In most American communities, one will see sleek, newly constructed luxury apartments, a variety of trendy eateries, carefully manicured shrubbery and the new well-to-do residents seemingly without a care in the world on one block. Then, one will see the bleak, dilapidated buildings, gaudy fast-food restaurants, tree-barren landscapes and the established residents that are struggling to meet their daily basic needs often mere blocks away. This is the disturbing reality that has sadly become the norm across most cities, towns and municipalities in this country.
The Opportunity Zones (OZs) that were created via the Tax Cuts and Jobs Act of 2017 with the intention of closing the economic gap between these communities are inadvertently accomplishing quite the opposite effect. Instead of capital flowing to the most economically disadvantaged neighborhoods, it has flowed to the most commercially viable of the OZs, further fueling the dynamic of gentrification. Instead of fostering economic opportunity for historically marginalized people, it is facilitating profit opportunities for developers, while economically distressed communities continue to suffer.
The proposed “skinny” federal budget would effectively gut federal financing for CDFIs, HUD housing programs and community development block grants in the new budget – in essence all the programs that support community development in the United States. Opportunity Zones could possibly become the biggest federal effort to improve investment in low- and moderate-income neighborhoods. This makes getting the Opportunity Zone 2.0 provisions right crucial for both urban and rural areas that are economically struggling.
The overarching goal of OZs was to provide additional financial incentives for private developers to produce more community economic development projects and initiatives in low- to moderate-income census tracts. The governors of each state were tasked with deciding which census tracts could be classified as an OZ area, determined via certain guidelines.
“All low-to-moderate-income (LMI) census tracts were eligible for designation as an Opportunity Zone. Tracts are LMI if they have a median family income which is no more than 80% of the surrounding area’s median income. If the census tract had a poverty rate over 20% it would also qualify as eligible for this designation,” wrote Jason Richardson, senior director of research for NCRC, in a 2020 article.
The program has attracted $100 billion in investments over the past 5 years, but the impact in terms of improved lives has been questionable. Additionally, problems with the OZ program became clear after only a few years into its creation, with disparities in investment and growing rates of gentrification affecting the original (and primarily majority-minority) inhabitants in the majority of OZ and OZ-adjacent census tracts.
“Often, the people who lived [in these communities], overwhelmingly people of color, were not benefiting from the investment that flowed there,” as Richardson and his co-authors wrote in NCRC’s 2020 report Gentrification and Displacement. “As the Philadelphia Federal Reserve found, renters are more vulnerable to displacement as their communities gentrify, and unlike owners, they reap none of the rewards that rising home prices and rents can bestow.”
The individuals experiencing the largest financial gains from these development projects are the private developers themselves. There is also substantial evidence that the majority of the projects private developers take part in in OZs more than likely would have taken place regardless, with the tax incentives only sweetening the proverbial pot.
As the National Bureau of Economic Research’s 2024 book The Economics of Place-Based Policies outlined, “The structure of the OZ incentive particularly lends itself to developing real estate projects in growing areas. With a real estate project, much of the taxable return to the investor comes in the form of capital gains, as depreciation and interest deductions usually offset much of the annual rental income and the underlying asset is long-lived and will often generate a capital gain when sold. The larger the capital gain, the larger the after-tax benefit for an OZ investor.”
While some proponents argue that the tax provisions of the OZ program are revenue-neutral echoing the disputed claim that income tax cuts for the rich inevitably pay for themselves, historical evidence suggests otherwise. In practice, the OZ program offers substantial tax benefits to investors by shielding their capital gains, effectively allowing those gains to be deferred, reduced, or, in some cases, eliminated entirely.
These benefits for the wealthy are conferred with minimal measured benefit to the residents of low- to moderate-income communities which the OZ program was intended to target. The price paid in lower tax revenues directly contributes to an increased federal budget deficit. To date, the OZs have merely been another mechanism for the upward redistribution of wealth.
The most glaring finding in recent studies on OZs is that the economic development within the zones is primarily concentrated in areas that are already experiencing a substantial economic upturn. Instead of capital being routed into places that are struggling economically, the money is flowing to OZ areas experiencing major increases in population from those with correspondingly high income and education levels to afford to live there.
Secondly, the current residents in OZ and OZ-adjacent census tracts are still not seeing any economic development even if they are able to brave the rising property taxes and rents brought by the development happening in nearby OZ tracts. Many are effectively priced out of their communities altogether.
“When ranking census tracts by how much all-in commercial or multifamily housing investment they get, all zones except the very top see very low OZ investment levels, while roughly 75 percent of OZ investment goes into zones with the top 20 percent of commercial investment,” wrote Brady Meixell and Brett Theodos in a recent Urban Institute article on the needed reforms for OZs. “Further, more OZ investment went to zones in counties with higher incomes and educational attainment—areas with higher potential for appreciation (which drives greater tax benefits under the program). Rural areas pose a special challenge for the program. Of all Opportunity Zone investment, 93 percent went toward metropolitan areas.”
Contrary to the program’s stated intent, OZs are currently functioning as a handout to rich people rather than a hand up for struggling Americans. Luckily, Congress and the White House can fix that with a few key changes to the current OZ program.
NCRC recently sent a letter to the House of Representatives’ Ways and Means Committee and Senate’s Committee on Banking expressing concerns about the lack of meaningful economic development occurring in economically distressed communities via Opportunity Zones. The letter proposed several possible reform strategies to better harness the potential of OZ programs:
- Tie investment benefits to affordability and community impact: Create a tiered structure offering enhanced tax benefits for projects that include affordable housing units with greater benefits for deeper affordability levels. Enhance OZ zone benefits for affordable housing by offering stronger incentives for projects serving households earning below 100% of the Area Median Income (AMI) level.
- Lower improvement thresholds: Reduce barriers for rehabilitation of existing affordable housing units by adjusting substantial improvement requirements for projects with long-term affordability commitments.
- Improve targeting to communities with greatest need: Implement a fresh designation process based on current economic data to ensure zones represent truly disadvantaged communities rather than those already experiencing investment.
- Mandate meaningful reporting and accountability: Require detailed reporting on investment types, amounts and measurable community impacts. In addition, develop a standardized framework for evaluating investments based on benefits to existing residents, including affordable housing creation, job opportunities and small business development.
- Help people stay in their homes: Require assessment of gentrification risk and the implementation of displacement mitigation strategies for investments in areas with rapidly changing demographics.
- Align efforts with other community development tools: Position OZ zones to address market segments and geographies that other programs, such as the Low-Income Housing Tax Credit (LIHTC) and New Market Tax Credits (NMTC) programs, do not effectively reach. In addition, create pathways for community development financial institutions to better utilize OZ incentives.
True community-centered economic development via the Opportunity Zones pathway should be substantially less focused on the profit motive solely and more focused on the community benefit holistically. Key stakeholders across the equitable community economic development ecosystem have a role to play in ensuring that OZs don’t continue to perpetuate the same economic inequities that they originally set out to remedy.
“If Opportunity Zones are to become the focus of community development,” said Bruce Mitchell, principal researcher for NCRC, “then we need to make sure that they are truly serving that purpose and are not just an investment vehicle for the wealthiest Americans.”
Timantha Goff is the Managing Editor for NCRC’s Communications team.
Photo credit: Brett Sayles via Pexels.
