Using Tax Law to Perpetuate Gentrification: Vinegar Hill Lives Again in Charlottesville

ABSTRACT

The 2017 Tax Cuts and Jobs Act, enacted by the Trump administration, created the largest government-sponsored subsidy for urban renewal through the Opportunity Zones program. This tax expenditure is designed to delay and even avoid capital gains taxes to incentivize development in areas deemed to be in economic distress. While the program’s stated intent is to revitalize neighborhoods, build affordable housing, or promote small businesses, the selection of qualified areas is based on the income rate of residents. That is to say, a subsidy program focused on the physical place improvements has based its designation criteria on local resident’s income. While little academic scholarship has focused on this revolutionary program yet, this note finds that the Opportunity Zone approach to urban renewal likely furthers gentrification, is ripe for abuse, and lacks specificity to help the communities it is intended to serve. These statutory effects are seen clearly in a case study of the Opportunity Zones in Charlottesville, Virginia. In particular, the selection of Zones shows ability to manipulate the program to inappropriately subsidize already-occurring development. In response to the structural issues and the results from the Charlottesville case study, this note further provides a framework of policy solutions for state and local governments, as well as stakeholders, to utilize the opportunity for investment dollars while mitigating the negative externalities.

I. INTRODUCTION

The much-touted Opportunity Zones arising from the 2017 Tax Cuts and Jobs Act has resulted in a flurry of activity among investment bankers, real estate professionals, and capital asset holders. Designed to “encourage economic growth and investment in designated distressed communities,” Opportunity Zones create a capital gains tax benefit for taxpayers who invest into funds that are designed to pour money into low-income communities.¹ Such communities are chosen through a somewhat complex process involving criteria designed for another similar federal tax benefit aimed at providing low-income housing. However, some report that the criteria is so broad as to allow up to 57% of America to qualify for the low-income census tract status, despite not truly constituting “distressed communities” as the act intends to assist. Generally, Opportunity Zones are perceived to be an incredible asset for investors but pose potentially severe harms for the low-income communities they are designed to help. This program has attracted much attention from the business sector as representing an unprecedented tax cut for wealthy investors but has been little addressed by the academic community.

This note argues that Opportunity Zones potentially exhibit a number of negative externalities and that the Charlottesville case study lends credence to arguments that these areas exacerbate gentrification. Primarily, a lack of relation between the location criteria and the intended benefits as well as an absence of limitations to guide investment in distressed communities weaken the program’s effectiveness. That is to say, as the largest tax expenditure focusing on urban renewal and the largest urban renewal program of the decade it should include very specific criteria to ensure the investments truly accomplish the stated purpose instead of harm the low-income communities the program is geared to benefit. Secondarily, Opportunity Zones are an inefficient place-based subsidy that circumvent local institutional knowledge by incentivizing outside development instead of encouraging local participation in community-betterment. But, practically speaking, changing this approach to tax policies has significant hurdles. Within this structure, this note argues that state and local leaders, in addition to stakeholders, can implement strategies to ensure the Opportunity Zone Funds invest in ways that benefit local residents.

Part II of this note details the structure of Opportunity Zones, the policy rationales behind their creation, and their perceived weaknesses. Part III suggests stronger state and local government, in addition to community-based, solutions to prevent gentrification and other detrimental effects stemming from the current structure of Opportunity Zones. Similarly, it suggests mitigation tactics that capitalize on the federal government’s expenditures to benefit the local community. Part IV contains a case study on a specific locality, Charlottesville, Virginia and focuses in evaluating their Zone selections—which indicate previously existing development—and suggesting future actions to prevent any negative effects on the community-at-large. This section also applies the local government and stakeholder solutions to determine validity of these mitigation tactics.

II. PLACE-BASED AND UPSIDE-DOWN SUBSIDY WEAKNESSES

A. Structure

The Opportunity Zone legislation is conceptually attributable to England’s “enterprise zones.” When brought to the U.S., Republican Congressman Jack Kemp envisioned the program as a way to revitalize urban areas. In the 1990s, amid attempt to pass this as national legislation, geographer Doreen Massey said, “the main impact of the zones will be spatially redistributive—that they will lead to a shifting around of jobs, but not to the creation of new ones.”² By this, he meant that new jobs created in the area likely would lead to the moving of jobs from other areas which might or might not result in a net good.³ This criticism survives today. Opportunity Zones are also an incarnation of the subset of tax policies targeted at specific localities instead of people. This program, along with many other federal incentives to invest in low-income areas arose as the Department of Housing and Urban Development (HUD) repealed certain rules designed to prevent gentrification, notably the one-for-one replacement rule, which forced developers to provide new housing to those displaced by urban renewal.⁴ Thus, scholars identify place-based tax policies like the Opportunity Zone program as having roots in “subsidiz[ing] gentrification,” through laissez-faire government policies.⁵ That is to say, the government views these expenditures as a successful way to incentivize private industry to fulfill what many perceive as traditional responsibilities of government.

Like its predecessors, Opportunity Zones are structured to funnel capital into certain census tracts that satisfy selective criteria designed to target low-income communities for revitalization. That is, the program bases selections of the Zones on people’s income but strives to improve the physical landscape. While selection is ostensibly designed to improve community member’s situations, the program does not address this disconnect.

According to the relevant tax code, a “Qualified Opportunity Zone” is defined as “a population census tract that is a low-income community” and so designated by the Treasury.⁶ The designation arises by the “chief executive officer of the state,” usually the governor, notifying the Secretary of Treasury of the desired tract within the state and the Secretary certifying such nomination.⁷ “Low-income community” is defined in another section of the tax code originally drafted as guidelines for the New Markets Tax Credit, another place-based subsidy. Low-income community means census tracts that have at least a twenty percent poverty rate. Alternatively, in the case of non-urban areas, the census tract qualifies if median family income does not exceed eighty percent of the “statewide median family income.” Likewise, in the case of an urban area, it is also eligible if median family income does not exceed eighty percent of the “metropolitan area median family income.”⁸ Also, contiguous tracts are eligible “if their median family income does not exceed 125% of the adjacent qualifying low-income community tract.”⁹ That is to say, the program is designed to include nearby tracts that are not as distressed but perhaps should be combined for logistical or other purposes.

In the end, 42,176 census tracts were selected for Opportunity Zone designation with 2.6% of the chosen tracts being contiguous.¹⁰ The Urban Institute, a think tank in Washington, D.C., evaluated the investment scores for all designated tracts including measuring on a scale 1-10 the amount of pre-existing investment in each state’s selections. Virginia scored on the higher end of preexisting development with a score just under 6.¹¹ The worst offenders include Hawaii, Minnesota, Nebraska, Vermont, and West Virginia with scores between 6 and 7.¹² The states with the lowest preexisting investment are Montana, Alaska, and Georgia, as well as DC.¹³ The Urban Institute also evaluated the Zones by comparing preexisting socioeconomic changes. In Virginia, 4.2% of selected Opportunity Zones already had high levels of socioeconomic change.¹⁴ While discouraging, it is much lower than states such as New York where 13% of their Zones are already experiencing socioeconomic changes.¹⁵ This factor is particularly relevant in evaluating the efficiency and accuracy of selected Zones as the stated purpose of the tax expenditure is essentially to create socioeconomic changes by altering the physical landscape. Thus, preexisting changes indicate an inefficient subsidization of activities that would have occurred without such an expense.

In the most simplistic terms, taxpayers’ capital gains tax liability is reduced when the gains from a sale or transfer are invested in qualified Opportunity Zones. If the funds are left in an Opportunity Fund for 10-years, then the gains will not be taxed. The taxpayer has a 180-day period from the date of sale to invest the gains or any portion thereof from a capital gains realization event into an Opportunity Fund, excluding the invested portion from that year’s gross taxable income and deferring gain.¹⁶ For a simplified example, should a taxpayer sell stock for $2,000 that they purchased for $1,000, they have 180-days to invest the gain into an Opportunity Fund and avoid including the $1,000 gain in their gross-annual-income. Should the money be kept in the Opportunity Fund for five years, the taxpayer enjoys a step up in basis by 10% and, at seven years, the basis increases an additional 5%.¹⁷ After being held in the fund for 10 years, the basis is stepped up to the fair market value (FMV) of the asset on the day it was sold or exchanged.¹⁸ This step up in basis to FMV is another way of saying the appreciation in value or the gain the taxpayer has experienced in the asset (from the original sale) will never be taxed. Any “step up” in basis reduces the portion of the gain potentially subject to tax if the money is not left in the fund for the full vesting period. While appearing technical, this is an extraordinarily favorable tax benefit, especially for investors with significant potential capital gains. Prior to this program there was no comparable way to avoid capital gain inclusion.¹⁹

The Funds themselves can be structured in numerous ways, including as a corporation or partnership.²⁰ Proposed Treasury regulations promulgated in April of 2019 added more clarity to how the Funds should interact with the Opportunity Zones (which was a common question at the outset due to vagueness of the relevant code sections). Per the statute, Funds must retain 90% of their assets within Opportunity Zones as measured on the last day of the 6-month interval and the final day of the taxable year for the fund.²¹ This typically means June 30th and December 31st. The test is “applied by using asset values as reported on an audited financial statement or by using the asset cost if no such financial statement is available.”²² However, there was a point of confusion created by the requirement that “substantially all” of a business’ assets must be within the Zone to qualify as an “Opportunity Zone Business” (or, to be one of the assets includable in the fund’s 90% retention requirement). This particular question only refers to a two-tiered structured fund where the qualified Opportunity Fund invests 90% of their assets into a Qualified Business (or multiple businesses). This concept is represented in Figure 1.

As diagramed above, the Qualified Business itself is required to have “substantially all” of their assets within the zone. The Regulations served to clarify that “substantially all” was designed to require 70% of the property to be within the zone at the times of accounting.²⁴ This could allow businesses to take advantage of the gains but invest at least part of their property in other localities. To summarize, a one-tier structure must have 90% of their assets within the zone. A two-tiered structure must have 90% of their assets, which are Qualified Businesses, within the zone. However, the Qualified Business is only required to leave 70% of their assets within the Zone. Though it is outside the scope of this note, it is notable that there are concerns of fraudulent dealing regarding the corporate structure.

A final point concerned with the structure of the program is that reporting requirements were not included in the tax code. Therefore, at present, there is not a feasible way to track investments being made nationally, how much gain is being deferred, or what exactly is being invested in by Opportunity Funds.²⁵ There have been some moves to change this structure. Most notably, in November of 2019, Senator Ron Wyden (D-OR), introduced a bill requiring annual reporting from the Funds, strengthening some regulations regarding what types of investments can be made, and reducing the number of Zones by excluding those deemed to not be truly low-income.²⁶

B. Conceptual Categorizations

The first and easiest way to conceptually structure the Opportunity Zone program is to think of it in terms of tax expenditures. Tax expenditures are defined as “provisions of the federal tax laws in which allow a special exclusion, exemption, or deduction from gross income or which provide a special credit, a preferential rate of tax, or a deferral of tax liability.”²⁷ More generally, tax expenditures designate an area the federal government gives some sort of tax benefit to in order to incentivize behavior, costing revenue to the government itself. Examples of such programs include the mortgage interest deduction, the earned-income tax credit, and the deduction for medical insurance provided to employers. Tax professor Ruth Mason argues, “[t]he federal government uses tax expenditures to regulate, including in areas traditionally reserved to the states.”²⁸ Economically, these expenditures function the same as direct government spending, but they are significantly less visible to the public.²⁹ However, Professor Mason goes on to argue that the lack of visibility should not change the federalism concerns given the federal government regulating areas traditionally reserved for the states.³⁰ Federalism concerns notwithstanding, unique to tax expenditures is the idea that states can “claw back” the incentive. That is to say, states can tax the exact area the federal expenditure is providing tax savings on and “theoretically . . . completely repeal the federal . . . deduction for their own residents,” without implicating preemption in the same way might regulating direct aid programs.³¹

Tax expenditures’ greatest strength is likely the very factor that poses federalism concerns, decreased visibility. In theory, such a policy allows the government to funnel robust resources into a community without facing political pushback that is traditionally associated with direct aid programs. Direct aid programs usually function with recipients applying and perhaps interviewing to receive the benefit.³² Tax expenditures remove the regulatory impediments and psychological costs but accomplish the same goal, theoretically.³³

Second and more generally, this program can be described as an upside-down subsidy in that it has a stated goal to help low-income areas by assisting low-income people, but the benefit of the program economically flows to wealthy taxpayers. Although statistics vary as to who benefits from capital gains cuts, one set of researchers found that only 18% of U.S. households have unrealized capital gain.³⁴ Another way of stating this phenomena is that the tax incidence, or that of “who bear[s] the burden of a tax or enjoy[s] the benefit of the tax preference,” is not who the tax is intended to help.³⁵ Simply, the program ensures that non-impoverished, and likely wealthy, taxpayers see a benefit in their capital gains treatment with the hope that investors provide some sort of benefit to low-income residents in the qualified census tracts. Logically, this fits into the neoliberal “trickle down” policies dominating U.S. economics in recent decades, but ignores volumes of criticism related to this conception of capitalism.

This program has attracted significant attention from political forces and the business community. State legislatures see this as an opportunity to encourage investment in their cities and the business community recognizes a significant financial benefit. For example, the Wisconsin legislature introduced a bill in September of 2019 that would grant an additional 10% capital gains tax reduction for investors who hold the majority of their investments in the qualified funds within the state for five years.³⁶ This is an incredible windfall considering the federal Opportunity Zone program alone is estimated to cost the federal government 9.4 billion in lost revenue by 2022.³⁷ Clearly the program has massive benefits for investors, so additional state funds targeted at the same goal, without any additional requirements to encourage the money to be invested in projects that fit a state-goal like affordable housing, indicates just how strong the political ideological support is, despite inefficiency of additional monetary incentives. That is to say, the need for additional state incentives shows that the lack of criteria at the federal level creates systematic inefficiencies as the states expend more funds than necessary to direct the investment towards desirable ends. To simplify, the federal structure simultaneously subsidizes development that likely would already occur, creating inefficiencies at the state level requiring more subsidization than should be necessary to encourage the originally conceptualized development.

In part due to the program’s size and but also in response to media accusations of wrongdoing, six democrats sitting on the Senate Finance Committee and the House Ways and Means Oversight Committee requested a report from the Government Accountability office (GAO). Interestingly, one of the requesting senators included Cory Booker, who was an initial co-sponsor of the Opportunity Zone Bill.³⁸ The most recent move for accountability may be in response to a New York Times article accusing Treasury Secretary Mnuchin of instructing that certain land in Nevada be deemed an Opportunity Zone to benefit a long-time friend, Michael Milken, the inspiration for Gordon Gecko in the blockbuster movie “Wall Street.” The article linked an internal memo that listed the many reasons this particular area should not be an Opportunity Zone, including that designating Zones that do not meet the legislatively mandated criteria is unfair to other states, risks the legitimacy of the program, and creates issue with the designation of powers between the IRS and Treasury.³⁹ Milken holds significant real estate holdings that would benefit from this particular tract being designated and there is a claim that his business partner heavily lobbied Treasury to change the area’s classification to benefit a 700-acre development site.⁴⁰ Both Milken, a spokesman for his institute, and Secretary Mnuchin deny that there was any collusion here to personally benefit Milken.⁴¹ However this particular designation occurred, it reaffirms stakeholder’s fears that Opportunity Zones may not be utilized to truly benefit low-income areas and their residents and have at least the potential to be manipulated by lobbyists or powerful private interests.

C. Policy Rationales

Opportunity Zones, like most tax expenditures, have strong bipartisan support. Specifically, the Opportunity Zone initiative was presented and supported by Republican Senator Tim Scott, aforementioned Democratic Senator Cory Booker, Republican Representative Pat Tiberi, and Democratic Representative Ron Kind.⁴² For republicans, programs like this “leverage[e] modest federal investments to drive private capital into communities that have been sidelined as our national economy booms.”⁴³ This approach allows the market to influence and manage what is a politically desirable end of revitalizing urban areas. Alternatively, progressive groups tend to see this as a way to drive capital towards impoverished areas without experiencing political pushback to direct aid programs or encountering welfare stigma. Additionally, while it may not be an ideal structure, this program at least drives some federal funds to help income impoverished areas and people.⁴⁴ Despite this rhetoric, it is notable that terms such as “revitalization” and “renewal” often are used to hide the policy goal of gentrification by couching the same activities in socially permissible terminology.⁴⁵ It is not clear that this program would have achieved the support it has if gentrification was an openly stated policy goal making the utilized justifications suspicious. That is to say, if the hope is to accomplish poverty relief, this is more than likely an inefficient tax expenditure as it is not accomplishing what a direct expenditure might.⁴⁶

The 2015 white paper that originally proposed the Opportunity Zones program attributed its motivation to the fact that income discrepancy was exacerbated or tied to localities.⁴⁷ The authors conceptualized city devolution as a cycle of losing industry revenues creating a “falling tax base” and reduced money for infrastructure. Simply they explain, “capital liquidity constraints both drive and are driven by a lack of public infrastructure, resulting in an equilibrium characterized by decay.”⁴⁸^[7] Theoretically, incentivizing the return of private investment will break the cycle and assist community members who refuse to leave their failing cities.⁴⁹ Interestingly, the authors recognized that previous, similarly-structured programs such as Empowerment Zones and the New Market Tax Credit have not been successful. They attribute those failures to complicatedness of the process for accessing the gain and weak or misaligned incentives to accomplish the stated goals.⁵⁰ The idea that prior programs have been extraordinarily complicated and therefore limit the pool of investors to the highly sophisticated and resource-rich is non-controversial. However, the idea that removing guardrails on investment to attract additional capital creates more tailored results is curious. The authors argue that employment subsidies (in addition to asset purchase subsidies and capital investment incentives) are mistaken as they are an “indirect method” to revitalizing a city.⁵¹ More logically, they point out that employment subsidies are likely poorly structured in that the benefit is greater for the employer if they hire multiple part-time workers than one full time worker.⁵² However, this isn’t a general problem with incentivizing investment but one of a lack of standards for how the benefit is to be accessed within the structure.

Additionally, the authors argue that limits on the size of investment discourage resource-rich entrants that might otherwise create a large boon for the community.⁵³ The authors do not clarify how resource-rich entrants are both discouraged from using the prior programs but simultaneously the only ones who can access the benefit due to the complex tax incentive structure. The clearest policy rationales provided in this original conception of Opportunity Zones are to simplify the tax program, reduce administrative costs for entrants, and avoid the burdensome application process to a regulatory agency who grants access to the benefit. However, the reasoning why this structure will produce more efficient or fair results is unclear. The unsupported claim is that problems attributable to prior-tax programs do not arise from the structure of Opportunity Zone programs because the money is restricted to specific goals.

D. Perceived Weaknesses

Before conducting a case study or discussing solutions, it is helpful to provide a brief overview of certain conceptual structures that sort and explain the Opportunity Zone program’s tax structure. Michelle Layser, a tax professor at University of Illinois, is one of the few academics to dedicate research to place-based tax subsidies; therefore, her structural conceptualizations will be particularly analyzed, critiqued, and utilized to conceptually sort the benefits and detriments to a program such as Opportunity Zones.

i. Tax Categorizations

Outside of the tax expenditure structure and conceptual moorings of the Opportunity Zone program, there are numerous ways of categorizing tax policies in order to evaluate their strengths and weaknesses. Important to this discussion is the comparison between place-based and people-based policies. Place-based policies view community through the lens of “spatially-defined arrangements” whereas people-based policies tend to focus on common interests, relationships, and the like.⁵⁴ Simply, place-based policies are spatially motived and consequently fund their programs through spatial investment while people-based programs fund the targeted people-group more directly. The Opportunity Zone legislation is place-based as it is not structured to include safeguards that ensure the investment aids the most financially distressed people within the designated census tract nor are the funds distributed directly to community members. Instead, the sole qualification for the benefit to the investor is tied to a pre-determined boundary of land. Housing vouchers are an example of a people-based program where the direct benefit of the expenditure of federal funds, their incidence, directly falls on the targeted audience.

Professor Layser has argued that place-based tax policies can be explained along two axes. The first is to distinguish between direct and indirect tax subsidies. She explains that a direct tax subsidy provides the benefit to businesses within the community versus that an indirect policy provides benefits to outside, third-party investors. Second, she would distinguish the policies between spatially-oriented and community-oriented policies. Spatially oriented tax policy targets investments to low-income areas specific to preselected “spatial boundaries.” For example, the Opportunity Zone program expressly flows investment funds into communities experiencing economic distress. By contrast, a community-oriented policy looks to how the community will be impacted by the investments and structures the investment to accomplish a stated goal for the target community.⁵⁵ This conceptualization is useful to summarize and explains some of the program’s most serious critiques.

1. Place-Based vs. People-Based

Opportunity Zones fall squarely within the spatially-oriented, indirect tax incentive categorizations because the program provides “tax breaks directly to third-party investors who invest in entities that, in turn, invest in low-income areas for the purpose of improving the economic or built environment.”⁵⁶ This program subsidizes third-party investors with the ultimate goal of subsidizing businesses that engage with low-income communities,” instead of directly aiding the community.⁵⁷ This, and like programs, shift decision-making to the private market and relieve the government of part of its duties to assist in equal opportunities for all people.⁵⁸ Predictably, shifting social policy to the private market creates significant problems, distorting the results and struggling to accurately accomplish stated goals. Though there is a non-negligible benefit to delaying a tax, the total incidence of the tax benefit occurs after a fairly significant holding period so naturally the majority of investments themselves need to be financially sound and profitable during this waiting period. The incentive structure to third-party investors has little to do with benefiting the community. Instead, it focuses almost entirely on investors choosing the least risky investment that will produce a sizeable return. Usually, that will lead a rational economic actor to look for already gentrifying areas and to fund projects with high return on investment. For instance, rapidly gentrifying areas present low-entrance costs but potential for large gains over the 10-year holding period. In other words, choosing areas with rising home values or real estate trends will increase the investor’s financial gain and minimize risk but reduce the correlated benefit to the low-income residents of that neighborhood.⁵⁹

It is noteworthy that not all scholars place weight in the place versus people distinction. Some have argued that every policy that affects place also creates a Tiebotian response of the sorting of people.⁶⁰ Charles Tiebout’s consumer-voter argument, later encompassed in the well-known “home voter” terminology of William Fischel, argues that consumers move to communities in perfect response to what a local government provides.⁶¹ That is, as a city (or neighborhood in this case) changes, people will sort themselves out based on their preferences to local amenities, including physical landscape, taxes, and services. If indeed such a policy causatively affects people sorting, subsidized investment in gentrifying areas will speed up an already occurring process and displace the low-income residents the plan intends to assist.⁶² Summarily, “[p]eople move or stay where they are based in no small measure on opportunity, so changing places changes the structure of choice.”⁶³ In that way, place-based policies have a direct effect on people who live in the targeted area. However true this critique of tax categorizations may be, it does not alter the analysis of how the community is impacted through these programs. Instead, it strengthens the idea that the Opportunity Zone expenditure forces out local residents responding to gentrification. Arguably, the thesis that urban revitalization causes the improvement of physical space, thereby increasing the desire for outsiders to move there is questionable, but, if it is indeed true, it is a polite way to point out the true results stemming from place-based incentives. That is to say, this form of urban investment may naturally lead to the exclusion of the very people it is designed to help because of the focus on urban spatial improvement which may incentivize outsiders to move in and price-out existing residents.

The New York Times issued a scathing report detailing current investment that is far from benefiting impoverished residents. For instance, luxury apartment towers that include yoga lawns and pools are being built in one Houston neighborhood where multiple developments designed for the wealthy are already in the building process.⁶⁴ That is not to say there are not productive developments happening, though they are in the minority.⁶⁵ For instance, a developer in Birmingham is building apartments for the local work force and Goldman Sachs is working to build mixed-income housing in various cities including Salt Lake. The president of the Economic Innovation Group (the group that authored the initial white pages discussed above theorizing Opportunity Zones) remarked that “(t)he early wave, that’s not what you judge.”⁶⁶ In theory, this seems to imply the intended development will occur later, perhaps when the program is better-known. How time will necessarily change the current incentive structure is unknown. Why initial investments primarily into luxury apartment buildings and shopping centers does not indicate a failure of the program to provide the anticipated benefits to low-income communities is far from clear. Perhaps there is a value in incentivizing rampant and unchecked development regardless of displacement; however, this was not the stated intent of the program and there is no data to suggest this creates an overall public good instead of completing Massey’s prediction of resource sorting. To rephrase, this idea can also be articulated as a policy that only creates urban renewal, thereby putting a paint of coat on poverty, but fails to resolve any of the root causes that stagnate low-income areas.⁶⁷

2. Tax Equity Model vs. Fund Model

Finally, Professor Layser’s distinguishes between the tax equity model and the fund model implicated in the structure of tax expenditures related to housing and low-income benefit programs. The tax equity model refers to “tax credits that are monetized through transactions with third-party investors in low-income communities.”⁶⁸ That is, the tax credit is likely sizeable and covers a significant portion of the project’s cost, but the taxpayer has to “buy” the tax credit after completing the initial investment. In practice, third-party investors “purchase” the credits and invest in the area proportionate to their tax relief. Examples of such programs include the New Markets Tax Credit (NMTC) and Low-Income Housing Tax Credit (LIHTC).⁶⁹ In comparison, the fund model instead provides deductions or exemptions from taxable gains “with respect to money or property used to help finance businesses that invest in low-income areas.”⁷⁰ In the case of development, both programs allow a builder to access some of the value now and complete a project despite the fact that the investors receive the ultimate benefit at a later date.⁷¹

The same incentive is true of both models, that of encouraging investment in low-income areas. But the fund model allows the benefit to be readily accessible to an investor when they contribute to the fund.⁷² In other words, they receive the time value of their money as they have a quasi-deduction at year one despite the criteria requiring the money to remain within the fund for the minimum set time period, 5 years. Even should they withdraw the money and lose the ultimate tax break, not paying tax in year one allows the money to be reinvested and grow, even if the investor ends up paying tax in say, year three. The fund model is also a particularly strong structure to encourage group investment from a variety of investors, not just investments from banks which is more common under the tax equity system.⁷³ Specifically, allowing the pooling of resources gives investors with less resources a greater capacity to participate in the program than an equity-model that is not naturally inclined to implement joint investments.

While there are benefits to both models, the tax equity model is uniquely advantageous in that it does not tie the investment to the project’s success. That is to say, from the investor’s perspective, it matters little whether the project succeeds as they receive their tax benefit merely from giving the money and the owners of the investment project retain the risk. Though a successful investment is still preferable, the benefit is more immediate thereby lowering the overall incentive to invest carefully in the longterm. Conversely, in the fund model, there is a significant incentive to choose projects that will generate profit as the investors and fund managers must sustain the project until the ultimate tax benefit appears many years later, meaning that the investment must be successful enough to retain its viability for the 10-year period.⁷⁴ Though the current exclusion from tax is beneficial, the taxpayer is incentivized to make money in the 10-year waiting period and ensure their gains are still in the Opportunity Zone Funds to withdraw once the relevant accounting dates pass.

III. A CASE STUDY OF CHARLOTTESVILLE

A. Case Study

A case study of Charlottesville’s Opportunity Zones reveals inefficiencies in Zone selection and the manipulability of data. This study also reveals the strengths and weaknesses of available mitigation tactics to local legislatures and stakeholders. Notably, the only requirement in selecting these Zones is that the poverty rate must exceed 20% or alternatively concerning urban areas (relevant to this study) the tract may qualify if the median family income for the tract does not exceed 80% of the median income of metropolitan area.⁷⁶ This study attempts to aggregate other available indicators not expressly required to determine how accurate the poverty rate alone might be at selecting truly impoverished areas in need, specifically, of development or renewal. Another thing to note at the outset is that the statute required the governor to select the Zones, but it is highly unlikely this was done without the localities input. This process is rather opaque with the only evidence as to how it worked being within a press release from Governor Northam’s office. The press release said the Virginia Department of Housing and Community Development coordinated with the Virginia Economic Development Partnership to evaluate feedback “received… from localities throughout the Commonwealth in order to recognize the needs and opportunities at the level of government closest to investors and residents.”⁷⁷ These agencies were intended to “‘focus on local, regional and state priorities and ensure a strategic mix of zones with different types of revitalization needs and development opportunities for potential investors.’”⁷⁸

In Charlottesville, there are three Opportunity Zones located in somewhat curious parts of the city and county at large. At the outset, it is important to note that a significant portion of the Charlottesville population are students. While none of the selected Zones are well-known student areas, a student’s lack of income does distort census findings.

The first Zone (Zone A) is located in the county and both includes and is adjacent to a significant business district best known for a nearby failing mall and an upscale shopping center, Stonefield.⁷⁹ While these businesses may not be as successful as the city would like, governor, or the federal legislature who set up the program standards, would likely be hard pressed to say the residents of this stretch of land are specifically low-income compared to other areas. In fact, the poverty rate is 14%, the lowest of the census tracts selected within Charlottesville and below the 20% requirement (see Table 1). This indicates the area instead utilized the provision allowing for selection if the median income is not above 80% of the metropolitan area. Zone A has a fairly high median family income of $59,931 compared to the Charlottesville metropolitan family median income of $76,173. This calculates to Zone A having 78.6% of the surrounding metro’s median income, just barely meeting the requirement.⁸⁰ Zone A also has 0% unemployment (see Table 1). This leads to two critiques. First, it is not entirely clear there is a benefit to choosing such a tract when there could be more overall need in other parts of the city. Secondly, it is strongly predicted this specific area will struggle to attract development that will assist the residents it is intended to reach. That is, because this tract includes business area with significant shopping and retail space, it is likely that investment money will first and foremost seek opportunities there. It is also likely that affordable housing, for instance, will be significantly less profitable than building a store or restaurant. The loose requirements of the program will be inefficient to constrain the economic desires of the investors. Therefore, though this tract cannot be classified as totally outside the definition of Opportunity Zones, it illustrates some of the inconsistencies with tying an urban development program to the poverty of people. That is, it might revitalize or assist the physical landscape but have no measurable benefit for the people themselves. Which is not to say there are not needy people within this Zone but instead that the true motivations likely behind its selection are not focused on them.

The second district (Zone B) sits to the southwest of the Downtown Mall and Belmont neighborhood. Avon Street sits to the east and 5^th street to the west of the Zone.⁸¹ This zone encompasses two census tracts that will be analyzed separately though forming the same general conclusion. Tract 1 (census tract 5.01) has the highest percentage of income spent on rent of all the Charlottesville Opportunity Zones at 49.7% of renters paying rent over 35% of their income. This is indicative of a lack of affordable housing exacerbating poverty levels. The poverty rate of the area is 24% and there is 7% unemployment (See Table 1).This tract also has the lowest median family income of Opportunity Zones within Charlottesville at $31,853 (See Table 1).

Similarly, Tract 2 (census tract 4.01), had the second highest rent to income discrepancy compared to Tract 1 at 42.6% of area residents spending over 35% of their income on rent. Oddly, the area has, simultaneously, the highest rates of homeownership compared to the other Zones at 42% (See Table 1). The poverty rate is also slightly higher than Tract 1 (See Table 1). To explain these discrepancies, the poverty percentage (See Table 1) and housing prices (See Table 3) paint a picture of income disparity. The greatest percentage of owner-occupied homes in this area range in value from $200,000 to $500,000 (See Table 3). This is hypothesized to represent a discrepancy of incomes within the tract itself. Interestingly, Tract 1 and 2 have almost the same number of residents and the percentage of white residents below the poverty line is nearly the same. However, 48.5% of the black population of Tract 2 is impoverished compared to 28.2% of Tract 1’s black population.⁸³^[1] Notably, there is a significantly higher black population in Tract 1. In combination, Zone B is more deserving of the program’s incentive development than Zone A because of the greater quantity of poverty, less business development to distract investment dollars, higher unemployment rates, and an overall picture of impoverished people living in the area.

The last zone (Zone C) centers on the intersection of 5^th Street and Old Lynchburg Road, just to the south of the Fry Springs neighborhood. The Oak Hill Neighborhood is encompassed in the Zone with the two nearby parks, Azalea Park and Biscuit Run State Park being mostly excluded.⁸⁵ Zone C is perhaps the most interesting and aptly designated Opportunity Zone in Charlottesville’. It has the highest poverty rate in comparison to the other census tracts at 35% but also one of the highest median incomes at $48,558 (See Table 1). Though what is most interesting about this area is the peculiar average housing prices in comparison to the other tracts. Zone B is the only census tract with a significant portion of housing valued at less than $50,000 (See Table 3). This is hypothesized to result from Southwood Estates Mobile Home Park being located at the bottom tip of the zone’s boundaries. Finally, Zone C is also the only Opportunity Zone with more impoverished white residents than black.

Interestingly, the Southwood Mobile Home Park is one of the only examples nationally of a positive Opportunity Zone investment parcel. Habitat for Humanity purchased Southwood in 2007 with the intent of replicating what they had done at Sunrise—another trailer park in Charlottesville.⁸⁷ That is, they intended to convert the park into mixed-income housing without displacing the existing residents. At Sunrise, they invested $20 million in repairs before beginning discussions about transforming the space. Notably, the process relied substantially on the residents themselves creating the plan for the new community. Now, at Southwood, they plan on building over 400 affordable housing units and 400 market rate units. This project will combine Habitat for Humanity’s development resources and private developers’ capabilities by soliciting Opportunity Zone funds.⁸⁸ While the development has not begun, reports say that Opportunity Zone funding has already allowed for upgrades on the existing plan.⁸⁹

In conclusion, Zone C best illustrates a tract that has both statistical data to prove poverty, income disparity, and a need for funds, but also possesses the right set of physical factors to make development incentives a productive exercise. Because of the existence of Southwood, with the helping hands of Habitat for Humanity, investment can be funneled in a way that improves not only the physical landscape but also the lives of residents within the census tract.

The takeaways from this experiment are namely that data can be manipulated and misinterpreted. Also, the data alone does not paint a clear picture of the tract and certainly the required criteria, that of the poverty level, far oversimplifies an area’s needs. The program and decision makers surely included other criteria in making these choices as evidenced by the inclusion the business district within Zone A. Because the Opportunity Zones program is so simplistic, there is a lack of transparency in what data is actually considered which is problematic in terms of accountability but also conforming implementation across states or even cities within a single state. While the Zones have already been selected, this critique may prove useful in amendments or future iterations of place-based programs. A lack of criteria in the selection of the “places” themselves, even disregarding the lack of specificity of investment, is incredibly problematic.

IV. MITIGATION TACTICS

State and local legislatures, in partnership with community stakeholders, have significant power to limit the negative impact of Opportunity Zones. Recognizing the inherent strengths and flaws in the conceptual structure and actual implementation of Opportunity Zones, as well as place-based tax expenditures more generally, raises the normative questions of what can be done? As a political matter, the bipartisan support these programs have achieved is a non-negligible benefit. Proposing an eradication of these types of programs in favor of direct aid, or even more simply, tax programs with greater safeguards, is a rational response. However, such a suggestion ignores that there are ways to accomplish a positive result within the existing program. That is to say, if the federal government is willing to forgo billions of dollars in efforts to help municipalities, the city and state legislatures, in combination with community leaders, should find a way to capitalize on this.

State legislatures and governors have an obvious power to exercise over the Zones. First, the governors selected the Zones and proposed them to Treasury, so they have already influenced this process heavily. Secondly, the benefit of a tax expenditure is that state legislatures (or city legislatures) have almost unparalleled ability to regulate without federal preemption issues precisely because the federal government is expressly not regulating or taxing this sector. As evidenced already, states can utilize the excitement of Opportunity Zones by creating further incentives for useful development, that of investment that accomplishes a legitimate goal for the benefit of the community members. They also have the capacity to ban certain forms of investment that may pose larger externalities or are not helpful to the census tracts in question.

Just as the state and local governments have potential solutions to take advantage of the federal funds for the benefit of their communities, community leaders and stakeholders have great potential to direct investment in a more productive way. Such possibilities range from legal, contractual solutions to partnering with the legislatures and Opportunity Zones themselves to provide valuable local knowledge.

A. Selection of Zones

States had significant ability to prioritize truly distressed neighborhoods but at least seven states chose tracts that “had lower poverty and child-poverty rates, were better educated, where incomes were rising faster, and where home values were higher than the low-income areas they skipped over.”⁹⁰ Allowing states to choose their Zones was an appropriate delegation of power as they have the best perspective on what areas need the most investment. They can consequently limit the negative effects of this program by specifically selecting areas that are not gentrifying. They can holistically review and exclude some areas that may qualify as low-income but instead simply have a large percentage of college students or the elderly skewing the results. That is to say, localities can help prevent the selection of Zones that are likely to experience investment regardless of the program’s incentive.

The overall reviews of state’s efficiency in selecting Zones is disputed. The New York Times reported, “(t)he federal government is subsidizing luxury developments—often within walking distance of economically distressed communities—that were in the works before Mr. Trump was even elected president.”⁹¹ That is to say, not only is selecting census tracts where development is already occurring an inefficient expenditure of funds, it also hurts nearby struggling communities. For example, one Opportunity Zone in Portland, Oregon is expected to raise $150 million to build a 35-story tower with a Ritz-Carlton hotel, office space, and condos priced at up to $7.5 million apiece.⁹²

The academic community is skeptical but less dire. One scholar reported that states picked “relatively disadvantaged areas—having higher poverty rates, larger minority populations, and lower educational attainment.”⁹³ However, a study by the Urban Institute concluded that “tracts with high rates of socioeconomic change were disproportionately represented in selected Opportunity Zone tracts.”⁹⁴ Governors have completed their selection processes and cannot retroactively de-designate Zones at this time; however, they can utilize better data and stakeholder wisdom when designating future Zones. Additionally, Republican Senator Tim Scott is reportedly considering a bill that would allow a change to a small portion of selected tracts. Senator Scott suggests that this would “redo some of the bad decisions,” in selecting the Zones.⁹⁵ Should this come to fruition, governors have significant opportunities to better their choices.

B. Provide Transparency, Monitoring, Earning, and Evaluation

Though a federal bill requiring transparency and reporting exists in an infancy stage, it is unclear how much support it will garner with big businesses’ interests at stake.⁹⁶ Either way, states can minimize this gap in protection by requiring reporting of development within their state.⁹⁷ Likely the most successful monitoring programs would tie an additional state tax benefit to reporting requirements, though this could be structured in numerous ways. An additional tax benefit effectively incentivizes reporting without creating potential litigation claims for restricting development unfairly. Professor Layser suggests that just as community involvement is necessary to the planning for development, likewise it is “essential for monitoring outcomes.”⁹⁸ She continues, “(t)he metrics for evaluating the impact of the law should be clearly defined, and an assessment schedule should be set.”⁹⁹ Layser advocates for community involvement specifically because traditional criteria such as “property values, employment rates, area poverty rate, or the amount of capital investments” tell evaluators useful information about the development but do not necessarily answer the more holistic question of the efficacy toward goal attainment.¹⁰⁰ This note would add that without reporting requirements it is infeasible to comprehensively review how this program is functioning. It seems untenable to forgo so much revenue without being able to determine the expenditure’s validity.

C. Accomplish State Policy By Utilizing State Land

Researchers at the Urban Institut have recommended many of these strategies but notably, have raised the idea of using state land to subsidize development within Opportunity Zones. In practice, this would have the state sell land at a discounted rate to a developer with the promise that a certain type of development that is amenable to the community needs will be implemented.¹⁰¹ The Institute provides Massachusetts as an example where the state policy encourages converting “brownfield sites (such as landfills)” into “brightfields” or areas that encourage solar panel installations.¹⁰² Clean energy is one example of this approach. Likewise, affordable housing, business sectors that are needed by community residents, vocational training, and local business investment services are other examples of appropriate state intervention.

While this likely will create a successful result in terms of incentivized and directed investment, this suggestion is not to argue that this is perfectly efficient. Rather, this creates huge boons for developers to fix the inadequate protections provided in the first place by the federal code structure. So, while this can direct the aid effectively, it is an example of overextending resources to confer the intended benefit.

D. Land Use Controls and State Action

Outside of selecting Zones, local legislatures and zoning boards (depending on the state’s structure) have significant power to influence land uses within their locality. That is to say, local legislatures can exercise at least some control over what development enters their cities either by denying or fast-tracking any application for variances, rezoning, and other land use applications. Most states have allowed significant local power in making choices and the courts have frequently upheld that. In a post- Kelo v. City of New London¹⁰³ world, localities have legal backing to base their land use decisions on economic revitalization. Though Kelo was centrally concerned with using eminent domain to take private property for economic development, it affirms the broad base of authority for local decision-making regarding the economic needs of their city.¹⁰⁴

Utilizing land use controls effectively might include a local zoning board pushing through plans for affordable housing faster than say, a golf course. In order to effectuate this efficiently and quickly, it may be useful for the localities themselves to amend their comprehensive plans to prioritize certain forms of development in their designated Opportunity Zones. This could also mean the locality disallows certain forms of zoning or imposes other restrictions to dissuade developers from building luxury projects.

E. Utilize Local Stakeholders

Local stakeholders should always be included in the decision-making process for investment.¹⁰⁵ That is to say, stakeholders with knowledge of the community can be of great aid in selecting projects that will serve the community and be profitable for the investors.¹⁰⁶ Such a solution likely produces wiser investments and greater community acceptance of the new capital flowing into their neighborhoods. However, it is less clear how to compel investment funds to find local stakeholders and consult them on the fund’s plans. Perhaps this idea works best when stakeholders aggressively solicit capital, so they are involved from the initial decision-making.¹⁰⁷ Alternatively, the governor can facilitate these relationships by working with the community and asking what they see their local needs to be. In this way, the governor can serve as a “matchmaker.”¹⁰⁸ Some states, like New Jersey and Colorado, are already accomplishing this through grants for “project-feasibility studies, requests for proposals, investment memoranda and marketing, or legal/accounting support on specific projects.”¹⁰⁹ Florida has proposed an Opportunity Zone Commission to aid in these attempts.¹¹⁰ Likewise, D.C. has established an “OZ Community Corps” to “provide pro bono legal advice to residents and existing businesses in its Opportunity Zones to help projects in those Zones benefit people already living and working there.”¹¹¹

Utilizing the community in these discussions helps to mitigate results of a long-standing practice of a top-down approach where architects and planners create spaces that they view as superior but that do not suit community needs.¹¹² In this sense, Professor Edward De Barbieri has advocated for “urban anticipatory governance” where land use decisions are first presented to residents for feedback before being implemented.¹¹³

F. Community Benefit Agreements

Another solution is Community Benefit Agreements (CBAs). CBAs offer a unique way for local advocates to circumvent the limitations of local government to force this tax subsidy to benefit the community itself instead of just the investors. CBAs are structured as contracts entered between community leaders and an incoming business or investment entity that create some sort of regulatory benefit for the community.¹¹⁴ Such an agreement might include requirements for local hiring, minimum wages, affordable housing, relocation funding, and limits on activities that may not be in the community’s interest.¹¹⁵ For instance, a CBA in Detroit required an incoming Whole Foods to hire 70% of its workforce locally and to hang local art within the store, to mention a few of the requirements. The community specifically acted in this instance with a desire to maintain the sense of community ownership.¹¹⁶ Notably, these agreements are usually effectuated by local community groups, not the legislature. In fact, it is likely that these agreements must be enacted by the community and not the local government due to limits on the government’s power to force businesses to act in a way they desire. Critics of legislatively mandated CBAs have noted that attempting to create such restrictions for incoming businesses would more than likely lose a legal exactions battle.¹¹⁷

In the Opportunity Zone context, CBAs offer a contractual solution to the lack of local power in land use decisions and the tax program itself to the community. Most favorably, an Opportunity Fund that decides to implement a building project (instead of investing in an existing enterprise) will work from the outset with the local community groups to reach a mutually beneficial investment opportunity. This system of early bargaining can likely only be accomplished in larger cities where community groups wield significant power and resources to effectively impact and coerce investors. Governors can help facilitate local leader’s impacts by using their political power to connect fund managers with local interest groups. If the groups can provide real investment value through local expertise or data research (or pose enough of a litigation threat to be taken seriously), fund managers may be induced to view their participation as necessary.

Though a potential fix that mitigates some of the relevant issues, there are critiques to using CBAs to mandate change. For one, these agreements may lack appropriate representation of all viewpoints of all people within a neighborhood.¹¹⁸ That is to say, CBAs in many ways circumvent the democratic process by eliminating the local government’s influence and power over regulation and instead further divide the decision making at a neighborhood level. However, the reverse can also be argued. That is to say, it can be said that local governments (and apparently the federal government) have long been influenced unduly by private development or, alternatively, that businesses are taking advantage of the local planning process. CBAs instead “bring those groups that have traditionally been on the fringes of the development process into the discussion,” and check the local decision-makers biases.¹¹⁹

G. Create a Strategy for Investment for the Community

Researchers at the Urban Institute suggest “diagnos[ing] neighborhood types and match[ing] strategies accordingly.”¹²⁰ At its core, this suggestion places the burden on local stakeholders to craft a strategy document for development in the city. Theoretically, this would have the community conduct some sort of market analysis to evaluate current capital investments or lack thereof to funnel investment to the neediest places whilst guarding against investment in gentrifying areas.¹²¹ Again, this idea is conceptually strong but is likely most useful in application in larger cities that possess sufficient local government relations with their philanthropic stakeholders. Funding and resources are also hurdles for smaller localities who might wish to conduct such a study. Though in some ways more administrable than prior suggestions, an easily accessible strategic plan reduces the need for direct interaction between the funds and locals. Instead, freely distributing such information to funds in advance of their decision-making not only reduces the costs of entry (by reducing the research costs), it also can provide a strong incentive to follow the community’s suggestions. This, combined with CBAs which place coercive pressure on developers to listen to the community for fear of litigation or delays in the process, can likely prove successful.

Likewise, cities can leverage existing incentives by shifting Tax Increment Financing Districts¹²² or encouraging investment by layering relevant Zones with other tax incentives such as the New Markets Tax Credits and municipal bonds.¹²³ While undoubtably offering greater financial incentives will draw in investments, it is unclear why a city should do this. Opportunity Zones already offer an unparalleled tax credit to historic programs; it is unclear why fighting for more capital investment will protect the communities any more than at the outset. If a locality is truly concerned with gentrification and the potential abuses stemming from unrestricted development, simply creating more incentives for more money to funnel in (still without guardrails) will exacerbate the problem.

H. Solutions for Charlottesville

With the revelation of issues within the Charlottesville designated tracts, it is useful to attempt to apply the slate of suggestions previously provided. The solution for federal accountability measures will be disregarded as it is not an implementation solution for a locality specifically. Instead, the first solution is to use state land to accomplish a specific goal. As the selected Zones in Charlottesville are primarily urban, it is unclear what, if any, state land might exist within these areas. However, should land exist, it is likely that affordable housing would be a wise policy choice to pursue here.

Land use controls is a more obvious solution for Charlottesville. The Charlottesville and Albemarle Planning Commissions, respectively, are active bodies that implement the comprehensive plans when faced with variance, special exceptions, and permit applications. These two bodies (the Albemarle Planning Commission govern Zones A and C and Charlottesville Planning Commission governs Zone B) can have a significant impact upon what types of development occur. That is to say, the Commissions can implement a preference for projects that will benefit and not harm the low-income communities, ensure residents are aware of any incoming development and have a chance to voice their concerns, and expedite projects with preferable intentions.

Third, the local government can utilize stakeholders through creating a strategy for the community. Charlottesville is specifically well-suited to create a comprehensive plan to influence developers and solicit “useful” funds. In fact, Charlottesville is so well-suited to this task particularly because it is a university town with great research capabilities and a host of academics who may be willing to help. The city also has an incredibly active community to solicit input and feedback from. A theoretical framework to begin this work first includes speaking to residents of the Zones themselves to determine what the communities are missing. For instance, perhaps a community would prefer neighborhood markets to a large grocery store. Or, perhaps they need more low-income apartments over affordable homes for sale.

Part of what has made the current Habitat for Humanity project so interesting is that in their prior mobile home park redevelopment, they held multiple meetings to gauge what the residents wanted before making changes. They are conducting the same process with Southwood. One Habitat for Humanity employee said, “They set the vision… They (the residents) actually learned and were trained in architecture, engineering, and financing. Our goal was to stand back and support the residents as they made a plan of development.”¹²⁴ Initially speaking with the community to gauge support and need will be infinitely more vital to a successful investment plan than using data alone. A second suggested step is to speak with stakeholders such as Habitat for Humanity or the local business association so multiple perspectives are represented. Finally, any plan created should focus on communicating specifically tailored information to developers. Hence, this should not be an academic report nor geared to the residents themselves. Instead, the information should be specific to concerns of investors and fund managers and must include an analysis of the financial data that will persuade them to invest in the manner suggested. It is also encouraged that information regarding a group or groups best suited to negotiate a CBA be included at this stage to encourage the funds to initiate contact.

Should such a plan be created in conjunction with local groups, these entities will be perfectly set up to negotiate a CBA. That is, the plan, though created for developers, gives local groups a starting point to advocate for specific forms of development as well as to provide data to support their claims. Ideally, a complementary guide would be created in conjunction with the development plan that gives suggestions for what provisions of a CBA would be most beneficial to each individual project. For example, say a neighborhood desperately needs a grocery store. Is it most beneficial to the community at large to have a CBA with local hiring requirements? Or, should the CBA negotiate for a fresh fruits and vegetables section with affordable pricing? Perhaps, instead, the local art requirement from the Detroit CBA would create a positive impact for the community-at-large. When interviewing local residents as to their needs, this is an ideal opportunity to ask such questions and simultaneously craft plans for both fund managers and the local community. In this way, the local government can funnel development to optimize success. Utilizing the university’s research not only reduces research costs but also provides a third-party check. Presumably, academics will not be as heavily influenced by the desire to increase the tax base and instead focused more on the objectives of the program.

V. CONCLUSION

In conclusion, both the structural critiques and implementation of this program creates systematic inefficiencies resulting in a greater expenditure of funds than necessary. Whatever the arguable benefit is to place-based subsidy programs that incentivize private actors to assist in state goals, certainly a program such as this with so little criteria to incentivize actions for the general good is problematic. In one sense the program is critiqued because it ties its selections to income levels of people but is intended to revitalize space. That paradox in and of itself has created strange Zone selections, such as Zone A in Charlottesville that has no need for more unchecked investment. This is true of any gentrifying area, lending credence to other’s arguments that place-based subsidies exacerbate gentrification. In another sense the program is critiqued because the investments themselves have no limitations as to mode or ends. If this program was indeed designed to alleviate poverty and improve the lives of residents, it must have some, any, sort of limitations to ensure benefit is conferred on residents.

Finally, the available remedies and mitigation tactics available to state or local legislature and stakeholders are imperfect but can help capitalize on the federal government’s expenditure of funds. The suggestions discussed should be evaluated carefully to assess which strategy or strategies will be most successful in a given locality. Certainly, some pose higher administrative planning costs that may prove infeasible. Any extra expenditure of funds must include a cost benefit analysis to ensure the loss of tax basis will result in a greater overall good. Secondly, any additional incentives should be accompanied by investment guidelines that promote the flowing of funds to meet identifiable state or local goals relevant to the census tract. Ideally, these goals would be crafted in conjunction and with the participation of the residents themselves. Finally, in terms of local planning to assist this program’s effectiveness, a major takeaway from the Charlottesville case study is that local input and guidance is invaluable. Not only does it reduce pushback against development, but it creates wiser investment plans both for the community and the investors.

Going forward, it is helpful to recognize that gentrification is potentially a real and substantial externality of development programs. Even with the most benign justification for the Opportunity Zone implementation, there are consequences to using private actors, incentivizing development without guidance, and inefficiencies to this form of spending.

Treas. Reg. § 1.20186-18, 3 (2019).
Michelle D. Layser, The Pro-Gentrification Origins of Place-Based Investment Tax Incentives and a Path Toward Community Oriented Reform, Wis, L. Rev. 745, 779 (2019) [hereinafter, Layser, Pro-Gentrification Origins].
Id. at 779-80.
Id. at 784-85.
Id. at 785, 788-89 (“One Maryland-based architect was quoted by a trade news outlet saying, ‘[My] concern [is] that this strategy will result in gentrification on steroids . . . The guidelines and regulations thus far show little concern for the effects of new development on the existing blighted community. Focus should be on raising the quality of life for the existing population of the blighted area through new development and also through the improvement of consumer goods, and services where government falls short. Addressing social impact needs to be in the guidelines.’”).
I.R.C. § 1400Z-1(a).
I.R.C. § 1400Z-1(b).
I.R.C. § 45D(e)(1); note, this is the only criteria to census zone selection.
Brett Theodos, Brady Meixell, & Carl Hedman, Did States Maximize Their Opportunity Zone Selections?, Urb. Inst., May 2018, at 2 [hereinafter, Theodos, Did States Maximize].
Id. (Contiguous tracts were allowed up to 5%).
Id. at 5.
Id. at 4-5.
Id. at 4.
Id. at 6-7.
Id.
I.R.C. § 1400Z-2(a)(1).
I.R.C. § 1400Z-2(b)(2)(B)(iii)-(iv).
I.R.C. § 1400Z-2(c).
“Lock in” is a well-accepted problem associated with capital gains. That is to say, capital gains are taxed at a lower rate because there is a recognition that there is no basis adjustment for inflation and these long-term assets. This can result in large taxable gains should the taxpayer sell. Because capital gains holders are usually wealthier, they theoretically have the fiscal wherewithal to hold onto the assets until death where the code allows for a step up in basis to FMV. Because the federal government wants to simultaneously incentivize investment and lower the rate enough to incentivize selling and the capture of taxable gains, capital gains rates are already lower than what might be expected. The Opportunity Program shatters this rational and ignores the Laffer curve (a formula predicting 20% capital gains rate to be the ideal rate of taxation). Richard Schmalbeck, Lawrence Zelenak, & Sarah B. Lawsky, Federal Income Taxation 867-72 (5th ed. 2018).
Ronald Cima & Brett Cotler, Recent Developments Relating to Investments in Qualified Opportunity Zone Funds, J. of Tax’n of Inv., at 19-20.
I.R.C. § 1400Z-2(d)(1)(A), (B).
Cima & Cotler, supra note 20, at 19-20.
STAFF OF THE JOINT COMM. ON TAXATION, QUALIFIED OPPORTUNITY ZONES: AN OVERVIEW, 26 (2019), https://www.jct.gov/publications/2019/qualified-opportunity-zones-an-overview/.
Treas. Reg. § 1.20186-18, 7 (2019); Michael Novogradac, Clarity Provided by Second Tranche of Treasury Regulations to Incent More Investment in Opportunity Zones Businesses (Part I), Novogradac (Apr. 17, 2019, 12:00 am), https://www.novoco.com/notes-from-novogradac/clarity-provided-second-tranche-treasury-regulations-incent-more-investment-opportunity-zones.
Hilary Gelfond & Adam Looney, Learning from Opportunity Zones: How to Improve Place-Based Policies, The Brookings Institution, 11 (2018), https://www.brookings.edu/research/learning-from-opportunity-zones-how-to-improve-place-based-policies/ [hereinafter, Looney].
United States Senate Committee On Finance, Wyden Introduces Legislation to Reform Opportunity Zone Program (Nov. 6, 2019), https://www.finance.senate.gov/ranking-members-news/wyden-introduces-legislation-to-reform-opportunity-zone-program-.
Ruth Mason, Federalism and the Taxing Power, 99 Cal. L. Rev. 975, 984 (2011) (quoting Congressional Budget Act of 1974, 2 U.S.C. § 622(3) (2006)).
Id. at 985.
Id. at 985, 988.
Id. at 992, 994 (“If, in order to secure federal subsidies or avoid federal penalties, taxpayers strive to meet federal (rather than local) standards, then the taxing power raises concerns similar to those raised by the spending power.”).
Id. at 1012.
Susannah Camic Tahk, The Tax War on Poverty, 56 Ariz. L. Rev. 791, 828-29 (2014).
See, Stanley S. Surrey, Tax Incentives as a Device for Implementing Government Policy: A Comparison with Direct Government Expenditures, 83 Harv. L. Rev. 705 (1970) (espousing the idea that tax expenditures and direct aid programs are analogous).
Looney, supra note 25, at 1.
Michelle Layser, A Typology of Place-Based Investment Tax Incentives, 25 Wash. & Lee J. C.R. & Soc. Just. 403, 413 (2019) [hereinafter, Layser, Typology of Place].
Wisconsin Legislators Introduce Bill to Increase State Tax Benefit for OZ Investments, Novogradac (Sept. 25, 2019, 3:30 pm), https://www.novoco.com/news/wisconsin-legislators-introduce-bill-increase-state-tax-benefit-oz-investments.
Staff of the Joint Comm. on Taxation, Estimates of Federal Tax Expenditures for Fiscal Years 2018-2022, 27 (October 4, 2018), https://www.jct.gov/publications/2018/jcx-81-18/.
Novogradac, supra note 36.
Internal IRS Memo: Nevada – IRS Concerns (May 16, 2018), https://www.documentcloud.org/documents/6521520-2018-05-16-IRS-Objection-Memo-Re-Nevada-Request.html.
Eric Lipton & Jesse Drucker, Symbol of ‘80s Greed Stands to Profit from Trump Tax Break for Poor Areas, N.Y. Times (Oct. 26, 2019), https://www.nytimes.com/2019/10/26/business/michael-milken-trump-opportunity-zones.html.
Id.; Laura Davidson & Saleha Mohsin, Mnuchin Says He Didn’t Know Milken Would Benefit From Tax Help, Bloomberg (Oct. 29, 2019, 3:01 pm), https://www.bloomberg.com/news/articles/2019-10-29/mnuchin-says-he-didn-t-know-milken-would-benefit-from-tax-help.
Opportunity Zones, Economic Innovation Group, https://eig.org/opportunityzones/history.
Layser, Pro-Gentrification Origins, supra note 2, at 114.
Id.
Id.
In this way, this note differs from Surrey’s thesis that the costs and benefits to a tax expenditure are the same as if the program was a direct aid program. See generally, Surrey, supra note 33.
Jared Bernstein and Kevin A. Hassett, Unlocking Private Capital to Facilitate Economic Growth in Distressed Areas, Economic Innovation Group, Apr. 2015, 2, https://eig.org/wp-content/uploads/2015/04/Unlocking-Private-Capital-to-Facilitate-Growth.pdf.
Id. at 3.
Id. at 4-5.
Id. at 11-12.
Id. at 12.
Bernstein & Hassett, supra note 45, at 13.
Id. at 14-15.
Amy T. Khare, Putting People Back Into Place-Based Public Policies, 37 J. of Urb. Aff. 1, 47, 47 (2015).
Layser, Typology of Place, supra note 35, at 412-3.
Layser, Pro-Gentrification Origins, supra note 2, at 117.
Id. at 5.
Id.
Looney, supra at note 25, at 6.
Layser, Pro-Gentrification Origins, supra note 2, at 21-22.
See, Charles M. Tiebout, A Pure Theory of Local Expenditures, 64 J. of Pol. Econ. 5, 416 (1956); see also, William A. Fischell, The Homevoter Hypothesis: How Home Values Influence Local Government Taxation, School Finance, and Land-Use Policies 1-18, 39-97 (Harvard University Press 2001); please note, this is an overreach in terms of what this theory provides. Fischel and Tiebout were concerned about local municipal government amenities, taxes, and services. The theory itself is not meant to explain moves based on private actor’s choices.
Professor Lasyer argues that “(s)patially oriented tax investment tax incentives are inefficient to the extent that they encourage businesses to engage in tax-motivated behaviors that do not correct a market failure…” She concludes that gentrification is an inappropriate policy goal and there is data that shows it is happening anyway so, subsidizing the behavior is fully inefficient. Layser, Pro-Gentrification Origins, supra note 2, at 149.; Professor Mason additionally argues that tax incentives should only be used to incentivize goals that can be successfully accomplished by private taxpayers. She provides the example of incentivizing the contribution to charities. However, what she calls “complex benefits,” such as the federal highway system are best left for state cooperation in the implementation. While it’s not clear that community revitalization would classify as a “complex benefit,” the idea of revitalizing a local community through urban renewal has been historically accomplished by state and federal actors. In particular, it is not clear that private actors are the best suited to assist in anti-poverty relief efforts if that is indeed a facet of the Opportunity Zone incentive. Mason, supra note 27, at 1014.
Nestor M. Davidson, Reconciling People and Place in Housing and Community Development Policy, 16 Geo. J. on Poverty L. & Pol’y 1, 9 (2009).
Lipton and Drucker, supra note 40.
Brett Theodos, Eric Hangen, Jorge González, and Brady Meixell, An Early Assessment of Opportunity Zones for Equitable Development Projects, The Urban Institute, 4 (2020) (Finding that there are a number of challenges for “mission-oriented projects,” including access to capital as the program incentives favor the projects with the highest rates of return on investment).
Lipton and Drucker, supra note 40.
Id. at 3.
Layser, Typology of Place, supra note 35, at 420.
Id. at 420-23.
Id. at 420.
Id.; Opportunity Zones differ from prior programs in that it allows for investment in existing businesses, not just creation of new projects.
Id. at 427.
Layser, Typology of Place, supra note 35, at 426-28.
Id. at 428.
Opportunity Zone Map, Novogradac, https://www.novoco.com/sites/default/files/mapbox/opzone/gozone_map_16.html (text added).
I.R.C. § 45D(e)(1).
Press Release, Office of the Governor of Virginia, Governor Northam announces Nomination of 212 Opportunity Zones, (Apr. 19, 2018), https://www.governor.virginia.gov/newsroom/all-releases/2018/april/headline-822687-en.html.
Id. (quoting Secretary of Commerce and Trade Brian Ball).
Opportunity Zone Map, supra note 74.
See U.S. Census Bureau, 2013-17 American Community Survey, “Income in the Past 12 Months (In 2017 Inflation-Adjusted Dollars),” table generated by Kelsey Massey using American Fact Finder, <http://factfinder.census.gov> on Nov. 21, 2019 [hereinafter, “Income in the Past 12 Months”].
Mary Margaret Frank & Ben Cullop, Opportunity Zones: 5 Things You Need to Know, UVA Darden Ideas to Action (Feb. 28, 2019), https://ideas.darden.virginia.edu/opportunity-zones-5-things-you-need-to-know; https://www.cims.cdfifund.gov/preparation/?config=config_nmtc.xml.
See U.S. Census Bureau, 2013-17 American Community Survey, “Selected Housing Characteristics,” table generated by Kelsey Massey using American Fact Finder, <http://factfinder.census.gov> on Nov. 21, 2019. [hereinafter, “Selected Housing Characteristics”]; Opportunity360 Measurement Report, report generated by Kelsey Massey on Nov. 21, 2019, https://www.enterprisecommunity.org/opportunity360/measure; “Income in the Past 12 Months,” supra note 79.
U.S. Census Bureau, 2013-17 American Community Survey, “Poverty Status in the Past 12 Months,” table generated by Kelsey Massey using American Fact Finder, <http://factfinder.census.gov> on Nov. 21, 2019 [hereinafter, “Poverty Status”].
See “Selected Housing Characteristics,” supra note 81.
Frank & Cullop, supra note 80.
Poverty Status, supra note 82.
Kathy Orton & Samantha Schmidt, In an Old Mobile-Home Park in Charlottesville, the Residents Get a Say in the Redevelopment, June 6, 2019, https://www.washingtonpost.com/realestate/in-an-old-mobile-home-park-in-charlottesville-the-residents-get-a-say-in-the-redevelopment/2019/06/05/b3396420-8569-11e9-a491-25df61c78dc4_story.html.
Id.
Id.
Such states include West Virginia, Mississippi, New Mexico, Alabama, Arkansas, Kentucky, and Louisiana. Quote specifically references Mississippi and West Virginia. Looney, supra note 25, at 5.
Lipton and Drucker, supra at note 40.
Id.
Hilary Gelfond, Opportunity Zones: Driver of Economic Development or Domestic Tax Shelter for the Rich?, The Future of Cities, Volume XIX, at 7.
Id. at 9.
Lydia O’Neal, Senate Republican Plans Bill to Alter Opportunity Zones, Bloomberg Tax (January 22, 2020, 8:13 AM), https://news.bloombergtax.com/daily-tax-report/senate-republican-plans-bill-to-alter-opportunity-zones.
Wyden Introduces Legislation to Reform Opportunity Zone Program, supra at note 26.
See generally, Brett Theodos, Cody Evans, & Brady Meixell, An Opportunity Zone Guide for Governors and a Case Study of South Carolina, Urb. Inst., September 2019. [hereinafter, Evans, Opportunity Zone Guide].
Layser, Pro-Gentrification Origins, supra note 2, at 814.
Id.
Id.
Evans, Opportunity Zone Guide, supra note 97, at 7.
Id.
125 S. Ct. 2655 (2005).
Many states have limited the localities power to implement Kelo style land use provisions. See The Castle Coalition, “The 50 State Report Card,” http://castlecoalition.org/50-state-report-card.
Id.
Brett Theodos & Brady Meixell, How Chicago and Cook County Can Leverage Opportunity Zones for Community Benefit, Urb. Inst., January 2019, at 9 [hereinafter, Meixell, Chicago and Cook County].
Though this may happen through CBAs, it may be less formal in some areas.
Evans, Opportunity Zone Guide, supra note 97, at 3.
Id. at 5
Id.
Id. at 6
Layser, Pro-Gentrification Origins, supra note 2, at 162.; See generally, Jane Jacobs, The Death and Life of Great American Cities 17, ch. 1 (1961).
Layser, Pro-Gentrification Origins, supra note 2, at 163-4 (quoting Edward W. De Barbieri, Urban Anticipatory Governance, 46 Fla. St. U.L. Rev. 76, 79 (2019).)
Edward W. De Barbieri, Do Community Benefits Agreements Benefit Communities?, Zoning and Planning Law Reports, June 2017, at 1.
Colyn Eppes, Legislatively Mandating a CBA is Not the Way: A Case Study of Detroit’s Proposed Community Benefits Ordinance and its Constitutionality Under the Takings Clause of the Fifth Amendment, 26 J.L. & Pol’y 225, 234-35 (2018).
Id. at 1-2.
Id. at 2.
Barbieri, supra note 113, at 1.
Richard Schragger, City Power: Urban Governance in a Global Age 159 (Oxford University Press 2016).
See Meixell, Chicago and Cook County, supra note 106, at 10.
Id.
Tax Increment Financing Districts or (TIFs) are areas with a frozen tax base. They are utilized to finance infrastructure improvements. This is a way of subsidizing development that is not as visible politically. See Schragger, supra note 118, at 211-12.
Meixell, Chicago and Cook County, supra note 106, at 11-12.
Orton and Schmit, In an Old Mobile-Home Park in Charlottesville, supra note 86.