Opportunity Zones: State of the Marketplace – Economic Innovation Group

Passed into law in December 2017, Opportunity Zones (OZs) quickly emerged as one of the most innovative elements of the Tax Cuts and Jobs Act (TCJA). OZs represent a deliberately flexible—and experimental—new approach to community and economic development designed to increase access to capital for a wide array of uses in eligible low-income communities. Prior federal efforts to boost low-income communities have largely followed the same playbook of offering tax incentives (often in the form of tax credits) for specific purposes. OZs represent a valuable chance to gain insights into the viability of a more wide-reaching, flexible, and open-ended approach to address a longstanding policy challenge.

During the recovery from the Great Recession, no segment of American society did better than investors. Stock markets soared, and by the end of 2017, households and corporations were sitting on $6.1 trillion in unrealized capital gains in stocks and funds alone (the figure is now much higher).¹ Meanwhile, the number of high and concentrated poverty census tracts rose sharply—the country contained 4,700 high poverty metropolitan census tracts in 2000, yet by 2018, it contained 6,400. Born out of these intensifying economic and social inequities, OZs were intended to unlock some of the financial gains of the recovery for investment into the country’s chronically struggling areas.

For the first two years after OZs passed into law, the public discourse brimmed with hype and speculation about what might transpire once this unusually open-ended, flexible new development finance tool hit the market. Since final regulations were promulgated in December 2019, the OZ conversation has steadily moved beyond hypotheticals and into the realm of the observable. As the contours of a new marketplace come into focus, it is becoming clear that many of the loftiest hopes—that a tweak of the tax code could fundamentally transform the economics of investing in low-income communities overnight—and greatest fears—that an OZ-fueled tidal wave of resident-displacing gentrification would crash across the designated communities—proved foreseeably off the mark.

Instead, a disaggregated market is actively in the process of figuring out where this powerful new tool of development finance fits in the broader toolkit. Mystery is dissolving away into practiced familiarity as more deals get done, best practices get established, and innovative use cases get replicated. At the same time, much remains to be done to educate investors, local leaders, and other potential market players on the incentive and how it functions. Broadly, the early 2020s are shaping up to be a “proof of concept” phase for the policy. The early results are promising but also suggest that further tweaks to the policy will be necessary for it to fulfill its promise.

1 EIG analysis of Federal Reserve Survey of Consumer Finances and Financial Accounts of the United States data.