellow. See the full map. Source: www.policymap.com.