Lipstick on the Proverbial Pig

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Opportunity zones are billed as a tool to lift up communities left behind by the modern economy — and if the wealthy get a generous tax break in the process, all the better.

The program was the brainchild of several high-profile investors from the tech industry, but tech leaders haven’t rushed to invest in OZs.

And early studies suggest the program itself has done little to help the communities that need it most.

President Joe Biden’s plan to raise the capital gains tax rate to 39.6% for households earning more than $1 million annually could sweeten OZ investments.

If investors will be on the hook for higher capital gains taxes down the line, they might funnel more money into an OZ fund, which would allow them to defer capital gains tax after sitting on the investment for a decade.

But investors aren’t certain of the tax benefits, because Biden has signaled his intention to reform OZs so that they do more to benefit low-income areas.

There are few things as powerful as an experienced, institutional player admitting that it was wrong. Consider the Kresge Foundation, a philanthropic private group based in Troy, Mich., which was at first sold on the idea of opportunity zones. No longer.

"Our intoxication with the idea of a truly scalable equity tool for community development finance pushed us past critical questions like… Who will benefit most? What happens in markets without community accountability? What did the incentive’s creators know about low-income community investing? And, most importantly, what are the possible unintended consequences?" wrote managing director Aaron Seybert.

OZs rewards appreciation regardless of social impact, but don't require measurement, accountability or tracking of any impact.

"This is not a worthy measure. If millions go into a community, but they’re invested into liquor stores, storage units, and condominiums that price people out of housing opportunity, are the people who live there any better off?" Seybert said.

"... We can no longer put lipstick on the proverbial pig. The downside risk is too great for the communities Kresge serves. We need full transparency into OZ, we need some level of local accountability for the capital invested, and we need better evidence that the tool can deliver against community needs at scale. Without these, I don’t think the incentive should continue to exist at all."

There are more than 8,000 opportunity zones nationwide. Though most of them are low-income communities, some don’t have to fit that designation.

A study by economists at the University of California Berkeley found that most OZ investments are real estate projects concentrated in higher-income neighborhoods that were already becoming more affluent and popular.

“These neighborhoods have also experienced significant changes in their demographic composition over the past decade, with increasing shares of college-educated adults and declining shares of non-white residents,” the report’s authors wrote.

Dean Barber is the principal of BBA, a Dallas-based consultancy that helps economic development organizations unleash and create a better business environment within their communities. BBA also helps companies find optimal locations where risks are reduced and a return on investment is enhanced. Visit us at barberadvisors.com