Building a Bigger Opportunity Zones Boondoggle
Buried in the 'big, beautiful bill' is a giant mess.
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Editor’s note: Today’s main post was written by Hedy Yang, a contract researcher at the American Economic Liberties Project.
The spending bill that would allow the Trump administration to carry out much of its policy agenda — dubbed the “One Big, Beautiful Bill” — narrowly passed the House recently and is now being debated in the Senate, with the tentative goal of passing it through the upper chamber before the July 4 holiday.
You can read a lot of analysis of it elsewhere, but it’s worth noting that buried in the bill are provisions to permanently extend and modify what’s known as the “Opportunity Zones" program, which first rolled out in 2018 and offers tax benefits for investing in certain low-income census tracts known as (of course) “opportunity zones,” or “OZs.”
Proponents of the program have applauded this move, claiming it will usher in a “golden age” of economic development for left-behind communities. But we heard these same rallying cries the first time around, and now there is ample data that exposes the program’s false promises: Far from benefiting downtrodden communities, Opportunity Zones only usher in a golden age for wealthy investors looking for government handouts to fund luxury projects.
The new bill proposes many changes that address some of these concerns, but in the end, they don’t address the fundamental flaw undergirding the program and other wider U.S. economic development efforts: Private investors simply cannot replace the economic foundation that solid, public-sector investments can provide. (Please note, the language in the Senate bill is fluid, so it’s very possible that it changes during backroom negotiations before a vote.)
What’s wrong with the current program?
(1) The distribution of OZ funds is highly unequal. A 2023 study by the Department of Treasury’s Office of Tax Analysis found that the top 10 percent of OZ tracts received 84 percent of all funding from 2018 to 2020, while a little more than 4,000 of the 8,764 designated tracts did not receive any funding at all. Another study found that $2.1 billion (11 percent) of all OZ investment in 2019 was not associated with a designated OZ at all, resulting from a provision in the program that allows up to 10 percent of investments to be made outside of an OZ. This means that almost half of OZ tracts didn’t receive any investment, and a chunk of investments went to more affluent places that don’t need them.
(2) The funds helped investors do what they would have done anyway. Investors flocked disproportionately to urban areas — 93 percent of all investment was directed to urban OZs — and places that were already seeing an economic upturn. So the program was giving handouts to investors and projects that likely would have attracted the money anyway.
There are also cases of investors relocating ongoing projects to be inside a zone so they could be eligible for the tax benefits, as well as investors lobbying politicians to change opportunity zone designations so that already-started projects could receive tax benefits.
(3) Luxury real estate was the big winner. It's not a surprise that real estate developers were most enthralled by the program, as the way the tax breaks work makes real estate projects especially profitable. In fact, three-quarters of investees were businesses in the real estate and rental leasing sector.
Additionally, because the program didn’t put any guardrails on the types of projects that would be eligible for the tax benefit, many were in luxury commercial or industrial real estate that did little to benefit the public. Proponents of the program point out that it helped increase market-rate housing supply in some areas, which could drive down rents, but preliminary studies yield mixed results. There are also few examples of OZ funds going towards stimulating affordable housing production, and the risk for displacement spurred by OZ investment increasing costs of living is very real.
(4) Tracts that received the highest levels of investment also favored certain demographics. Zones that had more investment also tended to have a population with a greater number of bachelor's degrees, higher median home values, higher median incomes, lower unemployment, and lower poverty rates. On the investor side, the average income of investors was $4.9 million, which is in the 99th percentile of all earners.
(5) And finally, data collection was shoddy. Reporting for OZs is currently handled only through IRS Forms 8996 and 8997, which restrict public data-sharing. Only researchers at the U.S. Treasury & Joint Tax Committee have access to all OZ-related data, making it difficult for independent entities to research the effects of the program.
Unfortunately, this is something we see all too often with economic development programs, which makes it difficult for communities to know who is getting the tax break, what the money is really being used for, how many jobs it really creates, etc.
Even with limited data availability and short time horizons to evaluate its impacts, most studies to date show mixed, if not limited, effects of the program in terms of its stated goals. Various studies have found that designation of a census tract as an OZ:
Didn’t have a statistically significant effect on the area’s unemployment rate, poverty rate, or average earnings, or the number of job postings.
Didn’t lead to increased business activity or consumer spending.
Didn’t lead to venture capital investment to support startups or small businesses.
Lawmakers aren’t completely blind to the fact that there are issues with the program as it currently exists, so they’re proposing some changes that address concerns from both proponents and opponents alike.
Change #1: Changing the criteria for OZ designation, redefining “low income,” and increasing incentives for investing in rural areas
OZ designations from the first round of the program will “expire” at the end of 2026 (instead of the original date of 2028). The House version of the bill would create a new set of OZs starting in 2027 and ending in 2033, while the Senate is looking to make the program permanent with new OZ designations occurring on July 1 every 10 years.
The bill will make changes by adding an additional guardrail that raises the bar for low-income eligibility, and also gets rid of guidelines in the original program that allowed tracts to be designated as OZs even if they weren't technically eligible based on income and poverty requirements. The House bill also adds requirements for a certain proportion of OZs to be in rural areas. Various studies have indicated that these changes will reduce the pool of eligible tracts by up to 30 percent.
The new bill also offers a larger tax benefit for investing in rural areas, a clear response to the fact that the bulk of the funding in the original program was directed to urban areas. But it seems like their solution is just to make it even more alluring for investors to take on get-rich-quick projects in rural areas that maximize returns fast, rather than investing in more foundational projects that actually stand a chance of addressing generations of disinvestment.
Change #2: Ability to invest ordinary income
The House bill also includes a provision that allows people to invest up to $10,000 of ordinary income — money earned through things like wages or salaries — instead of only being open to entities with unrealized capital gains. This change supposedly seeks to democratize investment and make the program more accessible to smaller or non-institutional investors. The bill, however, does not include safeguards for these funds, opening up the risk for everyday people to be scammed with faux investments.
Change #3: Lowered threshold for deeming if an investment effected a “substantial improvement” in rural areas
The 2018 program also contains a rule requiring that investors make “substantial improvements” to the properties that they acquire, rather than just holding them passively. The rule requires investors to double the property’s basis (its value) within 30 months, whether by doing new construction, upgrading infrastructure, etc.
The bill would lower the threshold by which investors must increase the value of properties to 50 percent for properties in rural areas. The supposed logic behind this move is the fact that many properties in rural areas can be revitalized for less than double (100 percent) its basis, and lawmakers argue that this discourages many investments in rural areas from being made because investors can’t reach that 100 percent threshold.
While this may be true, it also feels like yet another knock to rural communities: This provision lowers the bar for the types of projects investors can undertake in rural areas because they don’t have to create as much improvement.
Change #4: Greater reporting requirements for tracking/transparency
Finally, the bill also adds new reporting requirements and penalties that aim to increase tracking and transparency in the program. The Senate bill also allocates $15 million to the IRS to enact these reporting requirements.
To the extent that lawmakers mean it and can actually ensure that this happens, it would be worthwhile. But with DOGE’s rampage of the federal government, it’s unclear whether there is the will or capacity to actually collect and analyze the data in a useful way. The IRS, in particular, has seen its workforce cut by over 25 percent and is looking at a funding cut of up to 37 percent with the new budget, which fosters doubts about how useful the Senate’s $15 million will actually be. This is in line with the larger pattern we’re seeing from the Trump administration, which is eliminating data collection and analysis across a host of agencies and programs.
The bottom line: These changes won’t alter the fundamental issues with the OZ program, which is that giving corporate investors massive handouts will never be able to reverse decades of disinvestment, and instead concentrates wealth upwards and pushes lower-income residents out. What we really need is more direct investment into infrastructure and public services that allow communities to be self-sufficient and build their own, unique economic foundations.
UPDATE: After pushback from many advocates and lawmakers, including 17 GOP governors and a group of GOP state lawmakers, the Senate last night voted 99-1 to strip a proposed moratorium on state and local AI-related laws from the federal budget bill. The Senate and House bills will still have to be reconciled, but the removal of this provision entirely from one version is excellent news. (Read more on this issue here and here.)
SHAMELESS SELF-PROMOTION: I co-wrote a piece for Greater Greater Washington debunking an “economic impact report” that D.C.’s mayor commissioned about the effect of a potential new NFL stadium. Read it here.
I also spoke to NPR in Indianapolis about how non-disclosure agreements are cutting communities out of discussions regarding data center development. Read it here.
SIMPLY STATED: Here are links to a few stories that caught my eye this week.
A new report from Good Jobs First shows how corporations in Camden, New Jersey, pocket huge taxpayer subsidies without hiring local workers.
Potentially corrupt Trump administration changes to the federal broadband funding program are causing big problems for state governments.
Leaders of the Nevada electric utility NV Energy requested that customers reimburse it for millions of dollars in expenses, “including limousine transportation and alcoholic beverages.”
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— Pat Garofalo
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