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“Opportunity Zones” Don’t Actually Work

September 4, 2020
“Opportunity Zones” Don’t Actually Work
U.S. President Donald Trump shakes hands with Sen. Tim Scott (R-SC) during a working session regarding the Opportunity Zones provided by tax reform in the Oval Office of the White House February 14, 2018 in Washington, DC. President Trump hosted a group of local elected officials, entrepreneurs, and investors to discuss "how the 'Opportunity Zones' designation in the Tax Cuts and Jobs Act will spur investment and job growth in distressed communities." (Photo by Alex Wong/Getty Images)

If you were one of the die-hards who diligently sat through last week’s Republican convention, you heard a lot of talk about opportunity zone (OZ) programs.

Created as part of the 2017 Republican tax bill, Opportunity Zones are a key component of the Republican Party’s outreach, such as it is, to minority voters.

The Opportunity Zones enjoy a fair amount of bipartisan support: They reduce the tax liability of investors who reinvest capital gains in certain census tracts. These designated census tracts are often low-income ones, and the program is typically presented as an effort to create jobs and raise wages in those areas.

But like the rest of the Trumpist economic agenda, Opportunity Zones have not delivered on their promise so far and seem unlikely to do so in the future.

South Carolina Senator Tim Scott, one of the program’s original champions, called OZ’s “the first new, major effort to tackle poverty in a generation.”

If this is our main effort to tackle poverty, then poverty will be with us for a while.

The central idea underlying location-specific tax incentives (such as OZs) is to direct investment where it would not otherwise go.

In some sense this is counterproductive: We are using public policy to direct capital away from its most productive ends. But if the OZs addressed involuntary unemployment in depressed areas, or created self-sustaining agglomeration economies, perhaps they would be worth it. But those are the best-case scenarios.

Sometimes things don’t work out that nicely

To be eligible for OZ designation by a state’s governor, a census tract “usually needs to have a poverty rate of at least 20 percent, or a median family income that is below 80 percent of the statewide median (or below 80 percent of the metropolitan area median if that is higher and the tract is inside a metro area). In addition, up to 5 percent of OZ tracts can be higher-income tracts that are contiguous to tracts that meet the poverty or income standards.”

Because of these eligibility criteria, high-income neighborhoods and rapidly gentrifying areas can be designated opportunity zones. Meaning that the program’s vague targeting can wind up helping the people who are already economic winners.

For example, a census tract can contain both public housing and high-income areas, and be eligible based on its poverty rate. Some census tracts were eligible simply because they are adjacent to an eligible tract. The Brooklyn waterfront, now an Opportunity Zone in New York, was eligible because its census tract is contiguous to a census tract that contains a large public-housing complex.

Local policymakers may also simply fold the designation into existing development strategies: All four of the locations the District of Columbia offered for Amazon’s HQ2, for example, were largely inside OZs. That was convenient for the D.C. area and for Amazon. But not particularly helpful for low-income residents or unemployed people at the lower end of the wage scale.

And it isn’t just ineffectiveness that’s a problem. The targeting problems means that some share of the tax subsidy will wind up going to investment that would have occurred anyway, turning the program into an extraordinarily regressive tax cut. A recent study confirms that Opportunity Zone investment has disproportionately flowed into OZs that were already flourishing.

Perhaps as a consequence, home prices in opportunity zones—a forward-looking indicator of whether homebuyers expect dramatic change—have not increased. In addition, to the extent that we can observe labor market effects, zip codes with opportunity zones seem to have slightly fewer job postings than similar areas that were not selected.

It’s probably a good thing that, despite how often Opportunity Zones were talked about at the RNC, these programs are not a large share of overall place-based spending (which is mostly done by state and local governments). The OZ program was originally scored to constitute only about 3 percent of spending on such policies at all levels of government.

That said, it is large by the standards of federal jobs programs: According to the Joint Committee on Taxation, annual spending on Opportunity Zones is now $3.5 billion—twice that of the Tennessee Valley Authority at its peak in the early 1950s.

For that kind of money, we’d be better off with an actual Infrastructure Week.

Stan Veuger

Stan Veuger is a senior fellow in economic policy studies at the American Enterprise Institute. Twitter: @stanveuger.