Opportunity Zones: Will They Deliver on Their Promise?

From the 1980s through the early 2000s, California had an array of designated areas to develop economic opportunity in under-performing areas. The state’s four types of Geographically Targeted Economic Development Areas (GTEDAs) had tax incentive benefits as well as a variety of locally provided incentives and benefits. The types of areas designated included: Enterprise Zones (EZs), Local Agency Military Base Recovery Areas (LAMBRAs), Manufacturing Enhancement Areas (MEAs), and Targeted Tax Area (TTAs)

These various types of areas, each had their own origin story, for instance LAMBRAs were born out of a need to revitalize areas that became economically depressed due to the loss of a military facility during the federal Base Realignment and Closure (BRAC) activity following the end of the Cold War.

End of Enterprise Zones and LAMBRAs

Eventually the California legislature ended all of these area designations. The first to go were Targeted Tax Areas (TTA) and Manufacturing Enhancement Areas (MEA) both of which expired on December 31, 2012. The termination of Enterprise Zones (EZ) and Local Agency Area Military Base Recovery Areas (LAMBRA) followed on January 1, 2014. 

While there were valid reasons to create these districts: underemployment, depressed economic conditions, poor infrastructure, and a need to bolster economic activity, studies later found that generally the way these programs were enacted did little to increase the overall number of jobs created. Though there were other benefits which were realized in the local areas, such as improved infrastructure.

Another Opportunity to Aid Job Creation

In 2017, The federal Tax Cuts and Jobs Act established Opportunity Zones (OZs) as a mechanism to provide tax incentives for investment in designated census tracts. Investments made by individuals through special funds in these zones would be allowed to defer or eliminate federal taxes on capital gains.

An Opportunity Zone, under the new law, is defined as an economically-distressed community where new investments, under certain conditions, may be eligible for preferential tax treatment. Localities qualify as Opportunity Zones if they have been nominated for that designation by the state and that nomination has been certified by the Secretary of the U.S. Treasury via his delegation of authority to the Internal Revenue Service.

Challenges OZs Will Face

For Opportunity Zones to flourish, there needs to be a match between the type of business investment brought into a specific area, and the skills of the workers in the designated zone. One of the issues in the past has been that the there has been a skills mismatch between the type of businesses investments and the available job skills native to the area with too few investors offering job retraining. An influx of additional capital and the need to import labor into a given area can increase housing prices, gentrifying neighborhoods, which could displace longtime area residents without providing job opportunities to the local population and the economic issues which gave rise to the area designation in the first place.   

Business investors, local governments, and legislative leaders will all need to be mindful of the multiple factors involved to make this a successful formula for businesses and communities alike.