New Tax Loophole Will Attract Private Capital to Distressed Communities
Incorporated into President Trump’s big tax bill, the bipartisan “Investing in Opportunity Act” promises to boost private investment in qualifying communities by billions.
One of the clear positives for community development created by the new tax bill is a little noticed incentive to invest in low-income communities. The Tax Cuts and Jobs Act (TCJA) incorporated a bill introduced last year by Senators Tim Scott (R-SC) and Cory Booker (D-NJ) as well as Representatives Pat Tiberi (R-OH) and Ron Kind (D-WI), known as the Investing in Opportunity Act, which enables states to define “opportunity zones” where investors are able to defer capital gains as long as they invest in qualified “opportunity funds.”
An "opportunity fund" is any investment vehicle organized as a corporation or a partnership to invest in opportunity zones that holds at least 90% of its assets in opportunity zone assets.
Governors may submit nominations for a limited number of opportunity zones to the Department of the Treasury for certification and designation. Governors must give particular consideration to areas that:
are currently the focus of mutually reinforcing state, local, or private economic development initiatives to attract investment and foster startup activity;
have demonstrated success in geographically targeted development programs such as promise zones, the new markets tax credit, empowerment zones, and renewal communities; and\
have recently experienced significant layoffs due to business closures or relocations.
Treasury must designate zones if a governor fails to submit nominations within a specified period of time.
If a state governor does not declare zones quickly enough, then the U.S. Treasury Department has the authority to define qualifying zones in that state.
The proposal is roughly modeled after New Market Tax Credits (NMTC) and uses the same eligibility criteria for determining low-income opportunity zones, including: a poverty rate of at least 20%, or, for rural areas have a median family income that does not exceed 80% of statewide median, or in a metropolitan area have a median income that does not exceed 80% of the metro area’s median income, or be a census tract adjacent to a low income area as long as the median income doesn’t exceed 125% of the area median income.
The new investment vehicle will provide real financial incentive to put capital to work in depressed areas. Social and impact investing are on the rise, but such favorable capital treatment will surely draw some new money to otherwise worthy but previously overlooked opportunities in distressed communities.
So while public infrastructure financing looks to take a big hit in the new tax bill, which may hurt local infrastructure investment, private investment through these new “opportunity funds” seems likely to increase investment—at least in some of the hardest hit U.S. communities. The Joint Committee on Taxation estimated it would cost taxpayers $7.7 billion from 2018 to 2022, which will drive many billions more into qualifying communities.