The Failure of Opportunity Zones

The Opportunity Zones (OZ) incentive has been put under a microscope in recent months, as the COVID-19 pandemic and Black Lives Matter protests continue to unearth systemic problems in the fabric of American society.

The OZ incentive drew skepticism from the start, as critics warned that it would only exacerbate gentrification and fail to serve the majority-minority communities that it was intended to support. These criticisms have proven prescient, as a recent study conducted by the Urban Institute found that the incentive provides the biggest benefits to projects with the highest returns, which leaves out affordable housing and small business investment. (Urban Wire, 2020)

Furthermore, the incentive targets capital gains tax, and 94% of capital gains taxes come from households that make more than $100,000 per year, a figure unattainable for many residents in these economically distressed neighborhoods. Compounding the issue, the fact that these tax breaks are spread over a 10-year period makes it both unaffordable to anyone besides the one-percent and prohibitive to investors looking to see near-term returns. (Bloomberg, 2020)

Some solutions put forward by the Urban Institute include restructuring the incentive to better support investments in small businesses, sizing the incentive based on a project’s positive impact on the community (measured through factors like job creation and affordable housing), and broadening who can invest by offering refundable tax credits or other incentives outside of the narrow capital gains exclusion.

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