Opportunity Zones: How Communities were Chosen for Participation

The Opportunity Zone program, also known as the OZ program, is a new tax incentive in the Tax Cuts and Jobs Act of 2017. The program is meant to create long-term investments in low-income census tracts in the United States. 

The new program enables investors to place capital gains from a sold asset into an Opportunity Zone fund that invests capital into specific Opportunity Zones. The biggest tax benefits go to investors that invest for at least 10 years in a particular zone.

Opportunity Zones are low-income community census tracts, which were originally founded under the New Markets Tax Credit program. Governors in United States territories and states had to send their nominations for Opportunity Zones to the United States Treasury by March 21, 2018. The governors were allowed to nominate up to 25 percent of the eligible census tracts, and up to 5 percent of the census tracts they nominated could be in regions that were in contact with low-income community census tracts.

States have designated Qualified Opportunity Zones with guidance from the CDFI Fund and the IRS. Some states asked for input for selecting the Opportunity Zones from other stakeholders and local governments. All of the state selections of Opportunity Zones were certified by June 2018.

About 42,000 census tracts were able be designated as Opportunity Zones by the governors. From this total, about 8,760 were designated, and about 8,530 were low-income communities, while about 230 were in contiguous communities. 

In the average Opportunity Zone, the median household income is $33,345, while the unemployment rate is 13.4 percent and the poverty rate is 31.75 percent, according to data from the Census and Economic Innovation Group analysis. About 31 million people in the United States live in Opportunity Zone areas, and about 56 percent of these residents are people of color. More than 75 percent of the Opportunity Zones are in metropolitan areas, and 294 of the Opportunity Zones include Native American lands. 

The effectiveness of the Opportunity Zones program is based on attracting capital to regions that need it most. There are two important questions that the governors of the U.S. states and territories asked and used in order to select the census tracts:

● Would states choose the maximum allowable amount of contiguous tracts, as more likely opportunities for investment? Contiguous tracts ultimately made up about 2.6 percent of all of the designated census tracts, which is lower than the 5 percent acceptable under the law.

● Would states ultimately choose tracts that were already attracting investments and offering an unnecessary tax incentive? Less than 4 percent of Opportunity Zones were exhibiting signs of socio-economic change, which indicates pre-existing development and gentrification, according to the Economic Innovation Group. Gentrification is typically hard to measure, and each local area and state can manifest it in a wide range of different ways.