House GOP Tax Plan: Opportunity Zones
House Republicans are proposing to expand the Opportunity Zone program and alter its reporting requirements as part of a new suite of tax bills packaged as the American Families and Jobs Act.
History of Opportunity Zones
Opportunity Zones are a type of place-based incentive program, designed to increase investment in distressed geographic areas. They were enacted in late 2017 as part of the Tax Cuts and Jobs Act (TCJA).
While Opportunity Zones come from a legacy of other place-based incentive programs, they differ from their predecessors by allowing investors “to pool their resources and invest in numerous projects at any given time in a highly nimble fashion.” Simply, they incentivize real estate development at a large scale within certain qualifying areas.
In order to be eligible for incentives, developments must initiate a capital improvement on an Opportunity Zone property that is at least equal to its acquisition expense, given that the property was acquired after December 31, 2017. Then, the proceeds from this type of investment must be reinvested in a Qualified Opportunity Fund (QOF), an investment vehicle organized as a partnership or corporation that holds 90 percent or more of its assets in Qualified Opportunity Zone property.
Once these qualifications are met, there are three ways in which projects can secure a capital gains tax break. Depending on the duration that an investment in a QOF is kept, developers can either defer capital gains tax payment on their investment, secure up to a 15 percent increase in the step-up basis for their capital gains, or permanently exclude from taxation any capital gains that accrue after their investment in a QOF.
While several variations of place-based incentive programs have been implemented throughout past decades, there is no consensus on whether they work as intended. Research suggests they shift rather than create employment, and primarily offer financial benefits to wealthy landowners or highly skilled mobile workers.
Because the structure of the Opportunity Zone program differs from former place-based incentive programs, its effects will likely vary. A 2023 brief from the Economic Innovation Group supported this assumption, saying “the emerging evidence suggests that Opportunity Zones have already achieved a combination of expansive geographic reach, large-scale private investment, and significant economic effects that (are) unique in the history of U.S. place-based policy.” However, a 2021 working paper published by the National Bureau of Economic Research found “little to no evidence of positive effects of the Opportunity Zone program on the employment, earnings, or poverty of zone residents.”
Given the lack of historical consensus, as well as the novelty of Opportunity Zones, gathering data on place-based incentives is crucial.
House Republicans’ Proposed Changes
The American Families and Jobs Act’s new reporting requirements for developer-run opportunity funds, as well as annual reporting requirements from the Secretary of the Treasury, would help clarify the effects of Opportunity Zones.
The new requirements specify, for example, that QOF’s report the monthly number of full-time equivalent employees of corporations formed in Opportunity Zones, and that the Secretary of the Treasury reports the aggregate approximate number of residential units resulting from investments made by QOFs.
In addition, there are two additional requirements for the Secretary that must be completed subsequent to the first several reporting periods.
For the sixth year after the legislation’s enactment, the Secretary is required to include in the report the impacts and outcomes of Qualified Opportunity Zones as measured by economic indicators, such as job creation, poverty reduction, and new business starts.
And, for the sixth or eleventh year after the legislation’s enactment, the Secretary is required to report comparisons between five-year periods of past and subsequent data on economic and mobility indicators in designated Opportunity Zones.
In addition to implementing changes in reporting, the American Families and Jobs Act would create a new category of Qualified Opportunity Zones that are rural and in persistent poverty, as defined by the Census Bureau. Qualified Rural Opportunity Zones would have the same tax advantages as Qualified Opportunity Zones, with two primary changes: the time period in which tax breaks can be elected (before December 31, 2032) and the time period in which opportunity funds can be invested in (after December 31, 2023). Qualified Opportunity Zones established under the 2017 Tax Cuts and Jobs Act required that tax breaks be elected before December 31, 2026, and opportunity funds be invested in after December 31, 2017.
As House Republicans consider alterations to the Opportunity Zone program, they should focus on increasing and further bolstering the program’s reporting standards. Given concerns about how Opportunity Zones can generate profit from the gentrification of neighborhoods, it is unclear whether positive results from the newly required comparative data would reflect the betterment of zones’ impoverished residents or a shift in the economic demographic of an area. While their proposal to expand the program to rural areas is well-intentioned, it should be reconsidered until the capacity to fully understand the effects of Opportunity Zones is available.
