Opportunity Zones: How Communities Were Selected for Participation
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The Opportunity Zone (OZ) Program is a new tax incentive within the Tax Cuts and Jobs Act of 2017, intended to spur long-term investments in low-income census tracts in the U.S. The new law allows investors to place unrealized capital gains from the sale of an asset into Opportunity Funds (O Funds) that invest capital into designated Opportunity Zones. The greatest tax benefits would go to investors who invest for 10 or more years in a certified zone. (Click here to learn the fundamentals of OZ program.)
OZs are low-income community census tracts, as originally established under the New Markets Tax Credit program. Governors in U.S. states and territories had until March 21, 2018 to send their nominations for OZs to the U.S Treasury. They could nominate up to 25% of eligible census tracts. Up to 5% of those nominated census tracts could be in areas that were contiguous with low-income community census tracts. (Read more here for the EIG’s early recommendations.)
With guidance from the IRS and CDFI Fund, states that have chosen to participate have now designated Qualified Opportunity Zones. Some states requested input for their selection processes from local governments and other stakeholders. For example, Washington State developed a procedure for nominating tracts; and Missouri collected formal feedback from local governments. As of June 2018, all state selections of OZs were certified. From there, the work of O Fund development has begun.
Characteristics of Selected Opportunity Zones
A total of 42,176 census tracts were eligible to be designated as Opportunity Zones. Of these, a total of 8,762 were designated, and of these, 8,532 were low-income communities, while 230 were in contiguous communities. According to Census data and Economic Innovation Group analysis, in the average Opportunity Zone, the median household income is $33,345, the poverty rate is 31.75%, and the unemployment rate is 13.41%. A total of 31.3 million people across the 50 United States live in areas that have been designated as Opportunity Zones. 56% of residents are people of color. Over 75% of Zones are in metropolitan areas. 294 Opportunity Zones contain Native American lands. Read this assessment of the selected Opportunity Zones by Urban Institute.
The effectiveness of the OZ program hinges on attracting capital to areas of greater need. As a result, two key questions surfaced quickly in the selection of census tracts:
1) Would states select the maximum allowable amount of contiguous tracts, as more likely opportunities for investment? Ultimately, contiguous tracts represented 2.6% of all designated tracts, lower than the 5% acceptable under the regulation.
2) Would states ultimately select tracts that were already attracting investments — ultimately providing an unnecessary tax incentive? According to the Economic Innovation Group, less than 4% of OZs were exhibiting signs of socio-economic change, an indicator for gentrification and pre-existing development. However, gentrification is difficult to measure, and each state and local area may manifest it in different ways. (See this Urban Institute analysis for further detail.)
National Map of Opportunity Zones
Below is a map of Opportunity Zones Program from all participating states, via Enterprise Community Partners. Enterprise's tool provides a variety of filters to analyze tracts according to community development indicators.