The new federal program could lure fresh investment to distressed areas. But the clock is ticking.
Originally published in Governing, November 2018
Twenty years ago, the rural hamlet of South Boston, Va., was a thriving blue-collar, middle-class community. Most of its residents were employed in manufacturing, such as at the nearby Burlington Industries textile plant and Russell Stover candy factory, or out in the tobacco fields.
Today, the once vast tobacco industry is largely derelict (China is now the world’s leading producer), and the Burlington plant and Russell Stover factory are closed. “We lost about $100 million in payroll out of this community over four years,” says South Boston Town Manager Tom Raab.
This is a familiar story for the nation’s rural areas, but Raab is optimistic about a turnaround. He is pinning his hopes, in part, on the new “opportunity zones” program passed in last December’s federal tax overhaul. It could generate billions in economic development for distressed communities like South Boston — provided they get the help they need.
Opportunity zones represent a breakthrough approach to community development. The program relies on an ingenious mechanism for spurring investment: Instead of tax credits or other traditional subsidies, investors are offered a temporary tax deferral for capital gains reinvested in designated opportunity zones. For investments held longer than 10 years, that deferral becomes forgiveness — a huge boon.
Unlike under past tax credits, there’s no cap on the amount that can be invested. What’s more, the process is simple. Instead of purchasing tax credits through a secondary market, investors simply create a “qualified opportunity fund” as a vehicle for making investments. The Economic Innovation Group (EIG), which developed the opportunity zone concept, estimates that as much as $6.1 trillion in unrealized gains held by both corporations and households might be waiting to be tapped.
Figures like these, as well as the benefit’s structural advantages, are why states are hopeful. “We’ve already had a number of inquiries and meetings with potential investors,” says Virginia Secretary of Commerce and Trade Brian Ball. “A lot of businesses are looking for opportunities to reinvest.”
A couple of potential hazards, however, could derail the ability of places like South Boston to reap the program’s benefits. One is federal regulations on implementing the program, which the Treasury Department has yet to issue and finalize. Speed is of the essence here. Opportunity zones expire in 2026, and certain benefits are not available for investments made after 2019. Final regulations are expected early next year, but the current administration has proven anything but predictable.
A more significant hazard, however, is that both investors and opportunity zone communities will need extensive matchmaking to find each other. “A governor’s job doesn’t end with the zone selections — it begins,” says EIG co-founder John Lettieri. “You may not get a single dollar of investment if you don’t work for it.”
Therefore, states will need strategies for marketing and promoting their zones, as well as identifying promising investors and steering them toward the best opportunities. This kind of support will be vital for places like South Boston, which is competing against roughly 8,700 other opportunity zones for investment dollars.
As a community of under 8,000 people in rural south central Virginia, the town has no budget for slick promotional materials to court wealthy potential investors. Town leaders don’t rub elbows with Silicon Valley venture capitalists, either. Identifying investors, Raab says, is “one more ball to juggle” along with understanding the mechanics of the new program and dreaming up opportunities investors may find attractive.
All of these challenges are eminently fixable if states step up to the plate. In the meantime, places like South Boston are waiting for the opportunities that could and should be their due.