U.S. Treasury Moving to Implement Opportunity Zone Tax Breaks
Regulations to implement Opportunity Zone tax incentives in the Tax Cuts and Jobs Act (TCJA)
The U.S. Treasury Department is moving to finalize regulations to implement Opportunity Zone tax incentives in the Tax Cuts and Jobs Act (TCJA) designed to encourage long-term investment in economically depressed communities, after a hearing in February and review of public comments.
The Treasury released proposed regulations in October 2018, but final action was delayed by the federal government shutdown. The IRS says the regulations can already be cited for 2019 tax filings, even though they could be modified in response to public comments.
In 2018, all 50 state governors, the District of Columbia, and five U.S. territories nominated 8,761 communities to be certified as Opportunity Zones by the Treasury, the press release announcing the regulations states.
The TCJA, enacted in December 2017, includes ways for investors to reduce or eliminate capital gains taxes on investments in Opportunity Zones. Partnerships and corporations formed as investment vehicles can delay or reduce federal taxes if they reinvest at least 63 percent of their capital gains and derive 50 percent of their gross income from the active conduct of a trade or business in a zone, states the Treasury in the release. Opportunity Zone investments will be free of any tax on the capital gains if the money stays in the zones for at least 10 years, and investors may defer taxes on their capital gain up to Dec. 31, 2026.
Nearly 35 million Americans live in the census tracts designated as Opportunity Zones, according to data from the 2011-2015 American Community Survey, the Treasury reports.
The designated regions have an average poverty rate above 32 percent, compared with a 17 percent national average, and the median family income averages 37 percent below the area or state median, the Treasury says. The unemployment rate in the zones is nearly 1.6 times the national average.
The Congressional Budget Office (CBO) estimates the Opportunity Zone tax incentives will result in a $1.6 billion reduction of federal revenue in the years 2018 to 2027. The program would begin generating net annual tax revenue for the federal government by 2026, the CBO reports.
Incentives Tied to Place
There are already location-based tax incentive programs throughout the United States and at all government levels, often referred to as enterprise zones, says Scott Eastman, federal research manager at the Tax Foundation. Eastman is the coauthor of a recent Tax Foundation report, “What We Know and Don’t Know About Opportunity Zones.”
Unlike enterprise zone tax incentives, Opportunity Zone incentives do not require the employment of residents of the zone and instead focus solely on capital gains tax reductions as a way to increase investment in distressed communities, Eastman says.
The TCJA does not require the program to generate reports on the affected communities, though the Trump Administration has taken some steps by creating an Opportunity and Revitalization Council, says Eastman. One of the council’s tasks is to determine what data, metrics, and methodology can be used to measure the effectiveness of the Opportunity Zones program, Eastman says.
“The Opportunity Zone Program was passed through the TCJA without any reporting requirements to ensure that the program is achieving its intended goals—mainly, bringing investment to economically distressed communities,” said Eastman.
“Given the track record of other incentive programs that encourage firms or investors to locate in particular areas with tax or other incentives, reporting requirements are crucial,” Eastman said. “Ensuring that we have the data to judge the effectiveness of Opportunity Zones is a first step.”
‘Incentive Programs Are Ineffective’
Previous tax reductions tied to investment in specific areas at all levels of government have had little effect, says Eastman.
“Academic and government research shows place-based incentive programs are ineffective at drawing investment to economically distressed communities at best, and potentially even harmful for residents of economically distressed communities,” Eastman says.
“Place-based incentive programs encourage firms and investors to relocate into a zone for tax purposes, and this relocation can potentially push out firms or investments in a zone that aren't subsidized, and potentially displace residents through increased housing prices or job competition,” Eastman said. “Even perfect data won't make a flawed program effective.”
Lower Taxes and School Choice
Opportunity Zones are an experiment he supports and hopes will succeed in economically developing depressed areas, says Stephen Moore, a visiting fellow at the Heritage Foundation and economic advisor to the Trump presidential campaign.
“I’ve supported [Opportunity Zones], but it is an experiment,” said Moore. “We do know that these depressed areas have very anti-business policies in many cases and it would help if the taxes were lower and there was less regulation,” Moore said.
Moore says high poverty areas require changing other policies, in addition to taxes.
“The most important thing you could do for inner cities to reduce poverty…[is] something that you all at The Heartland Institute have been working on for a long time, which is school choice,” said Moore.
“Even though I am in favor of…these development zones, I think school choice and getting crime off the street and encouraging work for welfare programs—so you don’t get whole generations of families that are on welfare rather than in the work force—those would be more powerful incentives to rebuild our inner cities,” Moore said.
Ben Dietderich (firstname.lastname@example.org) writes from Hillsdale, Michigan.
“Investing in Qualified Opportunity Funds,” Internal Revenue Service, U.S. Treasury Department, Docket No. 2018-23382, Oct. 29, 2018:
Scott Eastman and Nicole Kaeding, “Opportunity Zones: What We Know and What We Don’t,” Fiscal Fact No. 630, Tax Foundation, January 2019: