By Guest Columnist BUZZ BROCKWAY, vice president of the Georgia Center for Opportunity
Buried in the Tax Cuts and Jobs Act of 2017 was a provision that, if used wisely, could benefit investors, while at the same time knocking down barriers to human flourishing in struggling areas of our state. Championed by U.S. Sen. Tim Scott, of South Carolina, opportunity zones allow an investor to defer capital gains taxes for up to 10 years, if the gain is invested in a Census tract designated as a qualified opportunity zone.
Following guidelines in the law, last year then Gov. Nathan Deal designated 260 Census tracks across 79 Georgia counties to be federal qualified opportunity zones. Sixty percent of these Census tracts are in rural areas of our state, while 40 percent are in areas considered urban.
Experts estimate approximately $6 trillion in unrealized capital gains existed in the United States at the end of 2017. While no one expects all that money to flow into opportunity zone investments, it’s clear to see this program has the potential to direct massive investment into areas desperately in need of it.
The opportunity zone concept is not a new one. Presidents Clinton and Obama both implemented versions of this idea, with admittedly mixed results. What can we learn from previous attempts to direct money into low-income areas, and how can we set this program up for success?
In 1980, New York Congressman Jack Kemp introduced the Urban Jobs and Enterprise Zone Act. His goal was to use a variety of tax credits and incentives to encourage the creation or retention of small businesses within areas identified as high poverty and low employment. The bill never passed, but Kemp continued working on the issue while in Congress and as secretary of the U.S. Department of Housing and Urban Development.
Kemp envisioned a simple, easy to use program, focused on the unique needs of each particular community. Yet, when Congress finally enacted Kemp’s idea in 1993, it created a complex, one-size-fits all system, which ended up rewarding big businesses and wealthy developers. Not surprisingly, the transformation envisioned did not take place. Attempts by the Obama administration to revise the program proved similarly unfruitful, causing some to declare the concept a failure.
However, what Kemp envisioned, and what Scott added to the Tax Cuts and Jobs Act of 2017, is a program that is easy to understand and easy for people to invest in. If we follow their vision, I believe the chance of it succeeding is high.
According to the IRS, the new law provides that investors may be able to defer tax on almost all capital gains they invest after Dec. 31, 2017, through Dec. 31, 2026. To qualify for deferral, criteria that must be met includes:
- Capital gains must be invested in a Qualified Opportunity Fund (QOF) within 180 days;
- The fund must hold at least 90 percent of its assets in qualified opportunity zone property;
- Investment in the QOF must be an equity interest, not a debt interest.
These requirements are simple, flexible, and community focused. With an eye toward staying on this path, let us consider a few key principles to making opportunity zones a success:
Resist the temptation to regulate and micro-manage
- It is important that local governments do not add complexity to opportunity zones through zoning ordinances or other requirements. Attempts to micro-manage outcomes, or pick winners and losers, almost always fail. Investments that are locally focused and community driven are more likely to succeed than well intentioned “help” from policymakers and outsiders. Look to the early success the Arthur Blank Foundation and the Chick-Fil-A Foundation are having in Atlanta’s West End. They are laser focused on what people in that community need, and it’s beginning to pay off.
Understand that every opportunity zone is different
- Some people in opportunity zones need jobs, other people need affordable housing, others need healthcare, while other opportunity zones need investment in infrastructure. Determine what each unique area needs, and let solutions be locally driven not externally imposed.
Don’t focus mainly on “homerun” projects
- Before they backed out, Amazon’s HQ2 in Long Island was set to be located partially in an opportunity zone. While that project would have transformed the area, projects of that magnitude are extremely rare. Don’t let the search for “another Amazon” cause us to miss dozens of other opportunities that could also transform a community, but may not grab headlines.
Focus on people
- Above all else, focus on the people who live and work in these opportunity zones. The goal of directing investment into these areas of our state is to allow people to flourish and follow their own dreams. While investors in opportunity zone projects will surely benefit financially, it’s important to keep in mind there are real people in each opportunity zone and the benefits of any investment should primarily seek to meet their needs.
Opportunity zones as designed by the Tax Cuts and Jobs Act of 2017 have the potential to dramatically improve the lives of people across our state. With attention to the unique needs to individual people in each opportunity zone, we can create opportunities for human flourishing that will lift our state to even greater heights.
Note to readers: Before joining the Georgia Center for Opportunity in 2018, Buzz Brockway was elected to the state House of Representatives in 2010, where he represented portions of Lawrenceville and Suwanee until he stepped down in 2018 to run for secretary of state. He worked as an operations manager in the plastics industry for more than 20 years, until he and his wife started a company in 2005.