🔒Will Opportunity Zones help low-income communities? Only time will tell

The Tax Cut and Jobs Act of 2017 is the defining economic law passed by the Trump administration.

Most of the attention and focus of the law has been on cuts in corporate taxes and taxes on high-income individuals. Some would argue that the law cuts taxes for every taxpayer, but the nonpartisan Tax Policy Center estimates that taxpayers with over $733,000 in income can expect a $50,000 reduction in their taxes.

In contrast, a taxpayer with $50,000 in income might expect a reduction in taxes of less than $500 — 100 times less than the high-income person in this example. This discrepancy will lead to an increase in income and wealth inequality as well as a ballooning of the federal debt and deficit.

But a lesser-known part of the tax cut law is the section that creates Opportunity Zones.

Opportunity Zones (OZs) were supported by Corey Booker, a Democrat and Tim Scott, a Republican, both African-American U.S. senators. The law calls for states to identify parts of their state that would qualify for OZ status. Most states in collaboration with their state legislative bodies identified OZs based on percentage of households below a certain level of poverty, the percentage of children receiving free lunch, and unemployment rates.

On June 13, the Connecticut legislature passed Public Act 19-54, “An Act Concerning Opportunity Zones.” The Act authorizes the Department of Economic and Community Development to hire/appoint a deputy commissioner who will be responsible for the state’s effort to increase investment in OZs.

The act also identifies vacant state-owned properties located in Opportunity Zones as properties that could be sold to private investors interested in converting these properties into affordable housing units or other commercial developments. The Connecticut act also provides additional incentives for investors to make investments in OZs over and above the incentives provided by the federal legislation.

The goal of the federal program is to increase capital investment, employment and economic growth in these OZs. The federal legislation provides attempts to increase investment in OZs by creating tax incentives tied to unrealized capital gains.

The federal legislation permits:

• Taxes on capital gains to be deferred until 2026 if those unrealized gains are invested in businesses located in OZs.

• Taxes on unrealized capital gains held in OZ investments for seven years will experience a 15 percent reduction in those taxes. This is the equivalent of a 15 percent increase in the basis of the original investment that created the capital gain.

• Capital gains earned in OZ investments held for 10 years will be free of taxes on those gains.

According to the Economic Innovation Group there is over $6 trillion in unrealized capital gains sitting in the accounts of American households and corporations. This is an incredible amount of potential capital that could be directed towards investments in low-income communities.

The challenge is on the demand side of the investment equation. There are scores of companies that are trying to harvest these unrealized capital gains and then direct those gains into OZ opportunities.

The bigger, more difficult question is: Are there businesses, or more specifically investment opportunities, that want or need capital unleashed by this law?

This is where the new state law comes in. Connecticut wants to put state-owned vacant properties located in OZs on the market for investors to buy, rehab or repurpose into commercially profitable projects.

I am concerned that while residents of OZs may benefit from the jobs created by new investments in their communities, they are not likely to be the ones who create wealth for themselves.

The investment returns will stay with wealthy investors.

More needs to be done if OZs are going to create new wealth in low-wealth communities.

Time will tell whether OZs are just another boondoggle for those who already are getting the most from the new tax law.

Fred McKinney is the Carlton Highsmith Chair for Innovation and Entrepreneurship and director of the Center for Innovation and Entrepreneurship at the Quinnipiac University School of Business.