Just
weeks before the midterm elections, the Trump administration announced details
of tax breaks designed to help spur investment in economically
distressed neighborhoods.
But
while investors and real estate developers can expect to see immediate tax
benefits from the new rules, it won't be clear for a while how effective the
program will be in helping voters in the neighborhoods targeted for tax breaks.
The
new program targeting so-called "opportunity zones" was included in
the $1.5 trillion tax overhaul enacted late last year. Republicans, who are
defending majorities in the House and Senate this November, had hoped to stake
their campaign messaging to the tax cuts. But the measure failed to resonate
with voters on a large scale.
The
idea behind the investment and incentive program isn't new. State and local
governments have used tax incentives for decades to create enterprise zones to
attract investment.
The
new rules announced Friday outline a series of tax breaks for development in some
of the poorest communities in the country, that are home to nearly
35 million Americans.
Based
on recent Census data, the designated census tracts had an average poverty rate
of over 32 percent, nearly twice the national average.
Median
family incomes average 37 percent below the area or state median, and
unemployment rates were nearly 1.6 times higher than average.
These
targeted Opportunity Zones are also twice as likely to be located in a county
that had reported a poverty rate of at least 20 percent for 30 years.
The
plan has already drawn strong interest from investors. Last month, Treasury
Secretary Steven Mnuchin predicted
that the new program would generate more than $100 billion in fresh capital for
projects in targeted neighborhoods.
Investors
in these designated zones stand
to gain from generous tax benefits for qualified projects. Under the
new rules, capital gains generated through a certified opportunity zone fund
will not be taxed through the end of 2026 or when the investment is sold,
whichever comes first.
Any
gains from the fund are permanently shielded from taxes if the investment has
been held for 10 years. In addition, the initial investment will be discounted
by up to 15 percent for tax purposes after seven years.
The
benefits for the residents of these opportunity zones, though, are harder to
measure. A lot will depend on the details of the type of projects that qualify
for these tax breaks.
A history of 'minimal impact'
Proponents
of these programs argue that they help revive neighborhoods that have otherwise
been passed over by investors and developers. But critics have argued that they
represent tax giveaways to developers of projects that would be profitable
without the incentives.
"There
are very few guard rails on this investment," said Jesse Van Tol, CEO of
the National Community Reinvestment Coalition, a group of community
organizations that promotes lending to underserved areas. "There's very
little in the way of ensuring that the social impact of what comes out of this
is beneficial to low-income communities."
One
of the broadest studies of the economic benefits of enterprise zones was done
by researchers at the W.E. Upjohn Institute for Employment Research. In their 2002 study,
Alan Peters and Peter Fisher looked at the performance of 75 enterprise zones
in 13 states.
Their
overall assessment was "negative," in part because of the wide
variety of criteria used to designate projects for incentives. The enterprise
zones they studied often fell short in creating jobs for residents of targeted
neighborhoods because "the majority of jobs were taken by commuters from
outside the enterprise zone."
And
they found that these tax breaks usually ended up costing more money than they
generated in added tax revenues.
"Although
there is a lot of business turnover in enterprise zones, zone incentives have
only a minimal impact on new investment," they wrote.
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