Washington, D.C.— Yesterday, Rep. Andy Kim (D-NJ), Chair of the House Small Business Subcommittee on Economic Growth, Tax, and Capital Access, convened a panel of experts from the economic development field to examine the role of Opportunity Zones in the small business economy. In 2017, Opportunity Zones were created with the intention of spurring capital investment in economically disadvantaged areas.
“Underserved communities deserve a chance to get the resources they need to grow and prosper,” said Rep Kim. “Opportunity Zones can help create those chances, but we need to ensure they’re truly working for those who need them most. I want to thank my colleagues on this committee, and our witnesses, for taking time to assess the impact of Opportunity Zones and discuss how we can make them work best for the people we serve.”
In 2017, substantial changes to the individual and corporate income tax code were made. One of the changes dealt with the creation of qualified Opportunity Zones (OZs). OZs were constructed to incentivize investment in underprivileged communities by allowing investors to bypass capital gains taxes by instead investing in underprivileged communities. Investors can avoid paying capital gains taxes by rerouting realized gains into Qualified Opportunity Zone Funds. These funds invest in a diverse array of initiatives, including commercial and industrial real estate, housing, infrastructure, and existing or start-up businesses.
So far, the program has received mixed reviews when it comes to its goal of spurring economic development in undercapitalized communities. The program has received numerous criticisms, including that it doesn’t provide benefits to whole communities, that some communities in the program aren’t genuinely distressed, and that there aren’t enough reporting requirements to measure the program effectively. Some reports have also indicated that real estate developers are benefiting from the program rather than existing small businesses in distressed communities.
The hearing gave members the chance to examine the program and identify potential reforms to make it better serve small businesses and the disadvantaged communities they operate in.
“Legislative and administrative reforms are needed to ensure the federal government avoids subsidizing deals that don’t need the support,” said Brett Theodos, Senior Fellow at the Urban Institute. “Reforms are needed to avoid providing the lion’s share of incentives to the best-off Zones. Reforms are needed to prevent taxpayer forgone revenues from being used locally in ways that taxpayers find incongruent with their objectives.”
“Opportunity Funds could help incentive new investors to enter this market,” said Aaron Seybert, Managing Director of the Kresge Foundation. “However, I remain concerned there is a mismatch between the needs of small business owners and the incentives in place for investors and fund managers.”
“Regrettably, we have found that the Opportunity Zone tax incentive is not a good match for the kind of neighborhood revitalization deals of interest to community development financial institutions, particularly those targeting small businesses,” said Jennifer A. Vasiloff Chief External Affairs Officer, Opportunity Finance Network. “In our experience, most investors are expecting double digit returns, prefer real estate to small business investments and largely shun the more challenging geographies that need an infusion of capital the most.”
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