States Show Variety of Approaches to Incentivize Opportunity Zones
Complementary state provisions are crucial for the federal opportunity zones (OZ) incentive.
Eighteen months after the passage of legislation containing the OZ, taxpayers, developers and low-income communities are seeing early results, with more to come. Two factors are big:
- the second tranche of regulations released by the Treasury Department in April, and
- state and local incentives to direct the investment.
“I’m encouraged that some states have been very thoughtful in seeing opportunity zones as a priority and are thinking through incentives,” said Rachel Reilly, director of impact strategy at the Economic Innovation Group, which pioneered and championed the OZ incentive. “It’s a federal benefit, but to make it work, you need a creative structure around it at the local level.”
The structure has taken many forms, from state-funded information banks to investment tax credits to making OZs eligible for existing state programs. In 2019, there has been a lot of state OZ legislation, but Reilly said it’s too early to know the best approach.
“I think it’s an open question,” Reilly said. “It’s really important for cities and states to identify priority investments areas. That is going to determine the best approach for incentives. The OZ incentive is meant to provide a flexible framework at the federal level, so it can be tailored at the local level. As we see states offering different incentives to stakeholders, it’s important to understand how that affects investor behavior over the long term through analysis.”
An early frontrunner in establishing state OZ incentives is Maryland, where several bills were introduced to encourage OZ investment and where Gov. Larry Hogan aggressively promoted the incentive.
“At a high level, the goal is to support businesses that create jobs that drive economic welfare,” said Frank Dickson, director of strategic business initiatives at the Maryland Department of Housing and Community Development, which oversees the state OZ efforts. “That was probably more of a driver than real estate projects and infrastructure.”
In addition to investor incentives, Reilly suggested a smart approach is to create incentives for non-investor participants in OZ transactions, such as business owners and project sponsors.
“Opportunity zones offer a tax benefit to the investor, but you can create other benefits to the businesses in order to strengthen the investment,” Reilly said. “The incentives don’t have to all be for the investor in order for the investor to benefit.”
In Maryland, Hogan began promoting OZs last summer. By the start of the 2019 legislative session, Hogan made them a priority. That resulted in bills to expand a series of state incentives to OZs, most significantly making OZ businesses and property eligible for the More Jobs for Marylanders program. Legislation also gave local jurisdictions the opportunity to provide property tax credits for renovated vacant properties in OZs as well as making OZ investments eligible for other state credits.
Maryland’s DHCD hosted an OZ conference last summer, which attracted a lot of investors and developers. The department holds OZ briefings around the state and now there’s a Maryland OZ task force and an OZ information exchange.
Maryland also had legislation introduced to add OZs to the areas eligible for a 5 percent bonus for historic tax credits. Yet another Maryland bill would create a state affordable housing tax credit for LIHTC properties in OZs and other community revitalization areas.
Dickson said that while legislation is crucial, his department focuses on education.
“Education for the community is still probably 90 percent of what we do,” Dickson said. “Most of our time is spent working with the local communities, educating and helping them to see how they can benefit from the incentive.”
That extends to businesses.
“I think the most important thing that can be done now is to educate companies themselves, to let them know what enables them to be eligible [for incentives],” Dickson said.
Local Always Important
Reilly said that there was always an intention for state and local incentives to pair with the federal benefits.
“The Investing in Opportunity Act [the legislation that introduced the OZ incentive] included certain mandates regarding how governors should select their opportunity zones,” Reilly said. “It took into consideration mutually reinforcing economic development programs. The intent was that opportunity zones equity would be just one part of the capital stack.”
She cited two areas where local incentives could have impact when aligned with OZs.
“A great example is in Washington, D.C., where they have a supermarket tax credit,” Reilly said. “There is a large disparity of where grocery stores are available, so when designating opportunity zones, addressing these food deserts was a consideration. They saw their supermarket tax credit as additive, and in that way D.C.’s approach to designation was very strategic.”
She also cited Puerto Rico, where the Opportunity Zones Development Act was signed in May.
“I was in Puerto Rico when Gov. Ricardo Rosselló signed the bill, which is a robust package of tax and project incentives,” Reilly said. “You look at Puerto Rico’s response and it signals to investors that they are serious about leveraging OZ.”
Around the nation, plenty of state-level incentives were introduced as legislation during the first half of 2019.
State Tax Credits
One obvious way to encourage investment in OZs is to create a state tax credit for investment–and numerous states saw efforts to accomplish that, although none passed before the end of May.
Ohio Gov. Mike DeWine proposed a 10 percent state tax credit for OZs, using existing tax credit availability. That came after earlier legislation to propose a 1 percent tax credit for investments of $250,000 or more in state-specific qualified opportunity funds (QOFs).
Other tax-credit bills were proposed during the state legislative sessions:
- In Alabama, legislation would authorize up to $50 million in state tax credits to impact-oriented QOFs that meet certain standards, most aimed at rural communities, affordable housing and technology companies.
- Texas saw legislation introduced to create a 25 percent tax credit for rural OZ investment that would apply to the state insurance tax, since Texas has no state income tax. QOFs would be required to have invested at least $100 million in nonpublic companies in OZs or rural cities and counties and there would be a $35 million annual cap. Another Texas bill would create a franchise tax credit and sales-and-use tax refund for certain businesses that invest in OZs. A 25 percent credit would be granted for expenses to remodel, rehabilitate or build a structure in an OZ, or to purchase equipment or machinery for a building in an OZ. That legislation would also allow a one-time 25 percent credit (or $50,000 credit, whichever is less) for qualifying businesses for expenses involving materials, labor and equipment for structures in OZs. A third Texas bill would create a 25 percent tax credit against the state tax insurance for contributions to a state-approved QOF that makes an investment that meets certain job-creation and retention standards.
- Rhode Island saw legislation to create a 20 percent tax credit for investments of at least $250,000 in qualified OZ business property in the state. Another Rhode Island bill would create a 10 percent tax credit for OZ investments in Pawtucket and Central Falls, with a minimum investment of $250,000.
- A Kentucky bill would provide tax credits for investments in OZs and rural counties across the state with an annual cap of $35 million.
Other State Incentives
Another way that states encourage development in OZs is to tie existing incentive programs to OZs.
For example, Nebraska Gov. Pete Ricketts signed legislation that gives OZ developments priority for funds from the state Affordable Housing Trust Fund, as well as the state Site and Building Development Fund, Job Training Cash Fund and Business Innovation Act.
Meanwhile, the Mississippi Home Corporation committed 12.5 percent of the state LIHTC authority for 2018, 2019, 2020 and 2021 to OZs in a special allocation cycle.
In California, a bill was introduced to create a special $200 million set-aside for low-income housing tax credits for properties in OZs.
A West Virginia bill that would have made new qualified OZ businesses exempt from corporate net income tax and personal income tax was vetoed by Gov. Jim Justice. However, it was reintroduced in a special session in late May.
States also created other tools to help OZs.
Virginia created an online marketplace to match investors with OZs, as well as a $50 million program to provide credit to help investors acquire OZ property.
In Washington, D.C., Mayor Muriel Bowser announced three initiatives in addition to the aforementioned supermarket credit. The city committed $24 million to OZ properties that support certain initiatives (affordable housing, workforce development and small businesses), introduced the OZ Community Corps to provide free legal and other advice for OZs and created an online OZ marketplace.
Pairing with other incentives is popular, too:
- Oklahoma’s Department of Commerce will use priority enterprise zones to attract capital to OZs. That allows investors to layer in other incentives with an OZ investment, such as doubling the state investment tax credit, tax increment financing, low-interest loans from banks participating in the state program and more.
- Connecticut legislation would allow fewer hurdles to redevelopment of historic properties in OZs in small towns.
- A Louisiana bill would add buildings in OZs to a list of properties allowed to participate in the state’s restoration tax abatement program, which allows property owners to pay property taxes for five years based on the value of the property for the year before it was improved.
- A Vermont bill would allow OZ properties to apply for the state Downtown and Village Center Tax Credit twice as often as other projects. That credit covers 10 percent to 50 percent of eligible rehabilitation expenses.
- In California, legislation would create an office to support geographic-targeted economic development incentives, including OZs. Another bill would streamline environmental review and approval for OZ developments.
The OZ incentive is still a new provision, but as 2019 neared the midpoint, two things were clear for OZ supporters: Local and state incentives are important and there is a variety of efforts to discover what works best.
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