Why 'Opportunity Zones' Could Solve Unemployment In Slow-Growth Areas

Why 'Opportunity Zones' Could Solve Unemployment In Slow-Growth Areas
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Recent national economic reports point to a robust economic recovery. Employment is steadily increasing, and unemployment has fallen to a 17 year low. But obscured by the national averages are 52 million Americans still living in distressed communities, areas where poverty rates, unemployment, income, and business growth are far below the national averages.

This economic recovery has been unusual with its geographic concentration. Research by the Economic Innovation Group shows that just 73 out of 3,000 counties produced more than half the job growth in the first five years after the recession. A mere five metro areas were responsible for half the nation’s increase in new firms.

Outside of these prosperous metropolitan areas, the picture is grim. Two-thirds of distressed areas saw a decrease in jobs from 2000 to 2015, and 72 percent saw more businesses close than open. Labor force participation is lower and poverty is higher. There are more deaths due to alcohol, drugs, and suicide—characterized as "deaths of despair.” These Americans feel betrayed by trade agreements, vulnerable to globalization, and ignored by Washington, Wall Street, and Silicon Valley elites.

One reason for the slower recovery in these regions is that they lack the capital needed to start or expand businesses and revitalize their community. Data shows that 75 percent of venture capital goes to just three states, California, New York, and Massachusetts. Federal Reserve researchers found that in rural areas, bank loans of less than $1 million (after adjusting for inflation) are way below what they used to be before the recession.

That could change with the introduction of “Opportunity Zones,” a provision of the Tax Cuts and Jobs Act that gives investors the chance to reduce their capital gains tax when they invest in these distressed parts of the country. The program had broad bipartisan support, sponsored by Republican Tim Scott and Democrat Cory Booker in the Senate, and Republican Pat Tiberi and Democrat Ron Kind in the House.

There are two components to the program. First, governors are in the process of designating up to a quarter of their states’ low-income, high-poverty census tracts as Opportunity Zones.

The second part is the creation of Opportunity Funds—a new class of investment vehicles that gives investors the chance to reduce their capital gains tax when they invest in projects located in these areas. That tax incentive increases the longer the investment is kept in the community. If the investment is held for more than ten years, the investor will pay no additional capital gains on investments made through the fund.

This should allow distressed communities to tap a multi-trillion-dollar pool of capital to support a wide range of economic development activities. Funds could be broad or narrowly focused, with an emphasis on a single sector, such as housing development, charter school facilities, or broadband expansion. Others might be designed to raise startup funding for local entrepreneurs or help workers who are seeking job retraining.

Capital incentives alone aren’t enough to boost these communities. Governors and mayors will need to leverage Opportunity Fund investments with other economic development reforms. Governors might give entities located in a zone a competitive preference in grant competitions for education funding. Occupational licensing reforms could help reduce barriers to entrepreneurship in these communities. Or Opportunity Zone projects could combine different incentives for a larger impact, such as combining an Opportunity Fund housing investment with the Low-Income Housing Tax Credit for a mixed-use development.

For decades Americans have had the chance to invest in emerging markets all around the world. Now they have the chance to invest in America’s own emerging markets and finance the comeback story so many communities have been waiting to write.

John P. Bailey is a visiting fellow at the American Enterprise Institute. 

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