How Opportunity Zones Can Transform Neighborhoods
Part 1 in a 2-part series
In part one of our two-part series, BCT Partners starts with a definition of Opportunity Zones, the potential benefits, and the reasons that they were created in the first place. In part two, we will explore some examples of implementation and how Opportunity Zones can actually help to transform neighborhoods in some of our poorest communities.
However, before we start talking about what an Opportunity Zone is, it’s important to set the stage as to why they may be needed in the first place. There is no doubt that there is rising inequality in the U.S. and that the divide between rich and poor is growing. However, is it really that dire? Well, judge for yourself after you read the following statistics:
The richest 1% earn 188 times more in income than the bottom 90%.
An estimated 43.5 percent of the total U.S. population (140 million people) are either poor or low-income.
Since 2000, inflation-adjusted usual weekly wages have risen just 3 percent among lowest-income workers but have risen 15.7% for top earners.
Economically distressed communities (the bottom 20% of all ZIP codes in this index) are home to 52.3 million Americans, about 17 percent of the U.S. population.
Prosperous ZIP codes dominated the economic recovery. They contained 29 percent of the nation’s jobs in 2011 but have been home to 52 percent of new jobs created in the following five years.
Prosperous ZIP codes captured 57 percent of the national rise in business establishments from 2011-2015, nearly double their share of businesses in 2011.
Distressed ZIP codes shed more than 17,000 businesses during the same period.
If the statistics above do not give you room for pause, then you’re not paying attention. While it has always been widely acknowledged that there will be some winners and some losers in capitalism, the majority of people were supposed to be better off with a free market economy. A strong middle class was always an example of that. However, the middle and lower-middle-class have been steadily losing ground as good-paying jobs have been outsourced and manufacturing has moved out of the country. So, what is the solution? Opportunity Zones were created to counterbalance some of these trends.
The Tax Cuts and Jobs Act of 2017 included a new federal incentive—Opportunity Zones (OZ). OZ’s are defined as “economically-distressed communities where new investments, under certain conditions, may be eligible for preferential tax treatment.” Taxpayers may defer tax on eligible capital gains by making an appropriate investment in a Qualified Opportunity Fund and meeting other requirements.
Each state designated blocks of low-income areas by census tract, which were then certified by the Secretary of the U.S. Treasury. According to the Tax Policy Center, there are 8,762 tracts, making up 12% of U.S. census tracts, that are classified as Opportunity Zones. Some of the factors particular to these tracts are low income, high poverty, and high unemployment rates. The value of the real estate, as well as rent, is considerably lower.
There are three main advantages to invest in OZ’s:
Capital gains deferral
Partial cancellation on some of those deferrals
Permanent tax exclusion on new gains
Essentially, the goal was to create enough of a tax incentive so that investors would begin putting money into areas that needed it the most. And this infusion of capital would in turn create jobs, increase property values and reinvigorate neighborhoods.
So, now that we have tackled the what, why and where of Oz’s, the second part of our series will take a closer look at how they are being implemented. And most importantly, are the benefits reaching the local residents who need them the most?
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