Capital gains tax breaks could inject trillions into the nation’s struggling low-income rural and urban communities, thanks to new “Opportunity Zones” tax provisions.
Between unrealized capital gains from both U.S. households and corporations, about $6 trillion in potential investment funding has been sitting on the sidelines because investors are postponing the pain of incurring hefty capital gains taxes.
But thanks to new tax breaks on those gains invested in federal Opportunity Zones, a large chunk of this $6 trillion could soon be put to work. The tax breaks are the result of legislation championed by Sen. Tim Scott, R-S.C., that was included in the Tax Cuts and Jobs Act President Donald Trump signed into law Dec. 22, 2017.
Nathan Ohle, executive director of the Rural Community Assistance Partnership (RCAP), tells Agri-Pulse that rural areas historically have relied heavily on federal funding, but funding for projects in those areas has dropped precipitously. As an example, he notes rural areas have seen federal funding for water infrastructure plummet from 63 percent of total capital spending in 1977 to just 9 percent in 2014.
Ohle explains that private capital is needed because “Currently, only 1 percent of venture capital investments go to rural communities. This is a big issue, and one of the many that highlights the need to ensure that Opportunity Zone investments have the chance to flow to rural communities.”
To make this happen, RCAP is working with a coalition of rural-advocacy groups to inform governors and states about rural needs, “elevate the voice of rural communities in policy and implementation discussions,” and “educate potential investors and Opportunity Fund managers about opportunities in rural communities.”
Matt McKenna, executive in residence at Georgetown University’s School of Business, knows the challenges of pitching rural investment ideas to major fund managers. That’s what he did as head of USDA’s Rural Opportunity Initiative and continues to do following ROI’s move to Georgetown’s Global Social Enterprise Initiative last year. But along with the challenges, he tells Agri-Pulse that there’s “huge potential” for the Opportunity Zones because of the $6 trillion in so-far unrealized capital gains, making investors eager to reduce their huge tax liabilities.
“Where we’ve had the best luck is to appeal to the fund managers to say you want to be ahead of the crowd,” McKenna explains. “Because there’s underinvestment in opportunities in rural America, invest in rural America to be ahead of the crowd.”
For McKenna, large capital gains in companies like Facebook have created “a huge pool of money that can be invested in areas that wouldn’t otherwise be on investors’ radar.” This in turn has spurred investors’ desire to avoid capital gains taxes. Calling Opportunity Zones unique and extraordinary, he points out that “Prior to this, the only real way to avoid capital gains taxes was to die.”
The Economic Innovation Group (EIG), a D.C. think tank promoting Opportunity Zones, predicts that “If only a fraction of that $6 trillion flows’’ into the Zones, the initiative could quickly become the country’s largest-ever federal community development program.
EIG sees Opportunity Zones as a way to shrink the growing gap between roaring economic growth in major urban areas and other regions struggling to survive. EIG’s 28-page New Map of Economic Growth and Recovery report warns about “very different futures for American communities, suggesting that the gains from growth have and will continue to consolidate in the largest and most dynamic counties.”
One measure of the urgency around Opportunity Zones is that Congress provided just 90 days for states, territories, tribes and the District of Columbia to select one-quarter of each area’s qualifying low-income census tracks for Treasury Department approval as Qualified Opportunity Zones (QOZ). Nineteen states met the March deadline and the rest are rushing to deliver their paperwork to Treasury before an extension ends on April 20.
The incentive for investors is the opportunity to postpone or significantly reduce their current capital gains tax liability. These tax-break benefits ratchet up for investments left with a Qualified Opportunity Fund for five or seven years. For investments left for at least 10 years, the capital gains tax becomes zero for any capital gains on Qualified Opportunity Fund investments in Opportunity Zones.
Explaining the states’ interest in the new tax break, Iowa Gov. Kim Reynolds said last month, “We need to take advantage of all the tools and resources we have at our disposal to spur economic growth.” She added that by selecting the QOZ-permitted 60 out of Iowa’s 239 eligible low-income census tracts as Opportunity Zones, “I am optimistic that Iowa’s participation in the Opportunity Zones Program will serve as a catalyst for investment and job creation and result in prosperity for Iowa communities statewide.”
In nominating 628 census tracts across Texas as QOZs, Gov. Gregg Abbott said “This program will help highlight areas of Texas that are prime for business investment . . . With the potential for billions in new investment, I look forward to our state continuing to flourish, bringing further growth and opportunity to the people of Texas.”
When he nominated 120 QOZs, the 25 percent maximum allowed for his state, Wisconsin Gov. Scott Walker said last week that he’s “excited to embrace Economic Opportunity Zones as a new tool to build on our track record of economic growth.”
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