Julio Cortez/Associated Press
Leveraging Opportunity Zones for an Equitable Post-Covid Recovery
by dan carol and ragini chawla
 

dan carol and ragini chawla are director and associate director, respectively, of the Milken Institute’s Center for Financial Markets.

Published June 29, 2020

 

The pandemic has highlighted what we have long known and didn’t want to acknowledge: there are deep deficits in health care, financial stability and opportunity in distressed, low-income communities. As Washington and local economic development officials look to “build back better,” communities interested in investing in an equitable recovery using their limited public investment dollars need to be aware of all the tools available to create jobs and long-term economic resilience. Enter the “opportunity zone” — a source of capital often viewed as suspect in this time of fractured politics, but one worth careful consideration for innovative local leaders committed to outcomes over orthodoxy.

Nuts and Bolts

Opportunity zones (OZs) are an initiative created by the 2017 Tax Cuts & Jobs Act, providing tax incentives for specified classes of investors to reinvest capital gains in distressed communities that they earned elsewhere. The initiative was based on a bipartisan bill, originally introduced by Senators Tim Scott (R-SC) and Corey Booker (D-NJ). The legislation is designed to mobilize up to $6 trillion in dormant capital gains that wealth owners have chosen not to realize partly as a result of the tax consequences, giving them incentives to plough it into economically flagging rural and urban communities. These communities have long been struggling with disinvestment, and the pandemic has exacerbated the problem as local businesses languish and states lack the resources to hold the line.

In times of crisis, state and local governments should play an essential role in protecting and nourishing their communities, and the Milken Institute’s Center for Financial Markets (CFM) has produced a list of 25 distinct Covid-19 Policy Recommendations, which includes the use of opportunity zones as a fulcrum for equitable investment. CFM has gone a step further by designing a playbook for local economic developers to use OZs as a catalyst for driving a host of smarter economic development moves to accelerate community economic recovery.

Because OZs are not part of a grant program but a tax incentive for private investors, many public-sector leaders have struggled to understand what tools they have to integrate OZs into existing local economic strategies, what the public sector’s role should be and how they can attract new OZ investment aligned to their communities’ development goals. CFM outlines 20 distinct tactical “plays” that state and local leaders can employ to move up the curve of development and empower their communities.

Communities can incorporate the report’s key takeaways into their development plans — everything from identifying a community “quarterback” such as the Rockefeller Foundation’s Chief Opportunity Zone Officers, to defining high-impact projects and reporting requirements, to modernizing and developing local workforces, including aligning initiatives with the American Workforce Policy Advisory Board’s efforts.

Carol Dan Chawla Ragini Opportunity Zones Covid Chart1a

Is figuring how to make good use of an admittedly arcane initiative worth the effort? The numbers answer the question. According to the U.S. Treasury, up to $100 billion annually in new capital could move into over 8,700 eligible distressed economic areas over the next decade. As of April 2020, there are 621 Qualified Opportunity Zone Funds already gaining momentum, with a total fundraising goal of $72.14 billion. Everybody, including taxpayers, can win: the net cost in tax revenues would be only $2.6 billion.

While community engagement with OZs has thus far been uneven, the development of Treasury regulations and the market for opportunity zone investments is far outpacing earlier, successful tax incentives used for place-based development and affordable housing. And the timing may be propitious considering many equity investors coming off a bull run are now circumspect about capricious stock prices. They will be looking for ways to get out of the equities market without triggering capital gains taxes.

In line with recommendations from our playbook, this private capital could be channeled into a range of OZ investments that speed recovery from the Covid-19 collapse and toughen the economy for future shocks. High on the list of OZ efforts that provide an impact multiplier effect are:

• strengthening domestic health supply chains revealed by the crisis to be surprisingly weak

• supporting injured small businesses that need capital infusions to get back on their feet

capitalizing minority depository institutions that have the staying power and experience to build on the success of OZ investments

• capitalizing highly qualified local entrepreneurs who’ve been stranded by the economy-wide business collapse

• investing in community-resilience infrastructure, such as emergency facilities, hospitals and water treatment plants

• • •

In light of the very real prospect that the recovery will be long and brutal, especially for communities already facing economic distress and systemic inequities, we simply can’t refuse the helping hand offered by OZs in being part of an outcome-oriented approach to local economic development innovation. And then there’s the truly hard part: supporting public sector leaders who will be key to ensuring that engaged local communities can realize their objectives. If we keep our eyes on the prize, we can ensure that OZs achieve their goal of delivering maximum social impact per dollar invested.

main topic: Development
related topics: Fiscal Policy, Housing & Real Estate