You Decide: Can Opportunity Zones Boost Local Economies?

Downtown Raleigh, east of campus.

Downtown Raleigh, east of campus.

By Dr. Mike Walden

I make about 80 presentations across the state each year on a variety of economic topics. It’s one of the most enjoyable parts of my job at N.C. State University, by allowing me to become acquainted with many people and groups in almost every region of our beautiful state.

Recently I spoke to a group in Raleigh I had never before encountered. They were investors and economic development experts from across both the state and nation. They had gathered to hear about a new concept called “opportunity zones.”

My task was to broadly discuss the North Carolina economy, including both its needs and opportunities. My central theme was that North Carolina has experienced significant improvement in its economy in recent years. Yet there have been many areas of our state left out of these gains.

Opportunity zones (OZ’s for short) are a new concept designed to address this shortfall and spread prosperity to more regions of North Carolina. OZ’s are a national plan that were part of the 2017 federal tax overhaul. The meeting in Raleigh was one of many across the nation to explain OZ’s and hopefully get them started.

So how will OZ’s work? The basic idea is to use tax incentives to attract investors to designated geographic areas. The major carrot is the reduction – and in some cases, total elimination – of federal capital gains taxes. Investors pay capital gains taxes on the increase in value of their investment (in investment lingo, an increase in an investment’s value is called a “capital gain”).

Investors in OZ’s can save capital gains taxes in two ways. One is by taking capital gains from another project outside the OZ and putting that money to work in the OZ. In this case, the capital gains taxes owed from the other project are reduced. Also, the taxes on capital gains earned on the money invested in the OZ will be reduced and – if the investment is kept long enough – totally eliminated.

This might all sound like a financial mumbo-jumbo, but trust me, these tax incentives are important enough to get the attention of investors. Also, the incentives are all coming from the federal government, not the states.

There are 252 OZ’s in North Carolina covering 1.1 million people. Two-thirds are in metropolitan areas, while the remainder are in small towns and rural regions. Clearly the OZ’s are more economically challenged than the rest of the state. Average household income in the OZ’s is $18,000 less than the state average. Also, the OZ’s have unemployment rates 40 percent higher than the state, and the percentage of adults with a college degree is about half that for all the state.

Will the OZ’s work? Supporters say there is potentially $6 trillion of investable funds that could be available for the areas. Others question this amount as well as the success of earlier versions of the OZ’s. In the 1980s and 1990s, especially, there were similar programs to lure investments to economically lagging areas. The evaluations of those programs have been mixed. Several studies found no impact of the programs on employment in the qualifying areas. Others did find employment gains in the designated locations but concluded the additional jobs would have happened anyway without the tax incentives.

OZ supporters retort that previous programs didn’t have powerful enough tax incentives and also required too much red tape. They claim the OZ’s have fixed these problems, and supporters are excited about the interest already shown by investors.

Still, the ultimate question is this: even if the OZ’s are able to bring billions or trillions of dollars of new investments to lower performing economic regions, who will really win?

For example, what if the investors in OZ’s fund properties and businesses that primarily hire college-educated workers, many of whom move to the regions for the jobs. It’s likely this new economic activity would create other kinds of jobs for local residents who don’t have college degrees. Yet if the local economy really flourishes, it may also mean higher housing prices and other costs for the original local residents. We’ve seen this happen after many inner-city neighborhoods have re-developed.

This question comes down to a long-debated issue in economic development circles. Should the focus be on “place-development,” of which the OZ is an example? Here the goal is to increase investments in an area, using the philosophy that a general rising economic tide will lift all boats.

Or, should the attention be given to “people-development,” based on the notion that what lower-performing regions most need is better educational attainment and skill development for local residents. If this is accomplished, then more and better-paying jobs can follow. Although the OZ’s don’t preclude this approach, it is not their main focus.

The opportunity zone program is just beginning, but I predict we’ll hear much more about it in coming months and years. Along the way, we’ll eventually have to decide what constitutes success of the OZ’s.

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Walden is a William Neal Reynolds Distinguished Professor and Extension Economist in the Department of Agricultural and Resource Economics at North Carolina State University who teaches and writes on personal finance, economic outlook and public policy.

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