The future of a controversial federal tax break, Opportunity Zones (OZs), seems clearer following the reelection of President Trump. Although the program was supposed to sunset in 2026, a number of lawmakers have made it clear that they plan to expand and extend the program, despite its flawed structure and the lack of data showing its effectiveness.
Opportunity Zones were first established as part of the 2017 Tax Cuts and Jobs Act as a tax break on capital gains tax, ostensibly to help spur investment in low-income communities. When an investor sells an asset for more than they bought it for, federal capital gains tax is applied to those profits. But by investing those new gains in a project located in an OZ, the investor gets a significant break on federal capital gains taxes – or does not have to pay at all. This benefit is only accessible in low-income census tracts designated by governors. There are currently 8,764 OZs located in all 50 states, the District of Columbia, and five U.S. territories.
Good Jobs First and others have long criticized OZs for numerous structural flaws, including that the program is inaccessible for most taxpayers. In the United States, 85% of capital gains are generated by just 5% of taxpayers. A 2019 study found that OZ investors have an average household income of over $1 million.
There is also a stunning lack of transparency around the program. The program does not have any requirements to disclose who benefits from the program, how big the tax breaks are, or which zones are getting investments.
Ohio offers a concurrent state-level tax credit for investors in OZs, and because these credits are subject to Ohio’s transparency requirements, there is information available on the program. Earlier this year, Good Jobs First released a study analyzing this Ohio data and found that OZs have not benefited historically disenfranchised communities. Instead, OZ investments were largely made in already gentrifying neighborhoods within the state’s three biggest cities, including some near stadiums, and almost 16% of the money invested has been within one mile of a college campus. Rural areas, including Appalachia, got almost no investment.
A study done by Policy Matters Ohio found that federal law encouraged the selection of places with active investment underway, where rents may be rising, and low-income residents and small businesses may be priced out.
In other words, when governors were designating OZs they looked for places that had been already experiencing growth. The idea was those would be more attractive to profit-driven investors, rather than areas with no economic activity (and thus the greatest need for investment) that would provide smaller returns on investments.
Another flaw is that college towns often qualified as an OZ. That’s not because they were economically depressed, but because the large student populations artificially drove down the average wage. Finally, many stadiums, including almost half of the Major League Baseball’s and the National Football League’s stadiums, are in OZs, potentially allowing their billionaire owners to pay even less taxes.
Although President Trump has touted the program as a resounding success, we argue the program should expire: The expansion and extension of OZs would only benefit already wealthy investors, not the communities it claims to support. There is no evidence that the program is effective in elevating poverty, as it incentivizes investment that would likely already occur rather than encouraging community development. If the program must continue, OZ designations should be reevaluated, and transparency must be increased.