Published October 29, 2018

From the CEO

In the past decade, an unprecedented amount of wealth has been created in the United States, yet many communities most in need of capital have not fully benefited. Some 52 million Americans live in economically depressed locales, and between 2000 and 2015 more than half of them experienced a decline in both jobs and output. Indeed, about three-quarters of new job growth occurred in a relatively small number of metropolitan areas, exacerbating inequalities in both income and opportunity across the country.

Legislation passed by Congress last year set up what could prove a powerful tool to attract funding to communities that have been left behind. Investors in “Opportunity Zones” — low - to moderate-income areas that were defined by federal legislation and since selected by each state governor — will get tax breaks that both increase expected after-tax returns and encourage them to shift cash now effectively locked up in unrealized capital gains to more productive uses.

Since the passage of the legislation, experts at our Center for Regional Economics and Center for Financial Markets have been working with federal officials and a variety of stakeholders to explore the challenges and to help establish best practices in implementing Opportunity Zones. In an article in this issue (see page 54), Annie Donovan and Kim Saunders offer a capsule analysis of how the new legislation works and how existing specialized organizations called community development financial institutions (CDFIs), with deep knowledge of the localities in which they operate, can serve as natural complements to investors spurred by the new legislation.

The Institute is also working with stakeholders to flesh out the nuts and bolts of the initiative. Some of the issues that need attention: data collection and the fine-tuning of rules for new entities called Qualified Opportunity Funds to funnel investment through CDFIs.

In the next few months, officials at the Treasury plan to issue guidelines on how this initiative will work. As they do, we will continue to lend what assistance we can, guided by the belief that, without the participation of local stakeholders, the program will not be able to maximize social outcomes.

Accomplishing this will require investors to recognize that the tax advantages of Opportunity Zones come with the responsibility to help the communities where the money is invested. While the legislation is a promising start, truly expanding access to capital for those most in need of it will require continuing focus on real-world implementation.

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Michael Klowden, CEO