Today is the deadline for governors to nominate low-income areas in their states for federal opportunity zone investment tax credits, but a new Government Accountability Office report found that most states aren’t sure if previous investments are reducing poverty, unemployment and housing prices.
The report also noted that because of income requirement changes made under the One Big Beautiful Bill Act, about 25% fewer low-income areas throughout the country qualify as opportunity zones for the upcoming round of funding.
Congress created the opportunity zone tax incentive in 2017 as part of the Tax Cuts and Jobs Act. The law established about 85,000 low-income census tracts across the U.S. Governors can choose which census tracts they want to nominate as opportunity zones, where investors in qualified businesses like multifamily housing, hotels or commercial real estate are eligible for federal capital gains tax benefits, Jessica Lucas-Judy, GAO director, strategic issues, told Smart Cities Dive.
The investment tax credits are “designed to help provide a way for people with capital gains to be able to invest those gains in something that is going to stimulate the economy,” she said.
In 2018, the U.S. Department of the Treasury chose 8,764 of the census tracts that governors nominated as opportunity zones, Lucas-Judy said. Those opportunity zone designations sunset in 2028, and the nomination period for a new set of 10-year opportunity zones ends today.
The Tax Cuts and Jobs Act didn’t require the Treasury Department to keep a list of opportunity zone investments, and “there weren’t a whole lot of parameters on what kind of investments, so there was no way to know what those investments were doing — creating jobs, having an effect on employment rates, poverty rates,” Lucas-Judy said. “Some municipalities have gathered the information themselves by talking to developers in their area, but it’s their own initiative.”
The OBBBA changed that, Lucas-Judy said. Now, investors are required to report opportunity zone investment funds annually on their tax forms, and the Treasury Department will issue a public report on those investments’ characteristics, she said.
Also as part of the OBBBA, Congress asked the GAO to review investment activity in the opportunity zones and how the zones affect local communities, Lucas-Judy said. The GAO report relied on anecdotal evidence from a survey of states and territories, along with interviews of state and local officials and opportunity zone experts, she said.
Results showed that the opportunity zones most likely to attract investors are in urban areas, contain or are close to ongoing development, have access to infrastructure and have community support.
The report also found that most of the opportunity zone investors are in real estate development, particularly those specializing in multifamily housing, retail and mixed-use development, Lucas-Judy said.
“This is in part because you have to hang on to an investment for 10 years to get the tax incentives, and that’s harder to do with an operating investment. It’s not that there’s no business investment, but that it’s harder to meet the requirements,” she said. “Opportunity investment is kind of niche.”
The report also noted that opportunity zone investments are more likely to occur when they can be “stacked” with other government incentives like Department of Housing and Urban Development or Department of Transportation grants, low-income tax credits or community incentives or programs, Lucas-Judy said.
“The quote we kept hearing from people is [opportunity zone investments] don’t make a bad project good,” she said. “To be a successful investment, they tend to be in places where investment is already happening or starting to happen, and [opportunity zones] kind of sweeten the pot.”
