Yesterday we released a policy brief entitled “How States Can Maximize Opportunity Zones”. The paper was written in concert with our good friends, Jamie Rubin and Dan Berkovits, under the aegis of The Governance Project, a new non-profit that aims to help state and local leaders leverage the private sector and private capital to deliver new solutions to critical challenges.
Our policy brief lays out a plan of action for states to realize the full economic and social potential of this unique tax incentive. To recount, the Tax Cuts and Jobs Act of 2017 provides a new incentive – centered around the deferral of capital gains taxes — to spur private investments in low-income areas designated as Opportunity Zones. Given the significant interest among investors, it is possible that this new tax incentive could attract tens of billions of dollars in private capital, making this one of the largest economic development initiatives in U.S. history.
Governors have already played a critical role by selecting Opportunity Zones in their states from an eligible group of low income census tracts in accordance with the law. But state involvement should not begin and end with designation. States have a complex of powers, resources, assets and relationships which, if smartly and intentionally deployed, could help leverage the Opportunity Zone incentive to shape markets and maximize economic and social outcomes.
To this end, we recommend that states create Opportunity Plans. These Plans should primarily focus on how states can help communities identify and amplify local advantages and design actionable strategies that align with local priorities and needs. Opportunity Plans should contain, at a minimum, seven concrete actions for states to develop and implement:
- Help communities design and market an Investment Prospectus to showcase the distinctive assets of — and investable projects — in their Opportunity Zones;
- Maximize the economic impact of public institutions of higher learning;
- Maximize the economic impact of state assets that are located in or near Opportunity Zones;
- Ensure that Zone related infrastructure is of high quality and meets performance standards;
- Align state investments and decisions with the distinctive competitive assets and advantages of different Opportunity Zones.
- Help local residents obtain skills or competencies necessary to meet existing or likely labor demand; and
- Support the production and preservation of affordable/workforce housing.
To carry out these actions, we recommend that States establish a special Opportunity Zone Unit with the authority to coordinate actions within the government and the capacity to engage with communities, companies and investors. There is precedent for states taking such action, particularly to cope with natural disasters.
Here are a few framing thoughts as you read the policy brief:
Like many of you, we spend the bulk of our time working with cities, urban counties and metropolitan areas. These areas reflect the organizing unit of the global economy, with integrated labor and housing markets, regional innovation ecosystems and infrastructure that connects people and places within metros and without. States are a different animal, with governmental structures that are often rigid and compartmentalized and borders created by historic political calculations rather than current market integrity.
Yet states matter in multiple ways.
First, the importance of states rises as the functionality of the national government declines. Congress did, to its credit, enact this new tax incentive. But the Trump Administration has done precious little to communicate with the nation through the multiple channels that the federal executive branch possesses. Imagine what would be happening under the Bush Administrations or the Clinton and Obama Administrations? Weekly conference calls and webinars with mayors, county executives and governors. Regular workshops with economic development practitioners and investors. States (and cities and counties) must occupy the vacuum left by an Administration that has ceased to perform the basic, elemental functions of governance.
Second, states could play a substantial role in helping small cities, rural counties and towns realize the full potential of this new tool. Many small communities simply do not have the capacity to design, communicate and deliver an effective economic development strategy. States need either to step in and provide the capacity themselves or fund intermediaries that do so. The Gateway Cities Initiative in Massachusetts could provide a model for this kind of platform support for multiple communities that share common challenges. The notion that each community will build this kind of capacity is delusional if not inefficient.
Finally, states could help forge economic and social linkages between Opportunity Zones located in disparate parts of the state. The country has spent a lot of time recently talking about what divides rather than unites us. Yet Governors have designated Opportunity Zones across cities, suburbs, small towns, and rural areas; many of these are actually located within the same metropolitan areas and represent integrated business, housing and labor markets. States should not treat Opportunity Zones as isolated geographies but as places that have real but untapped market connections and synergies. The revitalization of a city’s medical district might, for example, offer quality employment opportunities for residents who live in a nearby Opportunity Zone and receive special skills training. A central city research commercialization strategy might enable manufacturing initiatives in exurban or rural parts of the state.
Federalism has had a rocky run in recent years. The relationship between many states and their cities has been defined by pugnacious combat and contention rather than common purpose and collaboration. The purpose of Opportunity Zones was to catalyze economic renewal in places left behind; the allure of jobs and capital could also help repair the rift between states and communities and elevate pragmatism over partisanship.