Evaluating the Impact of the Opportunity Zone Program on Communities
- Posted: February 14, 2019
- Posted by: Travis Lynk
- Last Reviewed: February 27, 2019
The 2017 Tax Cuts and Jobs Act included a provision creating the Opportunity Zone program, designed to draw private investment into economically distressed communities through tax-favored investment vehicles known as Qualified Opportunity Funds.
The promise of bringing new capital into some of the nation’s most disadvantaged neighborhoods has brought together an array of stakeholders with the goal of bringing economic development to these areas.
Understanding Community Needs in Opportunity Zones
The poverty rate in Opportunity Zones is nearly 32% on average, and the median household income is just $33,000.
Unemployment in these communities averages over 13%.
Some experts believe that these data points may not be the most meaningful measure of need in the Opportunity Zones. The Economic Innovation Group, for example, created a tool known as the Distressed Community Index that examined educational attainment and housing vacancy rates to compare ZIP codes moving toward prosperity.
Enterprise Community Partners developed the Opportunity 360 tool that aggregates 200 different data points in six different categories—including mobility, housing stability, and economic security—to better identify community progress.
These data points, metrics, and assessments will help stakeholders monitor the impact of Opportunity Fund investment in these communities.
Tax incentives in the program are intended to unleash billions in untaxed capital gains for investment in Opportunity Zone communities. Stakeholders must have a way to measure the impact of these investments and determine whether they are helping communities move toward parity with neighboring communities.
Ensuring Positive Outcomes
One of the key advantages of the Opportunity Zone program is its emphasis on place-based investment. Community leaders will be able to compile baseline data and compare it with data collected at five-year, seven-year, and 10-year milestones.
These milestones are significant, as they coincide with tax incentives built into the Opportunity Zone program. The first capital gains tax reduction of 10% occurs after investments have been held for five years; a second, additional 5% occurs after seven years. Investors who hold their Opportunity Fund investments for 10 years or more pay no capital gains tax on the increase.
Including Opportunity Zone residents in the data collection process is important to contextualize the impact of development. Resident input will ensure that the effects of development align with the community’s overall goals.
Many institutional and high-net-worth individual investors have increasingly looked for socially responsible investment alternatives. As part of a socially responsible investment program, Opportunity Zone community leaders have an incentive to create market-facing tools that help investors understand the risks, benefits, and opportunities for impact within these communities.
Although nothing in the legislation requires any sort of community impact reporting, there is a need for impact reporting and accountability for Opportunity Zone investments that doesn’t unduly burden Qualified Opportunity Fund managers.
The Opportunity Zone program will create markets for investment where previously none existed, in the nation’s most disadvantaged communities. Data collected about these communities should demonstrate the need for targeted investment and report on the effectiveness of these investments in a transparent way.
Reporting processes need to provide a pathway for community residents to share their observations and suggestions. An impact framework will only be effective if it includes input from members of the community and involves stakeholders across the entire community and development process.
- Opportunity Zones: A Tax Strategy for Capital GainsRead MoreFebruary 10, 2019
- IRS Releases New Guidance for Opportunity ZonesRead MoreMarch 22, 2019