Last year’s big tax cut legislation contained a lesser-known section that created a potentially powerful tool to encourage economic development in underdeveloped neighborhoods.
The Tax Cuts and Jobs Act of 2017 enabled the biggest tax cut in U.S. history but, under the radar, it also allowed the creation of special neighborhood districts where developers can qualify for big tax breaks if they invest in them.
So-called “opportunity zones” have been employed by policy makers before to encourage investment in communities that suffer from under-investment or disinvestment. But this new variety is a different animal and is unprecedented in the size of the potential tax relief.
Developers are rushing to plan projects that will qualify for the favorable tax treatment even as neighborhood leaders, community development officials, lenders, and others are working to figure it out.
“This is definitely a new approach at community revitalization,” says Justin Vanderglas, a tax manager with Clark Schaefer Hackett, a Cincinnati-based CPA firm.
He spoke to a recent well-attended workshop on the zones at HCDC, Hamilton County’s economic development organization.
The program is substantial. Nationwide, 8,700 census tracts, more than 10 percent of the country, have been declared opportunity zones. In Ohio, 320 tracts have been so designated, and 144 have in Kentucky.
Many of the tracts are in neighborhoods that have traditionally suffered from poverty and disinvestment: In Cincinnati, they include South and North Fairmount, Evanston, Camp Washington, and South Cumminsville; and in Northern Kentucky, Covington and Newport.
But others are in communities not typically favored with such tax-friendly policies: the industrial and commercial corridor of Queensgate in Cincinnati, parts of downtown Cincinnati, an industrial area in the Butler County town of Fairfield, and a zone around the airport in Boone County, Ky., for example.
The program allows developers to defer capital gains taxes for years, or possibly forever, depending on how long they own the opportunity zone property in which they are investing.
It’s an effort to tap into $6 trillion in capital gains nationally that have yet to be realized because of the tax liabilities, Vanderglas says.
The new program is complicated and developers, consultants and community leaders are hoping for more guidance from the Internal Revenue Service.
“There’s a lot of regulations and there’s still more regulations to come,” Mike Sullivan of real estate broker Cushman Wakefield told the group. “There’s a lot of unknowns at this point.”
The program appears to favor big real estate developers over small businesses, and that has some concerned about the impact it will have on neighborhoods.
Sara Sheets is executive director of the Madisonville Community Urban Redevelopment Corp. The east side Cincinnati neighborhood of Madisonville is included in the new opportunity zone roster.
“I worry about how these projects might be beneficial to the community,” she says. “Right now, there’s a disconnect between the investors and what the community wants to see.”
She’d like to see regulations issued that would require developers to consult with the communities before their projects are approved for the tax breaks.
With the potential the program has to shape development in so many communities, and the billions in tax breaks at stake, that seems like a sensible recommendation.