Encouraging investment in distressed areas doesn’t sound like the kind of thing that would be included in the rich-people-friendly tax plan congressional Republicans cooked up last year.
But on page 130 of the Tax Cuts and Jobs Act, there it is. Subchapter Z creates an “opportunity zone” designation for low-income census tracts and lays out tax breaks for investing in them. In this way, opportunity zones aren’t altogether surprisingthey create yet another tax benefit for the wealthybut proponents say the program could unlock some $2 trillion in investment across the country. Durham officials want in.
Preliminary talks are underway between city and county officials, the Durham Housing Authority, local universities, and the business community to determine which Durham census tracts would be best to put forth for an opportunity-zone designation, a decision ultimately up to the governor’s office.
To qualify, a census tract must have a median family income at or below 80 percent of the area median income (just over $58,000 for Durham) or have had a poverty rate of 20 percent or greater from 2011–15. There are about a thousand census tracts in North Carolina that meet these requirements, including thirty in Durham, as well as others that may qualify based on proximity to low-income tracts. States can designate up to a quarter of their eligible tracts, which means there are 252 spots up for grabs in North Carolina. Local stakeholders’ recommendations are due March 8.
Andre Pettigrew, director of the city’s Office of Economic and Workforce Development, says they will likely consider census tract 10.02, the focus of a poverty reduction initiative launched by former Mayor Bill Bell, and tracts surrounding N.C. Central, which is in need of student housing; Fayette Place, a vacant twenty-acre lot owned by the DHA; and McDougald Terrace, the city’s largest public housing development, which is in a census tract with a 57 percent poverty rate.
“I believe the opportunity-zone legislation might give Durham its next best opportunity to assemble this new mix of capitalprivate, public, and philanthropyto work on, for example, affordable housing, and I think you need all three,” Pettigrew says. “The city and the county can’t solve the affordable housing issue alone.”
Anyone can submit a census tract for the state’s consideration. The N.C. Department of Commerce will then make recommendations to the governor’s office, which must forward its picks to the U.S. Treasury Department by March 21. The Treasury Department is expected to rubber-stamp those nominations.
The law provides tax incentives to invest unrealized capital gainsassets that have accrued value but haven’t yet been soldin a Qualified Opportunity Fund, which in turn will be required to put at least 90 percent of its assets into opportunity-zone properties. The Economic Innovation Group, which pushed the initiative, estimates that U.S. investors hold $2.2 trillion in unrealized gains.
Investors can avoid paying taxes for up to nine years on gains invested in Opportunity Funds. They may also pay lower taxes on those gains or see some gains permanently excluded from their taxable income if their investment is held in a fund for at least ten years. (It’s unclear whether they can just park their money in the fund without putting it to work in the community).
This concept isn’t new. Similar initiatives, known as enterprise zones and empowerment zones, were in place in the eighties and nineties. Scholars have found those programs gave breaks to projects that would have happened anyway or didn’t generate significant economic growth, while depleting state and local resources.
Napoleon Wallace, North Carolina’s deputy secretary of commerce, says there is more capital eligible for this initiativeand more opportunities to invest it.
“The level of scale around this is bigger than any type of investment we’ve seen before,” he says.
Rachel Reilly Carroll, associate director of the Impact Investing and Enterprise Community Loan Fund, says the best candidates for opportunity-zone designation will be “at the nexus of need and opportunity.”
Pettigrew thinks Durham fits that bill and has the political will to make the most of Opportunity Funds. “One of the strengths I think of Durham applying for this is though we have a needparticularly around affordable housing, workforce development, and small business developmentwe also have a pretty strong economy that should be attractive to investors,” he says.
But that could also pose a challenge. Durham County is designated as tier 3, which indicates that it is among the least distressed counties in North Carolina. State economic development initiatives place an emphasis on more distressed tier 1 and 2 counties.
Wallace says tracts in all tiers have an equal shot at the designation.
“Urban poverty and rural poverty hurt just the same,” he says. “We do believe all communities are deserving of investmentor better yet, all communities are deserving of opportunity.”
Wallace says the agency will have an eye toward job creation, economic expansion, and access to housing in making recommendations to Governor Cooper. Good candidates will also have a history of investment (or a desire for it), showing an ability to handle what could be a large influx of private dollars.
Reilly Carroll says additional resourceslike federal grants or local government subsidieswill probably be needed to make sure these investments are effective.
The tax bill doesn’t explicitly empower local or state governments to control how investments are made. So which census tracts are selected and who sets up the Opportunity Funds that serve them will be key to the initiative’s success.
“What happens when historically divested communities see a large influx of private investment activity, and what are the lessons learned that we’ve seen in major metros around gentrification and displacement?” Reilly Carroll asks. “How can we be putting policies in place now that guard against that when we’re choosing Opportunity Zones so we’re ensuring that the investment that’s coming in is benefiting everyone in the community and it’s being done in an equitable manner?”