Opportunity Zones are low-to moderate-income neighborhoods. However, people with low-to moderate-incomes cannot participate in the tax benefits of Opportunity Zones.
The pre-requisite for Opportunity Zone participation is liquid capital gains, or already-owned assets that can be sold at a profit soon. However, capital gains does not have to be the main precondition for Opportunity Zone participation and Congress should consider a better solution for low- to moderate-income families that actually live in Opportunity Zones.
I understood the capital gains pre-requisite very well from the first day Opportunity Zones were introduced into the tax law, but it is was a recent presentation that highlighted the deeper problem as well as a solution.
“Our economy is going to be best served when fear between investors and communities is reduced, trust is built, and these seemingly-opposed groups [communities and investors] can work together toward mutually beneficial outcomes. That can happen through Opportunity Zones.” This was my honest, but nearly political, answer in October 2019 to an Opportunity Zone community member who asked how insensitive gentrification could be avoided in her neighborhood.
But then, I was pushed. She responded, “This all sounds good, but can I invest my money and get the tax breaks?”
My response was simple: “You can't directly participate in Opportunity Zones, economically, unless you already have assets and capital gains.”
The inability for “the poor” to receive a tax break is the biggest issue for everyday community members that live in Opportunity Zones and hope to see a direct benefit from the legislation.
There is a solution, however.
I implore Congress to consider expanding Opportunity Zone benefits to include investments by those living in Opportunity Zones, whether it comes from capital gains or not. This singular action could put a dent in the uneven trend of declining wealth for lower income Americans while wealth gains for higher earners are increasing.
Consider these data points:
Since 1986, the bottom 40% of income-earning families have experienced 2-3% reduction each year in their financial assets while conversely, the top 40% have seen growth of 3-5% annually.
Additionally low- to moderate-income workers are not flush with the financial assets, to sale for capital gains, necessary to participate in Opportunity Zone investments as a result of the uneven decline in assets over the last 30 years.
The bottom 40% of earners in the US - those with a median income of $31,400 or less - have $5,000 or less in financial assets, according to The Fed’s Survey of Consumer Finances. More dimly, the bottom 20% of earners have only a median financial asset base of $900, which is not nearly enough if that taxpayer would have to sell that $900 asset and use only those sale proceeds to participate in tax-advantageous Opportunity Zones investments.
If sizable, liquid financial assets are a requirement for a place-based tax incentive meant to reduce poverty, it is critical for Congress to recognize that over the last 30 years the big chunks of the economy (the top and bottom 40% - not just the 1% versus the 99% that many pundits discuss) have had very different economic experiences.
Only being able to participate in an exciting new tool like Opportunity Zones by waiting for the potential downstream effects can be a gamble for many community members, too.
The low- to moderate-income families that live in Opportunity Zones either have to a) trust that civically-minded investors will come to their community and build what is important and beneficial to their economic situation or b) believe that by the time data reporting requirements are legislated, reported and analyzed that there will be enough time to correct course in their neighborhood. These are hope-drowning wagers for families trying to stay in their neighborhood and prosper.
The three core economic benefits to Opportunity Zones are:
1) Deferral: An investor can defer their payment of capital gains on an old investment;
2) Reduction: An investor can reduce the amount of capital gains on an old investment by investing before 2021; and
3) Elimination: An investor can eliminate their capital gains on new investments if they are held for 10 or more years.
Expanding the Opportunity Zone benefits to those who live in Opportunity Zones would only affect the final benefit: the elimination of capital gains on new investments held for at least 10 years can be offered to people who live in Opportunity Zones by using logic from existing tax law.
Thanks to the Taxpayer Relief Act of 1997, if a consumer lives in their home for 2 of the 5 years before they sell, they do not have to pay capital gains on the sale of that residence up to certain thresholds.
Similar tax logic can be used in an expansion of the Opportunity Zone legislation. For example, taxpayers who have lived in an Opportunity Zone for 3 of the 5 years before the legislation was enacted (2013-2017) or who live in the Opportunity Zone for 5 of the 10 years after purchasing an asset could be qualified and therefore, eliminate their capital gains requirement.
The core of the Opportunity Zone tax incentive is location-based incentives to reduce poverty and improve local economies that haven’t seen investments.
The people of the location should indubitably be considered to be direct economic beneficiaries. Given the intent of the law, liquid capital gains (assets they can be sold at a profit relatively quickly) seems like an odd precondition to direct economic participation in Opportunity Zones.
The Bible is, too, very prescriptive in these matters as Jesus juxtaposed that “the poor you will have among you always”, however “whatever you did for the least of these, you did for Me.”
There is no assumption that poverty will be solved by Opportunity Zones. However, amidst a slew of new legislation being considered to ensure the intent of Opportunity Zone legislation is met, I urge our elected officials to consider the expansion of Opportunity Zone benefits to those without immediately available capital gains, but who live in the exact places that are supposed to benefit from the Opportunity Zone designation. The added tax incentives could result in the true economic partnerships between active community members and traditional investors and result in improved neighborhoods that existing community members can still live in and be proud of. This is the classic win-win.