Several recent research and policy discussions indicate a need for opportunity zones (OZ) incentive legislation to improve understanding about and use of this important tool. Common threads highlight the importance of addressing reporting requirements, providing an extension of the incentive and the designation or removal of OZs.

The Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution held a conference Nov. 18, 2022, on OZs and their impact on economically distressed communities. The conference included presentations on four research papers as well as two roundtable discussions on the future of OZs. The conference and presented research show a need to further OZ legislation and Novogradac expects to see certain OZ legislation reintroduced in the new 118th Congress. Specifically, the Opportunity Zones Transparency, Extension and Improvement Act (H.R. 7467/S. 4065).  

Background

The OZ incentive was enacted by the Tax Cuts and Jobs Act (TCJA) of 2017 to create a new financing tool for community development by providing investors with capital gains tax incentives to invest in designated low-income and economically distressed census tracts. The OZ incentive targets similar underserved areas as the new markets tax credit (NMTC) as the framers of the OZ used the same definition for a “low-income community” that is used by the NMTC. The chief executive officers of each state (i.e., for most states the governors) were generally able to designate up to 25% of the state’s low-income community population census tracts as qualified OZs; the legislation also allowed up to 5% of those tracts to be contiguous to low-income community tracts, provided the median family income of the tract did not exceed 125% of the median family income of the low-income community with which the tract is contiguous.

Though More Data is Becoming Available, Information Remains Limited

To date, data on OZs is limited. Novogradac’s Qualified Opportunity Fund (QOFs) survey tracks investments and the amount of equity raised. The QOFs tracked by Novogradac reported nearly $10 billion in equity investment in 2022, bringing the total raised to $34.1 billion as of Dec. 31, 2022. From this data additional Notes from Novogradac posts have been written detailing the types of investments seen, geography of investments and “super-QOFs,” those funds that have raised $100 million or more.  Though this information will prove important to understanding how these funds will benefit low-income people and communities, survey data covers only a portion of the existing funds.

Generally, data on the number of QOFs created, equity raised and the use of funds is unavailable without access to tax return data. The Internal Revenue Service (IRS) does not make all data publicly available due to taxpayer privacy concerns. Information made available is typically at least two years out of date. For example, the report recently released by David Coyne and Craig Johnson, both of the U.S. Department of the Treasury, Office of Tax Analysis (OTA), analyzed tax return data only through 2020. Further, information contained on paper forms must be transcribed before it can be analyzed. The fact that there are currently no reporting requirements further hinders access to data needed to assess the OZ incentive. While the research reports from the Brookings Hutchins conference are important, there is a need for more data and research to be done on how OZs impact low-income communities.

Brookings Hutchins Event Shares Research, Solutions for Measuring Impact of OZ Incentive   

A summary provided by David Wessel and Alex Conter highlighted the need to measure the impact of OZs, and conference experts agreed that the best way to do so is through IRS data. Experts agreed that a potential way to measure the success of OZs is by focusing on the flow of investment to census tracts, and the subsequent impact on real estate prices. Another way is through the life outcomes of people who live in OZs, such as changes in employment and incomes.

The conference included two roundtable discussions of experts. One roundtable discussed the data needed to fully evaluate OZs, while the other discussed what success for OZs looks like. Becky Lester of Stanford Business School stated that IRS filings were still the best data source for OZ research but agreed that obtaining IRS information is difficult. David Coyne and Adam Looney of the University of Utah and Brookings, respectively, provided that the Joint Statistical Research Program, a program overseen by the IRS’s Statistics of Income Division, might give researchers an opportunity to work with IRS data. Overall, these roundtable participants were dissatisfied with current OZ reporting, and agreed that the use of federal tax data is a necessary next step in analyzing OZs. The Opportunity Zones Transparency, Extension and Improvement Act of 2021 (H.R. 7467/S. 4065), which is expected to be reintroduced soon, would expand reporting by QOFs by requiring the reporting details about funds and investors.  

Experts had several ideas for measuring success for OZs. Ed Glaeser of Harvard stated that OZ effectiveness should show up in land values, while Tim Bartik of the Upjohn Institute, stated that measuring by property values may not be effective due to lack of homeownership in OZ communities. For this reason, Aaron Seybert of the Kresge Foundation stated that capital flows are the worst benchmark. Glaeser presented an option that includes tracking life outcomes for a group of people before and after OZ designation. However, Glaeser stated that tracking individual outcomes may not work because it may not reflect the community as a whole, and neighborhoods do not define labor markets. Kenan Fikri of the Economic Innovation Group added that enumerating how many OZ investments each census tract receives, along with vacancy rates can be useful data points. Experts agreed that it will take significant time to analyze the impacts of OZs due to the incentive design and the longer timeline of construction.

OZ Research Papers Presented at Brookings Hutchins Event Show OZ Investment Activity

Four papers were presented at the conference–two used IRS data not publicly available and two used commercially collected data. The 2022 Coyne/Johnson research report, which is currently a draft, focuses on data reported on IRS Form 8996 for the tax years 2018-2020 as well as data from IRS Form 8997 for tax years 2019 and 2020. The authors found that more QOFs were active and additional areas saw investment compared to the 2021 report from Patrick Kennedy and Harrison Wheeler of the Opportunity Lab at the University of California, Berkeley, which was also presented at the conference and has been cited often since its release.

While the Coyne/Johnson report builds upon previous research, they concluded it is too soon to reach conclusions regarding the effectiveness of the OZ tax incentive. They did suggest that the Treasury could share data on some individual OZs, specifically those that have enough investment so that privacy would not be breached.

Kennedy and Wheeler presented their previously released report that focused on neighborhood investment in OZs. Investors reported greater property investments in neighborhoods with OZs that had higher incomes, home values and levels of educational attainment. Kennedy and Wheeler recommend future research that focuses on the causal effects of the OZ incentive on real investment and local labor markets.

Ron Bekkerman (Cherre Inc.), Maxime Cohen (Desautels Faculty of Management, McGill University), Amber Xioayan Liu (Santa Clara University, Leavey School of Business; Cornell University - Samuel Curtis Johnson Graduate School of Management), John Maiden (Cherre Inc.) and Dmitry Mitofanov (Boston College, Carroll School of Management) researched the impact of OZs on residential real estate and found that the OZ incentive increased real estate prices between 4-6% in census tracts that were eligible for, but not designated as OZs. However, in their 2021 report, the authors did not find a significant impact on the number of real estate transactions made and to them this suggests that OZs generate demand but reduce supply as owners are likely retaining ownership of properties in case the OZ designation leads to higher future prices. The authors conclude that this investor behavior leads to fairness concerns, and that current government designation of OZs may be preventing the program from reaching its full potential. The authors reinforce fairness when it comes to OZ designation to allow the incentive to fully achieve its goal. Additionally, the authors recommend further research on the impact of the OZ incentive with the pandemic as a consideration.

Lastly, a report from Kevin Corinth (University of Chicago) and Naomi Feldman (Hebrew University of Jerusalem) on the impact of OZs on commercial investment and economic activity found that there is no evidence that the OZ incentive has significantly increased commercial investment in OZs. The authors also found that there are no changes in OZs such as business formation, new business loans, commercial diversity, or consumer spending. Corinth and Feldman recommend that future research monitor the effects of OZs on investment and other outcomes, such as employment, property values and other measures of economic activity.

Conference and Subsequent Research Actually Demonstrates Need for More Research, OZ Legislation

With the start of a new Congress, several key pieces of OZ legislation from the 117th Congress will need to be reintroduced. OZs legislation that is expected to be reintroduced includes the Opportunity Zones Transparency, Extension, and Improvement Act of 2021 (H.R. 7467/S. 4065). The fiscal year 2023 omnibus spending package enacted at the end of 2022 did not include a significant tax title nor any community development tax incentives. Because of this, there will likely be an effort to advance tax legislation during this Congress that includes community development proposals that were not addressed in the previous session. Though a divided Congress presents difficulties in getting legislation passed, many tax incentives are traditionally popular among Republicans and Democrats and the OZ incentive has robust bipartisan and bicameral support.

Novogradac’s OZ Working Group is dedicated to analyzing potential OZ legislation and furthering OZ education. The working group’s priorities for 2023 include plans to: analyze any newly introduced and reintroduced OZ legislation and provide bill sponsors with recommendations; and identify opportunities for improvements to the OZ incentive for inclusion in potential new OZ legislation. Additionally, the group will continue to conduct technical research initiatives to develop industry recommended practices. Engaging Treasury, particularly on the need for additional guidance, on issues like working capital safe harbor written plans and schedules, as well as qualified opportunity fund decertification and changing regulations to promote the use of OZs to finance affordable housing, will continue to be a priority of the group. To have a voice in these important matters, consider joining the OZ Working Group.