Opportunity Zones, created by Trump’s tax law, are meant to encourage investment in struggling communities. But in the poorest cities, many fear the program could do more harm than good.
FRESNO, Calif.—Census tract 06019000100 has a lot going for it. Locals cheer the melting-pot atmosphere, the arts scene, the nearby nature, and the affordable housing—affordable in national terms, which feels all the more amazing given that it is a quick drive both to the grandeur of Yosemite and to the tech hub of the Bay Area. Start your car up and grab a coffee here at 9 a.m., and you could be standing in downtown San Francisco or in front of Apple’s headquarters by noon.
For all that, though, this tract has its problems. There is the stifling summer heat, the poverty, and the pollution. Technology companies have not flooded into the area like they have in the Bay and in Reno, and the city faces underinvestment and blight. Roughly two-thirds of the families in 06019000100 live below the poverty line. The surrounding county is economically depressed too, with an unemployment rate above 8 percent, one of just a handful of places nationally where that is still true. Moreover, the income gap between households in Fresno County and Santa Clara County, where Apple is headquartered, has widened in the past 10 years.
Still, Fresno is a place that feels on the cusp, as if just a little more investment, a little more infrastructure, and a little more spit and elbow grease might help it thrive. It has what a real-estate broker might call “good bones,” with plenty of lower-cost real estate and highway saturation. It has a steady supply of educated workers, by virtue of being home to Fresno State, among other schools. And it has a powerful industrial base, in terms of agriculture as well as in other industries. “If you are a company that is looking at having a West Coast presence, especially a distribution or an e-commerce center, there’s no better place than Fresno County right now,” said Lee Ann Eager, the president of the Fresno County Economic Development Corporation (motto: “Living the California dream”).
That little nudge might just be forthcoming. A provision slipped into the Trump administration’s sprawling tax bill aims to transform places like census tract 06019000100 by luring private dollars to them. In Opportunity Zones, as they are called, investors will receive huge tax breaks for building office parks, warehouses, housing, grocery stores, and the like, helping to ease poverty and end blight in distressed communities. Despite being not much more than a remainder in the legislation, economists believe it could end up becoming the biggest place-based economic-development policy the federal government has.
“The key factors that have led to our uneven recovery are education, infrastructure, and workforce development. Can I address those three pillars by putting a target, a positive target, on distressed communities? Can I address those three issues and make a profit [as an investor] while also doing good?” said Senator Tim Scott, the South Carolina Republican who sponsored the provision, sitting in his Capitol Hill office—that’s census tract 11001008200. “The answer is yes.”
The answer to whether the Opportunity Zone designation might help places like Fresno might indeed be yes: Mayors and economic-development officials are enthusiastic about the initiative and scrambling to figure out how to capitalize on it, as are real-estate investors and developers. But economists argue that it looks unlikely to help revitalize the country’s most distressed communities—Flint and Detroit, the Mississippi Delta and Appalachia, Toledo and Youngstown—and that it looks likely to supercharge investment in places that were already growing. That means the provision might intensify the very regional inequality it seeks to remedy.
This is the dilemma posed by pursuing public policy with private capital. Leveraging the efficiency of markets will undoubtedly help many places on the margin. But it might take far more creative investment to truly solve the country’s worst-off communities and fix its growing problem of place.
Since the 1840s, America has become a more equal place—or, more to the point, places in America became more equal. The South caught up with the North. Electrification, the rise of the car and truck, the development of the highway system, the growth of manufacturing, and the federal government’s enforcement of antitrust statutes spread prosperity around the country. Aided by the Great Society and the New Deal, the middle class grew, everywhere from Winnetka to Orlando to Humboldt. As Phillip Longman noted in this magazine, the disparities in per-capita income across the different states shrank through the 1980s.
Then, something changed. The differences in per-capita and median income between states started growing again. Average incomes in big cities, in particular hubs such as San Francisco; Washington, D.C.; Chicago; Seattle; and New York, soared. Average incomes elsewhere stagnated. The recovery since the Great Recession has only aggravated these trends, with rural employment and earnings actually falling in the postrecession years in many places. The average income in census tract 060081600115, in Atherton, California, is $250,001. The average income in census tract 060064680028, in Mendota, California, is 20 times smaller.
The problem of place seems particularly acute in the South and the Rust Belt, away from the vibrant, expensive coasts and the low-unemployment agricultural and oil-and-gas heartland. As the Harvard economists Edward Glaeser, Lawrence Summers, and Benjamin Austin have noted, roughly half of men ages 25 to 54 in Flint, Michigan, are not working, versus just 5 percent in Alexandria, Virginia. “America’s social problems, including non-employment, disability, opioid-related deaths and rising mortality, are concentrated in America’s eastern heartland, states from Mississippi to Michigan, generally east of the Mississippi and not on the Atlantic coast,” they wrote. “The income and employment gaps between [the coasts, the heartland, and the eastern interior] are not converging, but instead seem to be hardening into semi-permanent examples of economic hysteresis.”
That growing regional inequality has had profound political effects, with trade-driven economic dislocations driving politically moderate representatives from office and leading to increasing polarization in a number of swing states, including Michigan, Ohio, and Pennsylvania. Economic anxiety might not have won Donald Trump the White House, but much of his strongest support came from more sclerotic rural and industrial areas. Thus, revitalizing the Rust Belt, aiding Appalachia, and healing the interior South—and winning the millions of voters in those regions—has become an urgent economic priority for both parties.
With the tax bill in the works, Tim Scott saw an opportunity. The Economic Innovation Group (EIG), a Washington, D.C.-based think tank and advocacy organization, helped him revive a provision encouraging private investment in distressed communities. (It was based on a white paper written by Jared Bernstein, who was Vice President Joe Biden’s chief economist, and Kevin Hassett, now the chair of Trump’s Council of Economic Advisers.) States would nominate distressed places as Opportunity Zones, Treasury would certify them, and investors would create special funds to invest in them, receiving a rich variety of tax deferrals, deductions, and exclusions for doing so.
Senator Cory Booker—a New Jersey Democrat, a likely 2020 presidential candidate, and a longtime resident of Newark, one of the most perpetually distressed communities in America—joined Scott in pushing for it. The law “will move capital off of the sidelines into places that haven’t been getting it, like the three in five distressed communities that have seen job losses between 2011 and 2015, while the country as a whole added 10.7 million jobs,” he told me. (Both Booker and Scott got their political start in municipal government, a fact which may help explain their shared interest.)
The provision was not a big one, not given the trillion-dollar sweep of the Trump tax legislation. The Joint Committee on Taxation has estimated that it would cost just $1.6 billion over the next 10 years (though the legislation is structured so that investors might realize most of their taxes outside the 10-year budget window). Still, the flexible structure of the new tax law and the accounting creativity of the country’s real-estate developers have led economists to anticipate that the provision might cost tens of billions of dollars in the near future.
Opportunity Zones are meant to be Goldilocks-type places: not so distressed that no amount of government incentive would induce private money to them, not distressed but gentrifying and thus already seeing a flood of private money coming in. “It’s not the economically very-worst-off places,” said John Lettieri, the president of the Economic Innovation Group. “It’s obvious that in many cases those areas are not today capable of attracting private investment. Their needs are first-order needs.” He added: “You also don’t want to choose at the higher end in terms of opportunity, because you don’t want to choose places that are on the kind of inevitable upswing. They’re already experiencing rapid change. They don’t need this as an incentive tool.”
Across the country, states, mayors, and development officials have scrambled to identify those in-between places and figure out how to shepherd the private dollars that might get spent in them. Stephanie Copeland, the executive director of the Colorado Office of Economic Development and International Trade, said the state built an index to identify places where private investment would be “highly catalytic.” She told me: “We looked at classic measures of distress, in terms of unemployment and poverty. We also looked at distance from the core of the state. Then we looked at assets that you had.” With that information, it chose to designate more rural areas, excluding more urban ones already on a clear upswing.
In Rust Belt communities, on the other hand, Opportunity Zones might help draw investment to neglected urban cores. “In Northeast Ohio, we’ve lost 7 percent of the region’s population since 1970. But we’ve greatly expanded our developed footprint—we’ve built more roads and more houses and more pipes and everything, with a shrinking population,” said Jason Segedy, who works on economic development in Akron, Ohio. “A lot of our issue is making the city more competitive with the suburbs and gradually getting at least more of a level playing field in terms of opportunities for new residents.”
Some localities were looking to create nonprofit or public-private partnerships and to use zoning and other local regulations to shape investment. In Fresno, for instance, a focus is on low-income housing. “The cost to build here in Fresno is 98 percent of the cost to build in San Francisco,” Preston Prince, the executive director of the Fresno Housing Authority, told me. “Yet our rents are our incomes and our rents are one-third of San Francisco’s. We don’t have the income, and we don’t have the philanthropic or government support at the local level to build. We just don’t have that same wealth.” He said he was cautiously optimistic about the response he had gotten from local developers about using the Opportunity Zone provision to finance new units.
But economists have proven more circumspect than developers and politicians. “We do have a lot of experience in the design of place-based policy and we have learned a fair amount over time about how these things work,” said Adam Looney, a former Treasury economist now at the Brookings Institution. “There are several lessons from that that seemed to have been ignored or overlooked in the construction of this policy, things that make me concerned that the policy will not be effective.”
For one, economists argue that those very, very distressed communities are where the government gets the biggest bang for its buck—the ones where the need is greatest and the opportunity for change the biggest. “You’re the only one doing investment there, so you’re not crowding out activity that would have occurred anyway,” Looney said, pointing to evidence from the Low-Income Housing Tax Credit program. Moreover, investments in such places tend to have stronger spillovers, raising the status of whole neighborhoods and communities. “When you build low-income housing in a really tough neighborhood, it improves the quality of neighborhood, it helps you reduce crime, and it improves other people’s property values,” Looney went on. “It seems to have these other, positive benefits.”
Experts also anticipate that a kind of perverse Goldilocks effect might take hold in Opportunity Zones, with all of the cash flowing into the too-hot places. There are Opportunity Zones in fast-gentrifying Northeast Washington, D.C. Or consider the inclusion of census tracts in Oakland, California, where rental-housing prices have increased more than 50 percent in just the past five years. “We aren’t concerned that it’s not going to help—we’re concerned it’s going to hurt,” said Paulina Gonzalez, the executive director of the California Reinvestment Coalition, which has publicly pushed back on the Opportunity Zone initiative as structured. “This is a result of a foreclosure crisis where you pushed people into rentals where we’re now adding an added layer of for-profit incentive.”
Another concern is that Opportunity Zones might simply shuffle investment around from place to place, rather than increasing the overall level of investment. Or that private-equity firms and property developers will use the Opportunity Zone designation for investments they would have made anyway. Or that real-estate investors will manipulate the program into a giveaway and then lobby for its extension and expansion, even if there is evidence it does not work.
Private-equity firms and property developers: Ultimately, those are the key architects of the provision, the ones that stand to reap the most direct benefits and are the most crucial determinants of its success. The initiative has Jack Kemp as a forefather, Scott told me, and businesses have been given huge latitude to determine where to put their money and what projects to invest in. “There is no up-front allocation or subsidy given to any investor,” Lettieri said. “They’re using their own capital at their own risk to invest in these distressed areas. And if they have additional gains, they will see the potentially substantial upside on the back end.”
The Opportunity Zone legislation has both expanded the federal government’s place-based policy and erased the federal government’s role in executing it. “This is another step down the continuum of greater private control over federal economic-development resources,” said Brett Theodos, an expert on place-based policy at the Urban Institute.
During the Great Society, an initiative of Lyndon B. Johnson’s White House, the government directly financed a huge amount of construction across the country. Under President Gerald Ford, the government started to grant money to states to use on projects through the Community Development Block Grant initiative. Under Presidents Bill Clinton and George W. Bush, the private market started underwriting public-development deals through the New Markets Tax Credit program. “Fast forward to this,” Theodos said. “There are no intermediaries. There is no local decision making. There is no competitive application process. It’s the private markets deciding, in a very real sense, where the federal resources are being used.”
That is a feature and not a bug, in Scott’s telling. Distressed communities need more jobs, better jobs, and better-paying jobs, he said. They need more tax revenue to finance better schools and better roads and better amenities. They need private industry, perhaps more than they need public investment, given that no community thrives on transfer payments alone. “Let’s say I have a $250,000 investment in the area [as a developer], as opposed to the government. I’ve got 10 years to get that money back out,” he said. “I think I’m going to handle that money better than the government. Most entrepreneurs can and will.”
But if private businesses and private jobs are an end, private investment might not be the best means. The lack of public control has raised the prospect that investors will finance projects with little spillover benefit. “What does a community need? You should think about that, and then match investment with that need,” Gonzalez told me. “That is not how this program is structured at all. It’s structured around incentivizing private equity to come in with investment, assuming that the investment is going to somehow benefit communities without any analysis around what the needs are.”
In truly distressed communities, public investment might be necessary to induce private investment—to fix the deep-seated problems, diversify or change the industrial base, and address the market failure directly. “You can bulldoze your way through with subsidies or you can actually try to address the problems these communities have,” said Timothy J. Bartik of the W. E. Upjohn Institute for Employment Research. “You might be able to invest a dollar in reducing crime, and cut the cost of investing in the area by $2. Or you might make smart investments in anti-crime policies and the return is $5. And these investments are also public goods, not private goods.”
For some communities, those public goods might be hospitals and elementary schools. “I hate to say this because I don’t like the government intervening in this way,” said Copeland of the Colorado Office of Economic Development and International Trade. “But in really isolated communities [with declining populations], I’d love to see more intentional federal dollars spent around the two building blocks to retain people: health care and education.”
For others, it might mean spending on crime reduction. In others, on transitional jobs programs. In others, massive infrastructure investment. In others, regulatory reform to add housing units, as well as better transportation infrastructure and homelessness-prevention programs. In others, health programs to stem the tide of opioid abuse. “The scale of the challenge is so much bigger than the tools we’re bringing to the fight,” Lettieri told me.
In Fresno and countless other places, of course, the problem, or at least some of the problems, might be more on the margin. Prince, for example, said the designation probably would encourage the construction of more low-income housing. “If we’re going to address the systemic issues that we have had in neighborhoods here for long periods of time, we need every resource we can get,” he added. And Eager pointed to the initiative’s potential to encourage development around California’s long-in-the-works high-speed rail project.
But for Detroit and Flint and Newark and Appalachia, it might not be enough. Direct investment might be necessary to help those worst-off communities and to make the country a more thriving and equal place, in terms of place.
This post originally appeared on The Atlantic.