On November 23, 2018, The Miami New Times published an article by Luther Campbell that addressed one under-discussed aspect of the Trump Administrations 2017 Tax Reform measure. In his highly critical commentary, Campbell highlighted some very valid concerns regarding the new ‘Opportunity Zones’ as created under Section 13823. However, I would not go as far as completely agreeing with the prophetic title of his article, “Donald Trump’s Opportunity Zones will ruin Miami’s Black and Latino Neighborhoods”. I might, however, agree with an edited title along the lines of “Donald Trump’s Opportunity Zones could lead to the ruin of Miami’s Black and Latino Neighborhoods without guidance from state, county, and community leaders”.
Opportunity Zones – An Overview
Page 130 of the $1.5 trillion tax cut signed into law in 2017 contains an attempt at solving a problem that has endured since the Great Recession. While major metropolitan areas have grown and, for the most part, recovered from the economic downturn, economic recovery has yet to arrive for so many communities across the country. Section 13823 “creates ‘Opportunity Zones,’ which will use tax incentives to draw long-term investment to parts of America that continue to struggle with high poverty and sluggish job and business growth” (New York Times, 01/29/18).
In exchange for investing large amounts of capital into new projects and enterprises, investors can qualify for federal tax advantages on capital gains. The incentives for long-term investment in low income communities are: 1) A temporary tax deferral for capital gains reinvested in an Opportunity Fund; 2) A step-up basis for capital gains reinvested in an ‘Opportunity Fund’ where after 5 years, the basis of the original investment is increased by 10%, and after 7 years this increased to 15%, excluding up to 15% of the original gain from taxation; and 3) A permanent exclusion from taxable income of capital gains from the sale or exchange of an investment in a qualified ‘Opportunity Zones Fund’, if the investment is held for at least 10 years.
It is important to note that ‘Opportunity Zones’ are not a unique idea. Previous federal attempts to increase investment in underserved areas include Enterprise Zones (under the Clinton Administration) and the New Markets Tax Credit program which existed prior to the 2017 Tax Bill and still exists today. With the goal of spurring economic growth through increased investment in low-income areas, the ‘Opportunity Zones’ concept is certainly a promising attempt at helping communities which continue to struggle economically.
Important Takeaways
Theoretically, the ‘Opportunity Zones’ program is an admirable attempt at bringing economic recovery to areas of the country that have been passed over by the economic growth of the last few years. However, I understand the concerns put forth by Campbell. There are no provisions or guarantees that the benefits of development will directly impact the local populations. As it stands, the language leaves the program open to being used as a tax haven that benefits only the investors and developers while causing gentrification and displacing already struggling families. Although this is not necessarily the guaranteed outcome, it is certainly a possibility.
To prevent this from happening, I would recommend certain steps be taken.
Firstly, upon the awarding of contracts for development, municipalities should include language requiring that community members get preferential opportunities to be hired for the project development, construction, and/or management. Without the specific wording within the contracts, it is highly possible that the benefits of increased job opportunity and the wages that come with it might not reach the intended communities.
Secondly, the projects and developments should be required to keep to the character and nature of the communities in which they will be carried out. For example, development and gentrification in the West Grove area has been a topic of concern. It is a neighborhood with a highly unique history and character that should be preserved. Both here and across the country, steps should be taken to prevent historic, culturally unique neighborhoods from being overtaken and replaced.
Thirdly, local and minority businesses should get preferential treatment in the awarding of development contracts. Continuing the line of reasoning of my previous points, it is important that the benefits of this program reach those that it is intended to benefit. By ensuring that local businesses and smaller companies have the first bite of the figurative apple, we can also ensure the benefits of this program reach its intended targeted population.
Another aspect of concern is that this program represents uncharted waters for investors. There are no “best-practices” to follow, no experienced firms to look to, and no model to study. This could be a hurdle that many investors might not be willing to jump over. If this is the case, then this program will be no more successful than the little-known Enterprise Zones of the Clinton Administration, and its failure probably won’t turn too many heads since the Trump Administration did not promote ‘Opportunity Zones’, and the rush to pass the bill prevented debate on the program in both chambers of Congress.
The ‘Opportunity Zones’ program is neither disastrous nor guaranteed salvation for struggling communities across the country. It has serious potential to bring positive changes and improved livelihoods to neighborhoods, families, and individuals that have been passed over by the economic growth of the years since the Great Recession. At the same time, it does leave open the potential to be exploited as a domestic tax haven for the extremely wealthy. Community leaders and local governments need to step up to ensure that the promised benefits of this program reach its intended recipients. The worst case scenario is the same policy of “the rich get richer while the poor get poorer” while the best case outcome is communities and investors benefiting in the long-run.
Miami-Dade County Commissioner Xavier L. Suarez can be reached at 305-669-4003 or via email at district7@miamidade.gov.
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