Opportunity Zones: Making Them Work for Minnesota

Opportunity zones will be in the news over the next few months. Since opportunity zones have the potential to affect communities across the state, now is a good time to learn a little bit about what they are, how they might work, and what they may mean for Minnesota communities.

Opportunity zones were created in December of 2017 through a bipartisan effort to guide more investment into low-wealth communities.States may designate eligible census tracts as opportunity zones, and taxpayers with capital gains can defer paying taxes on those gains by investing in opportunity funds that support investments in the in opportunity zones. These funds can be used for activities including commercial real estate development, infrastructure, housing, and business development. If an investor stays in an opportunity fund, their capital gains taxes are reduced over time. Additionally, the investor does not pay any tax on the gains earned on the opportunity fund investment if they stay invested for ten years.

Driving private investment in low wealth communities is intended to ensure that places that have suffered from a lack on investment capital are able to benefit and grow. The State of Minnesota designated a range of census tracts as opportunity zones including both urban and rural communities following consultation with local governments.However, designating a census tract  as an opportunity zone does not mean that any investment will happen in that tract. Decisions about where investment occurs will be based on the interests and needs of the investors. Areas that are attractive targets for investment are those that are likely to have the highest financial returns for investors. This has raised fears that opportunity zones could be an investment vehicle that encourages gentrification and displacement.Meanwhile disinvested rural areas are unlikely to attract investment without substantial mission focused effort and targeted efforts by local partners.

Opportunity zones also raise questions about what it takes to create opportunity in disinvested areas. While opportunity funds are intended to spur investments in housing, infrastructure, and jobs, it is unclear whether the job growth will include good family supporting jobs.

Outside of designating opportunity zones, the state has limited control over opportunity funds. There are, however,  several ways that state and local policy makers can help ensure that opportunity zones fulfill their potential of creating economic opportunities in disinvested communities.

First, communities can ensure residents of opportunity zones are engaged early to balance community benefits with investor returns. An example in Minnesota is work led by the City of Duluth and Duluth LISC.4

Second, organizations dedicated to rural investment strategies such as Regional Development Commissions and local foundations could play a vital role in encouraging investment in rural communities. Investments in and by these entities will be crucial to develop the capacity of local communities to create their own opportunity funds and tailor investments to local needs.

Third, if policy makers consider leveraging federal investment with state resources, those decisions should take into account the quality of the jobs and the affordability of the housing that is created by opportunity zone investment. While the state does not have the power to limit the types of investment that occur in designated opportunity zones, the state can incentivize certain types of activity. In some areas this will be important for driving the type of investment that occurs. In other areas it may be key to any type of investment occuring at all.

Ultimately the opportunity zone program is a market driven investment tool with limited state and local control that has substantial tax benefits for high wealth investors. Unlocking the opportunity of opportunity zones for Minnesota workers will require coordinated efforts by communities and policy makers.5

 

https://www.irs.gov/newsroom/opportunity-zones-frequently-asked-questions
For a complete list of opportunity zones in Minnesota https://mn.gov/deed/business/financing-business/tax-credits/opp-zones/census-opp-zone-tracts.jsp 
For national context on opportunity zones and gentrification see https://www.brookings.edu/blog/up-front/2018/02/26/will-opportunity-zones-help-distressed-residents-or-be-a-tax-cut-for-gentrification/ 
http://www.lisc.org/duluth/regional-stories/capital-gains-break-encourages-private-community-investment/ 
For more detailed information The Economic Innovation Group has  a range of fact sheets and background information about opportunity zones