Opportunity Zones, a bipartisan piece of legislation aimed at incenting capital investment into distressed areas, have been criticized by many as a simple tax break for the wealthy, while advocates insist the legislation is proliferating the flow of capital to regions often overlooked by investors. In reality, the legislation was authored and sponsored by bipartisan groups, and enacted into law by congressional leaders from both sides of the aisle.
Roots in Bipartisan Legislation
The origin of the OZ legislation is almost always misunderstood and misreported as a republican driven tax break for the rich. In reality, the Opportunity Zones provision is based on the bipartisan Investing in Opportunity Act, which was championed by Senators Tim Scott (R-SC) and Cory Booker (D-NJ) and Representatives Pat Tiberi (R-OH) and Ron Kind (D-WI), who led a regionally and politically diverse coalition of nearly 100 congressional cosponsors. The concept was originally introduced in a 2015 paper, “Unlocking Private Capital to Facilitate Economic Growth in Distressed Areas,” to help address the persistent poverty and uneven recovery that left too many American communities behind. The idea has since been championed by a wide-ranging coalition of investors, entrepreneurs, community developers, economists, and other stakeholders.
Where OZ Dollars Are Being Invested
During the most recent recovery following the 2008 financial crisis, much of the country was left behind. Median income stagnated across the country and more and more wealth was concentrated in fewer people and fewer places. Opportunity Zone incentives were passed as a way to encourage the flow of capital into these distressed areas, with the hope that this will create more balanced opportunity across geographies.
There has arguably been some exploitation of the OZ incentive both during the designation process of the zones and in some of the early use. However, the majority of OZ projects across the nation are being properly leveraged to bring more equitable economic growth.
Given the rules that allow for an investment to qualify, a major focus of OZ investments so far has been on developing more affordable housing, which is also our focus at Four Points Funding. This comes at a critical time because the last decade saw the lowest amount of new housing development nationally since 1959.
In order to de-politicize this issue, critics must realize that OZ tax incentives were created to provide mutual benefit to investors, local populations and regional economies. Opportunity Zone Funds that are leveraging OZ tax incentives for their original intended purpose are investing in attainable housing projects, local business, and services that will support the long-term growth and sustainability of a region in need.
How will the results of the upcoming election affect OZs?
OZ investors, fund managers, and critics are curious about how the results of the upcoming election will impact Opportunity Zones. Is it possible that OZs could be eliminated entirely? While congress has the power to change the law going forward, we find it unlikely that such a drastic departure from this legislation will occur given the grand coalition of support.
The truth is both Republicans and Democrats seek to improve reporting from OZ fund managers, investors, and for the US Department of Treasury to remove speculation and bad actors from the issue entirely. No matter the outcome of the 2020 election, one likely change to OZs is the implementation of an impact reporting framework. This will allow critics and speculators at large to review empirical data.
The other important anecdote to watch is the capital gains tax rate. Trump has proposed lowering the tax rate, whereas Biden has proposed a significant increase, which could cause a large movement of capital to Opportunity Zone Funds in order to shelter future gains from an increased capital gains rate. Ultimately, both candidates are in support of and focused on Opportunity Zones.