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When it comes to launching a new business venture, the business plan must be solid. Businesses must be able to implement their plans and sustain their business model. There are a lot of factors that contribute to the potential for the success of a business venture. Businesses must be able to attract enough qualified-workers to run their businesses efficiently. They must also ensure access to suppliers that can provide the raw goods they need at a cost-effective price. The community in which the business operates must have the infrastructure needed to support the operations of the business. Even when all of these and other criteria are met, business leaders must also have the capital needed to build or expand their businesses. The establishment of 8,700 so-called “opportunity zones” by the Trump Administration seeks to steer that necessary capital into struggling communities in order to foster opportunity creation, but the devil is in the details as the saying goes. The US is struggling with financial inequality, but it is also struggling with geographic economic inequality. What this means is that wealth is being concentrated into select communities, which is depriving a growing number of communities of the wealth needed to fuel their local economies. Not only does this mean more people in more communities are poorer, it means businesses are struggling to stay open in more communities. Business are not able to sustain and grow their revenues alongside their growing expenses, because they rely on poorer consumer bases. Recognizing the role the availability of well-paying jobs plays in uplifting individuals out of poverty, the inability of businesses to survive and grow in impoverished areas fuels the degenerative cycle of poverty. The infusion of capital into the right opportunities in these communities can break that cycle and fuel a virtual cycle of economic growth. As such, providing incentives to cultivate investment into economically depressed communities can have a very positive economic impact on these communities and help address economic inequality.
Created under the 2017 Republican tax bill, the opportunity zone program exempts capital gains earned in economic zones from taxes. It also allows investors to defer their capital gains tax on investments earned elsewhere, if they invest their gains in opportunity zones. In theory, the tax incentive should help wise investors foster opportunity creation in distressed communities by pushing them to invest in projects that carry the added risk of a less than optimal location. Given the Republican tax overhaul also maintained low capital gains tax rates, while creating new benefits for investors by establishing separate inflation-tied tax brackets, the benefits of opportunity zones are somewhat diluted. There is also concern that the designated opportunity zones may include communities, such as college towns, with poor statistic, but solid economic prospects. There is, however, a need for balance. Communities facing the most dire conditions will not benefit from capital infusions as their local economies are too toxic for fledgling businesses to take root. Only communities with the right conditions for success can benefit from capital investment. Looking at communities in terms of regions instead of cities, the success of one municipality in an area can create the jobs needed to jump start the local economy of an entire area, including those toxic business environments. Outside of properly defining opportunity zones, ensuring investors are deriving a tax benefit for actually investing in meaningful investments is essential. It is, after all, very easy for a tax incentive to create or bolster perverse incentives. For example, an investor might purchase a building in a distressed community then use the expenses and losses associated with the property to offset other income, thus lowering the investor’s overall tax bill. This is not an issue as long as the investor is actually maintaining the property in question. If an investor is simply investing in a struggling community by buying real estate to use as a tax write off and refusing to maintain the properties in question, it is to the detriment of the community. Not only does such a practice artificially increase the cost of real estate in these communities, thus making home ownership and business ownership more unlikely for poorer community members, the lack of property maintenance also further blights communities struggling to rebuild their economies. Because investors often invest through dissoluble, anonymous trust funds and other vehicles, they can avoid the consequences of owning a dilapidated building. In such cases, the community is left with the clean up bill, thus adding to their financial struggles. When envisioning the outcome of the opportunity zone program, investment into large job creating businesses by wealthy investors, as well as investment into small businesses by first-time entrepreneurial investors, is what comes to mind. The intent of creating opportunity zones, or at least what it needs to be, is to drive investment into job creating industries. The concept is progressive in terms of helping struggling communities. In practice, however, the “flexibility” of the program and broadness of the tax benefits most likely make it easier for certain investors to abuse the tax code without actually helping struggling communities. Unfortunately, the tax benefits can transform struggling communities into nothing more than domestic tax havens while inhibiting real opportunity creation. Curtailing the benefits of the opportunity zone program to investments that actually create local jobs and operational businesses is, therefore, a necessary component of the initiate that the Trump Administration has neglected. The opportunity zone program is a public policy initiative with a bright future, but it needs reforms before it exasperates the problems of those communities designated opportunity zones.
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April 2020
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