With Scant Data, Questions Hang Over Opportunity Zones

Around the time it was created under the 2017 tax overhaul, the Opportunity Zones program was touted by supporters as a way to potentially draw billions of dollars of investment to struggling communities across the country, providing needed capital for businesses and helping bolster local economies.

Now, nearly four years after the program's inception, it's still hard to know how well the program is working and whether it is lifting up poor neighborhoods, or delivering outsized tax benefits to the rich.

This is because Congress and the Treasury Department have failed to establish reporting requirements that allow for clearcut tracking of the outcomes that the economic development initiative was meant to achieve. People who are familiar with and involved in the program have flagged the issue previously and urged lawmakers to fix it.

Opportunity Zones have been somewhat overshadowed during the past couple years amid the coronavirus pandemic and as President Biden and Democrats in Congress have pushed to enact an ambitious domestic spending agenda. But on Tuesday the program drew fresh attention on Capitol Hill, with lawmakers hearing from experts about possible reforms, including with the reporting requirement issue.

"Nobody wants to cut this program off, but ... I don’t think it’s going to continue to exist the way it is. And I don’t think that’s a Democratic or Republican conclusion," said U.S. Rep. Bill Pascrell, a New Jersey Democrat who chairs the House Ways and Means Oversight Subcommittee, which held a hearing on Opportunity Zones.

"I think when we examine all the facts," Pascrell added, "I think we will conclude it could be made much, much better.”

The initiative offers tax breaks to people and companies that reinvest capital gains in designated census tracts—or "zones"—with distressed economies. Capital gains come from the sale of assets like stocks, bonds or property. So, the program is fueled by money from those seeking to reduce the taxes they will pay on this income.

Investors Gravitate Toward Safer Bets

Among the main criticisms of the program is that it's structured in such a way that investors, seeking the least risk and greatest possible returns, have gravitated towards investments in communities that were on the upswing, while also directing money towards real estate more than other types business ventures.

"Wealth is increasingly concentrated among a smaller share of American places and people; Opportunity Zones are not helping to reverse this trend," Brett Theodos, a senior fellow with the Urban Institute, told the subcommittee.

Theodos noted research from the congressional Joint Committee on Taxation indicating that just 1% of zones attracted almost half of investments through the program and 5% drew nearly 90%. Meanwhile, JCT has concluded that the program will cost the federal government around $1.6 billion annually in foregone tax revenue.

"OZs largely promote market-rate, private equity investment into multifamily and commercial and industrial real estate, which is a poor vehicle to deliver investments into small businesses, affordable housing, schools, child care centers and health care centers," he added.

Proponents, however, point to communities with major investment programs underway. Places like Erie, Pennsylvania, a city of about 95,000 that saw its population shrink and downtown property fall into disrepair after industrial declines dating back to the 1960s.

John Persinger, CEO of the Erie Downtown Development Corp., was among those who testified on Tuesday, highlighting a roughly $100 million revitalization program in the city's downtown, that incorporates $40 million from Opportunity Zone funds. These plans envision 478,000 square feet of new space, restoring eight historic properties, 140 new residential units, 25 new businesses and a new grocery store in an area lacking one.

"Opportunity Zones are giving Erie a chance to succeed where other federal policies have failed," said Persinger.

But with the limited data that's available, it's hard to untangle whether anecdotes about situations like the one in Erie represent one-off success stories or reflect broader trends.

U.S. Sen. Tim Scott, a South Carolina Republican who has championed Opportunity Zones, also appeared at the hearing. He defended the core tenets of the program. "I think we all want reporting requirements," he said. "Without those reporting requirements there's no possible way to have an honest, balanced hearing around the benefits that are really important to the poorest people in this country." 

Scott pointed to a recently released Government Accountability Office report that says at least $29 billion had been invested under the program through 2019.

"OZs have helped communities across this country," he added.

But Jessica Lucas-Judy, director of strategic issues at GAO testified before the subcommittee and highlighted data shortfalls that exist with the program. "Regarding what is known about Opportunity Zone investment, the short answer is: Not much," she said.

Assessing program outcomes is also difficult, she noted. Additionally, Lucas-Judy flagged risks related to complex investments, such as real estate deals with hundreds of partners and worth hundreds of millions of dollars.

GAO in its recent report recommended steps that the IRS can take to improve its oversight of the program. The watchdog has previously recommended that Congress should consider taking actions geared towards addressing the reporting requirement gaps.

Theodos offers up a slate of suggestions for how the program might be improved.

For instance, restricting investments more narrowly, restructuring the tax benefit so it's more valuable in areas that are more distressed, or linking it to outcomes like job creation or equitable development. Theodos also makes a case that the "opportunity funds" that are central to the program should be required to provide basic, transaction-level information on the investments they are making.

"When we design federal programs we should be confident what is that we're purchasing," he said.