From Transactions to Transformation: How Cities Can Maximize Opportunity Zones
By Bruce Katz and Evan Weiss
November 25, 2018
The Tax Cuts and Jobs Act of 2017 provides a new tax incentive – centered around the deferral, reduction, and elimination of capital gains taxes – to spur private investments in low-income areas designated by states as Opportunity Zones. This provision is based on the bipartisan Investing in Opportunity Act (S. 1639) introduced by Senator Cory Booker (D-NJ) and Senator Tim Scott (R-SC). Given the significant interest among investors, it is possible that this new incentive could attract hundreds of billions of dollars in private capital, making it one of the largest economic development initiatives in U.S. history.
The broad objective of this incentive – expanding economic opportunities for places and people left behind -- cannot be achieved by the market and outside investors alone. Cities in the broadest sense – local governments, urban institutions, networks, and civic leaders -- will need to act decisively if Opportunity Zones are to engender not only a large volume of individual transactions but broader growth that is inclusive, sustainable and truly transformative for each city’s economy. The promise of Opportunity Zones is not just to match private capital to investable projects but to inspire cities to reexamine and rediscover the fundamentals of economic development for all by channeling the resources of their own communities. Cities who are able to coordinate and focus investment will drive not just growth in the near term but institutional and financial reforms that will reposition cities for success over the long haul.
The new incentive differs from other federal tax incentives in several ways. First, it is more market driven; it does not use a federal or state agency to distribute the incentives but rather relies on the decisions of individual investors and fund managers, meaning local governments will likely not be even aware of most Opportunity Zone investments in their communities. Secondly, it can be used for a wide variety of projects -- residential, commercial, industrial, infrastructure – rather than being restricted to a relatively narrow purpose like low-income housing or historic preservation. Third, there are no requirements for investors to ensure a certain outcome, such as job creation or local financial matches. Finally, there is no cap on the amount of the benefit if regulations are followed.
The federal law governing the Opportunity Zone incentive does not provide any guidance on the role of cities, yet city governments and other local entities can shape markets and maximize economic and social outcomes by smartly deploying their complex set of powers, resources, assets and relationships. Cities, unlike the federal government and state governments, are networks of institutions and individuals that can “think like a system and act like an entrepreneur.” In this way, cities are primed to aggregate and align public, private and civic capital for strategic investments in economic development, schools and skills, infrastructure and affordable housing, the critical ingredients for long-term inclusive growth.
Since the Opportunity Zones incentive was introduced, two dominant, overly simplistic narratives have taken hold. On one hand, there is the view that all cities should merely compile and bundle a list of investable projects and reveal the true strength of the market for some distant investor on Wall Street or in Silicon Valley. This perspective treats the market failure that Opportunity Zones was intended to resolve as one primarily involving information and marketing rather than underlying business demand and economic realities. On the other hand, there is fear that Opportunity Zones will put gentrification on steroids, spiking housing prices and displacing residents. This perspective assumes that the principal challenge facing all cities is excessive value appreciation rather than poverty, high vacancy and low demand.
This policy brief advocates for a more balanced approach that reflects the market variance and complexity within and across cities, organized around Seven Principles to guide city analysis and strategy for leveraging newly established Opportunity Zones. The principles are designed both to enable cities to further capital investment in traditionally disadvantaged places in order to spur job creation and broader opportunities -- the core objectives of this new tax incentive –– as well as sharpen local strategies and modernize the institutions that design and deliver those strategies. To actualize these principles, we offer 10 Steps to leverage local advantages, knowledge and experience to fully realize the economic and social potential of this unique tax incentive.
Full Report: From Transactions to Transformation [PDF]
Executive Summary: From Transactions to Transformation [PDF]