Federal tax reforms from late 2017 created an “Opportunity Zone” program – will these incentives be the key to revitalizing underdeveloped areas?
The recent creation of federal Opportunity Zones called for selection of targeted census tracts for development incentives. As Maryland and other states have implemented their selection, the process of refining the processes for engaging new employers and activity within their bounds.
The nuts and bolts of the tax incentives are explained in a Q&A style summary sheet from the IRS:
Q. How do Opportunity Zones spur economic development?
A. Opportunity Zones are designed to spur economic development by providing tax benefits to investors. First, investors can defer tax on any prior gains invested in a Qualified Opportunity Fund (QOF) until the earlier of the date on which the investment in a QOF is sold or exchanged, or December 31, 2026. If the QOF investment is held for longer than 5 years, there is a 10% exclusion of the deferred gain. If held for more than 7 years, the 10% becomes 15%. Second, if the investor holds the investment in the Opportunity Fund for at least ten years, the investor is eligible for an increase in basis of the QOF investment equal to its fair market value on the date that the QOF investment is sold or exchanged.
An easy-to-digest summary of these issues has been laid out on the Tax Foundation website. Their analysis includes several scenarios for different employers, and how their tax treatment would change if located within an opportunity zone.
Governing magazine ran an article laying out the merits, and comparisons with, prior versions of targeted federal incentives:
Opportunity zones borrows a bit from the playbooks of the previous plans. But there are some significant changes. The market-driven solutions of the last 40 years have been in line with conservative supply-side economic policies. Investment, goes the theory, drives the economy. Cut taxes and investors will use their capital to make more money and, in turn, create jobs. Democrats in the 1980s and 1990s were largely skeptical of supply-side economics. The party insisted that market-driven programs include local hiring and local contracting provisions to make sure jobs were created in the community and the gains made by investors were shared with local businesses. For example, the empowerment zones that were established under the Clinton administration gave businesses a tax credit for hiring employees who lived in the zones. No such provisions exist in the opportunity zone program, despite backing from some prominent Democrats. Urban policy analysts see the program as an unbridled supply-side program. “It’s almost a purer version of the original vision,” Weaver says. “What happened with the empowerment zones and the enterprise zones is that Congress made compromises that watered them down.”
Maryland is now contemplating legislation to augment the federal incentives with a state ride-on program. Governor Hogan introduced the notion in January, as part of his announcement of legislative priorities for the 2019 session. From Washington Post coverage:
With the legislative session beginning next week, Hogan plans to introduce bills to offer a 10-year tax credit to businesses in opportunity zones while also exempting them from state property taxes and business fees.
The administration also plans to set aside $3 million for a competitive grant program for businesses in opportunity zones to train workers. He will also ask the legislature for $16 million to create a technology infrastructure fund to be overseen by an independent governing board. This group will develop a long-term plan to bring life science and cybersecurity firms to the state.
HB 150, the Governor’s bill to effect these and related changes, has been scheduled for its public hearing on March 6.