Tax policies are a sizable bucket of tools that local governments often use to retain existing enterprises and to attract new investments. Tax abatements, tax exemptions, and tax-increment financing are common strategies alongside such other approaches as tax credits, deferrals, stabilization strategies, and even accelerated depreciation of fixed assets, including equipment. And while economic development is primarily a state and local issue, the federal government has played a key role in supporting local economic development activities for nearly four decades.
The most recent federal initiative using market-based, tax policy approaches to spur investment in low-income communities is the Opportunity Zones program. Click below to learn more about Opportunity Zones:
What Is the Opportunity Zones Program?
In 2017, the Tax Cuts and Jobs Act was signed into law providing the enabling legislation for this emerging federal economic and community development program. Simply put, this new program provides a vehicle for investors to invest in qualified Opportunity Funds. These funds will, in turn, invest their resources into projects in Opportunity Zones that have been designated across the country.
The program’s tax incentive enables individuals and corporate taxpayers to defer capital gains on the sale of stock, assets, and other property by investing the proceeds into a certified opportunity fund that provides equity to businesses or projects within designated, distressed communities. To realize the deferment, the gains from the sale of an asset must be invested in one of the funds within 180 days of the transaction. The program spurs long-term investments of “patient” capital by providing the greatest benefits to investors who hold their investments for 10 years.
Chief executives of states, territories, and the District of Columbia nominated up to 25 percent of qualifying census tracts within their jurisdictions, focusing on tracts that have at least a 20 percent poverty rate or a median income that is less than 80 percent of the state, region, or metropolitan area median income to be designated opportunity zones. The U.S. Department of Treasury approved more than 8,700 such designations across the United States.
Why Is This Program Important to City and County Managers?
In survey after survey, local government leaders and managers point to economic development as one of the top priorities for their community. Opportunity Zones are a new tool that can be leveraged to enhance the creation of workforce and economic opportunity in communities. Some recent tips for managers were outlined in a January 2019 article in PM Magazine. It is important for city and county managers to be as up to speed as possible about this new program, knowing the boundaries of any Opportunity Zones in their jurisdictions as well as learning more about potential Opportunity Funds that may be targeting their community for investment.
The Opportunity Zones program allows local governments to align planning, strategy, and project priorities that may be under way, or nearing start-up implementation. Any investments such as infrastructure improvements, investments in educational institutions, and workforce development training programs might be further refined given Opportunity Fund investors indicating interest in designated zones.
Local brownfields sites programs, land banking efforts, and other activities focused on formerly used commercial and industrial properties might also benefit from the Opportunity Zones program, so it will be important to make sure that these efforts are integrated into any strategic planning efforts. Local governments should also think about how to effectively align the public and private partners that typically work with the jurisdiction on economic development activities, including chambers of commerce, community foundations, investor-owned and municipal utilities, colleges and universities, economic development corporations, nonprofit organizations, resident groups and commissions, as well as neighboring or surrounding jurisdictions like a county government.
Ensuring that all traditional economic development partners are fully up to speed on the Opportunity Zones program should be a priority so that everyone is speaking from the same set of talking points and strategies. Local governments should consider convening these stakeholders with investors, developers, financial institutions, wealth advisers, and tax experts to share information and position potential projects for investment.
The Opportunity Zones program might also be reason enough to conduct a retention and expansion survey of the local business community, including those already located and operational in a designated zone. Through the survey, a local government can gauge the level of interest and understanding by the local business community about the Opportunity Zone program, especially those that could be considering expansion and looking for capital to do so.
ICMA data indicates that more than half of communities use promotional and advertising activities to highlight their area’s amenities for attracting new development. Updating websites, brochures, and other media is a good idea to account for the designated opportunity zones in your community.
Given that local jurisdictions can often offer financial and nonfinancial incentives to trigger retention or attraction of businesses, they may consider developing companion incentives to encourage investment in their designated opportunity zones. Similarly, local governments should consider close coordination with state agencies to see what additional state-level incentives might be layered on as well to attract attention. Many states are considering incentive layers to enhance attraction to their multiple, local opportunity zones.
Resources for City and County Managers
The Opportunity Zones program has spawned a cottage industry of consultants, “thought leaders,” web sites, and other sources of information and expertise. With this on-line resource page, ICMA will provide the best information possible to help ICMA members navigate the Opportunity Zone process.
ICMA Member's Perspective on Opportunity Zones
Larry Spring, City Manager of North Miami, Florida, shares his insights into how to get your town to the top of the heap for Opportunity Zones. Read more in "How Opportunity Zones Are Working in North Miami."
New Guidance on Opportunity Zones
The Treasury Department has released new guidelines on Opportunity Zones, bringing added regulatory clarity for investors, fund managers and others seeking to bring much needed equity capital to operating and real estate businesses in Opportunity Zones. Novogradac, a thought-leader behind this program, offers a summary breakdown of the new guidance.
State-by-State Breakdown on Opportunity Zone Resources
Economic Innovation Group (EIG). The idea for Opportunity Zones is often attributed to EIG and they maintain a great website about the program. Find state-by-state information in the EIG national map of links to state agencies that are coordinating Opportunity Zone activities in their state.
Federal agencies, like the Internal Revenue Service, provide information about the program and its tax benefits. The Treasury Department’s Community Develop Financial Institution’s Fund also has useful resources about designated Opportunity Zones.
The Council of Development Finance Agencies also maintains a solid resource page on Opportunity Zones. Some of their information is locked behind a member firewall.
A growing list of Opportunity Funds, including areas they may target for investment, is being maintained by the National Council of State Housing Agencies.
Next City has written numerous stories about Opportunity Zones.
Articles, News, and Model Documents
Opportunity Zones: Worth the Hype? U.S. News and World Report
The Significance of Investing in Opportunity Zones. Forbes magazine
In the Zone. Governing magazine
Next City has written numerous stories about Opportunity Zones.
Accelerator for America has prepared a sample prospectus for communities to use to position their Opportunity Zones for Opportunity Fund investment.