New York, NY – A little-noticed section in the $1.5 trillion tax cut that President Donald Trump signed into law late last month is drawing attention from venture capitalists, state government officials and mayors across America. The provision, on Page 130 of the tax overhaul, is an attempt to deal with huge swathes of the country which have not experienced the recovery of other areas of America. While the rest of America is celebrating, President Trump has not forgotten that the work of making America great again is far from over and as long as there is poverty in parts of the U.S., he will be on hand to fix it.
President Trump’s tax reform creates “Opportunity Zones,” which will use tax incentives to draw long-term investment to parts of America that continue to struggle with high poverty and sluggish job and business growth. The provision is the first new substantial federal attempt to aid those communities in more than a decade. And it comes as a disproportionate share of economic growth has been concentrated in so-called superstar metropolitan areas like Los Angeles and New York.
If the zones succeed, they could help revitalize neighborhoods and towns that are starved for investment. They could also deliver a windfall, in the form of avoided capital gains taxes, for corporations and financiers who invest in the Opportunity Zones. The zones were proposed in the tax law by Senator Tim Scott, a South Carolina Republican who was born into poverty in North Charleston. Scott said that he had discussed the plan with President Trump and that the President had spoken approvingly of it. But in the rush to pass the bill over the course of a few frenzied weeks, the idea was never debated on the floor of the House or Senate.
One in six Americans lives in what the Economic Innovation Group calls a “distressed community,” where median household incomes remain far below the national level, which is $59,000 a year, and the poverty rate is well above the national average. Those communities are urban, rural and suburban. On average, the communities lost 6 percent of their jobs and a similar share of their business establishments from 2011 to 2015, according to census data.
The national economy grew and added jobs during that period, but that growth was disproportionately in large cities. Metropolitan areas with at least one million residents provided just under half of America’s jobs in 2010. But from 2010 through 2016, those metropolitan areas accounted for nearly three-quarters of the country’s net job creation, according to new research by the Metropolitan Policy Program at the Brookings Institution in Washington.
Rural areas accounted for just 3 percent of the job growth in that time. From 2010 to 2014, according to the innovation group’s research, rural areas saw more businesses close than open
Economic development professionals in those areas have struggled to attract the attention of companies and venture capitalists, who channel most of their money to major cities. To bring those investors into distressed communities “you have to hit them in their sweet spot, and their sweet spot is, they pay a lot of capital gains taxes,” said Donald Hinkle-Brown, president and chief executive of Reinvestment Fund, a community development group.
As a businessman President Trump knows how to play to that sweet spot and the new tax law provision does exactly that. It instructs governors in each state and territory, along with the mayor of the District of Columbia, to designate Opportunity Zones from a pool of low-income, high-poverty census tracts, subject to certification by the Treasury secretary. States cannot nominate all their qualifying tracts for that status – they are limited to only a quarter of eligible tracts. Investors, like banks or hedge funds, then create Opportunity Funds to seed either new businesses in those areas, expansions of existing ones or real estate development.
The people who invest in Opportunity Funds are able to minimize their tax burden through preferential treatment of capital gains.
More than $2 trillion in unrealized capital gains are sitting on individual and corporate balance sheets across America, according to the Economic Innovation Group, the result of profitable investments in stocks and mutual funds. Normally, the proceeds from the sale of those assets would be taxed as a capital gain, at a maximum federal rate of 20 percent plus a 3.8 percent surtax. The new law offers investors an alternative – to roll those unrealized gains into an Opportunity Fund, and defer federal taxes on the profit, at least temporarily.
That deferral grows into capital gains tax relief the longer the investment is held. An investor who retains an investment for seven years will pay only 85 percent of the capital gains taxes that would have been due on the original investment. If the investment is held beyond 10 years, the investor permanently avoids capital gains taxes on any proceeds from the Opportunity Fund investment.
Investors are already starting to take notice. A two-hour session on Opportunity Funds drew a standing-room-only crowd last week at the Winter Innovation Summit in Salt Lake City, said Patrick McKenna, founding partner of the venture capital firm High Ridge Global. McKenna has invested in distressed communities such as Baltimore and over the last year has tried to steer Silicon Valley dollars to struggling areas such as Youngstown, Ohio, out of a belief those areas contain untapped potential for growth and prosperity.
Civic leaders are beginning to pitch state economic development officials on designating tracts of their communities as Opportunity Zones. Michael Tubbs, the mayor of Stockton, California, which the Economic Innovation Group ranks as the eighth-most distressed large city in America said,
“It’s very exciting. It makes communities like Stockton more attractive for investment.”
The new Opportunity Zones are designed to be more effective than earlier Obama-era programs, and likely to generate far more investment than congressional scorekeepers predicted in assessing the tax bill. The Joint Committee on Taxation predicted the provision would reduce tax revenues by $1.6 billion over 10 years, suggesting a modest amount of additional capital gains investment.
As unemployment in the country falls to new record lows and the stock market soars to new record highs, President Trump has not forgotten the millions of disaffected Americans who put him in the Oval Office, for them, he is working hard to make their American dreams come true as well.