Doing good while also doing well has long been a challenge for investors who rightly pursue profitable investments, but also want to improve the world they live in. Opportunity Zones, created by President Trump’s 2017 Tax Cuts and Jobs Act, provide a unique investment vehicle to do just that. Since I became head of the Economic Development Administration (EDA) in March, I have worked with Commerce Secretary Wilbur Ross to engage with communities and regional leaders to promote the advantages of investing in Opportunity Zones.
Opportunity Zones were established to direct investment to and spur job creation in underserved, impoverished, or otherwise distressed communities throughout the country. To encourage investment into the nearly 9,000 specially-designated Opportunity Zones, which are located throughout the U.S. and its territories, the president worked with Congress to develop special tax incentives.
With the potential to impact the lives of so many people, including the more than 35 million Americans living in the specially-designated areas, Opportunity Zones can be a powerful driver of transformative investment and economic development in our nation’s low-income neighborhoods.
Among the many benefits, the initiative allows investors to defer tax on capital gains by investing in Qualified Opportunity Funds (QOF), vehicles organized specifically for injecting money into designated Opportunity Zones. Additionally, the longer an investment is held in a QOF, the lower the capital gains tax liability. Through step-up of basis (the readjustment of the value of an appreciated asset), investors receive a 10% exclusion of the deferred gain after five years, which grows to 15% after seven years. Furthermore, if the investment is held for at least 10 years, any appreciation of the QOF investment is tax-free.
Those looking for socially conscious investing can rest assured that these Opportunity Zone investments will target development in areas of the country that need it most. Last year, the unemployment rate in Opportunity Zones was nearly 1.6 times higher than the average U.S. census tract. Similarly, the average poverty rate across Opportunity Zones exceeded 32%.
Politicians and leaders of both parties have enthusiastically embraced this new approach to development in distressed areas. All 50 governors designated Opportunity Zones in their respective states in early 2018 and have since encouraged new investment there. Today, governors, mayors, and other community leaders are including Opportunity Zones in their economic development strategies. The support from state and local leaders will help ensure that the special Opportunity Zone investment incentives will bring economic growth and dynamism to the areas that need it most.
I have been working to promote Opportunity Zone investments across the country, both within the government and in the private sector. As a leader of an agency whose principal role is to make investments in economically distressed communities to create jobs, promote innovation, and accelerate long-term growth, I know that this initiative fits hand in glove with our mission, the mission of the Department of Commerce, and the mission of the broader Trump administration.
To educate and highlight best practices in communities across the nation, I discussed Opportunity Zones during an extensive, and ongoing, White House Opportunity and Revitalization Council (WHORC) listening tour. At stops in Lubbock, Texas; Lafayette, La.; Canton, Ohio; and elsewhere, we heard about the incredible potential of the Opportunity Zone initiative to transform distressed communities. We saw communities developing prospectuses that highlight their assets and use local knowledge to emphasize the most impactful investment opportunities.
I would also encourage state and local governments to offer their own Opportunity Zone tax incentive packages to stack on top of the federal Opportunity Zone tax incentives. Ohio provides a good example for other states to follow. In July, Gov. Mike DeWine signed into law the state’s 2020/2021 budget, which included an Opportunity Zone provision that gives investors an additional 10% tax credit if they invest in one of Ohio’s 320 Opportunity Zones.
The sky is the limit when it comes to how the Opportunity Zones initiative can benefit investors and transform distressed communities. That is why the Trump administration is committed to helping make the initiative a success.
John C. Fleming is the assistant secretary of commerce for economic development.
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