Opportunity Zones (OZs), the new federal tax break for investing in specially designated census tracts, are estimated to cost the federal treasury $1.6 billion between 2018 and 2027. But because all but a few states tie their personal and corporate income tax systems to Uncle Sam’s, OZs will also have a direct and negative impact on state revenues. (And some observers consider the federal cost estimate to be conservative: OZs greatly reduce capital gains taxes and there are an estimated $6.1 trillion in yet-to-be-taxed capital gains eligible to be rolled into OZs.)
Yet a Good Jobs First analysis of state budgets finds that only four states have even started estimating their OZ-driven revenue losses: Georgia, Maine, Oregon, and Wisconsin.
(These losses are above and beyond the lost revenue caused by additional “lard on” tax breaks that some states have enacted atop the federal OZ tax break.)
This federal-state linkage is known as conformity (if a state follows federal rules) or “decoupling” (if a state chooses to exempt itself from a federal tax rule).
When it comes to Opportunity Zones, state conformity means that unintended consequences are likely. For example, Michael Mazerov of Center of Budget and Policy Priorities has shown that because wealthy individuals are likely to invest in OZs in any place they think they will make the highest profit, states will likely give up tax revenue for Opportunity Zone investments in other states. This is because investors pay income taxes in states where they live, not where they invest. Colorado could give a state tax break to a Denver-based investor who puts her money in an Opportunity Zone project in Texas.
So far, only four states have estimated how much revenue they will lose to the federal program: Georgia $10 million (FY 2019); Maine between $1.5 million and $2.5 million (FY 2020); Oregon $10.5 million (and in later years $15.9 million) (FY 2017-2019 and FY 2019-2021, respectively); and Wisconsin $10 million (FY 2019) (all amounts include both lost corporate and personal income tax revenues).
That means more than 30 states with personal and/or corporate income taxes on capital gains, and which are still conformed, have not even started budgeting for revenues lost to OZs.
An even better remedy for states? Decouple, don’t lard on, and protect state treasuries for economic development investments that, unlike OZs, are known to pay off, such as education and infrastructure.
Note: States that do not conform to the federal tax provisions: California, Mississippi, North Carolina, Pennsylvania, New Hampshire.
States with no capital gains tax: Ohio, Texas, South Dakota, Wyoming, Nevada, Washington.