Understanding Opportunity Zones
Channeling financial capital to distressed communities.
The Niskanen Center’s Struggling Regions Initiative is developing new quantitative tools to evaluate the impact of Opportunity Zones. Established by the Tax Cuts and Jobs Act of 2017, the Opportunity Zones program represents a promising new method for channeling financial capital into low income communities, both urban and rural. Whether it will work as intended remains to be seen.
Under the legislation, governors nominate eligible low-income census tracts to be certified by the U.S. Treasury Department for special tax treatment on capital gains. Once a zone is established, investors are able to temporarily defer taxes on capital gains by making new investments within the distressed communities through an Opportunity Fund, with the potential of gaining a permanent exclusion from capital gains on investments held in a fund for at least ten years.
Given the lack of a cap and the open-ended rules about eligible types of investments, Opportunity Zones create a significant incentive to deploy patient capital in parts of the country undergoing economic decline or stagnation, but with potential for abuse. With some 8,700 census tracts certified as eligible, there are valid concerns that eligibility criteria are too broad. And while the open-endedness of eligible investments has the virtue of flexibility, it has the potential downside of drawing capital into projects that have high private yield but low social impact.
From an economic development standpoint, Opportunity Zones could either become the pinnacle of market-driven development policy or a tax giveaway of epic proportions. What few dispute, however, is that their impact will be large. The Struggling Regions Initiative strives for impartiality, with an eye to producing fair evaluations as new data rolls in.