Opportunity Zones
The 2017 Tax Cuts and Jobs Act (TCJA) included an existing government incentive, Opportunity Zones, to stimulate spending in undercapitalized and rural areas. Tax incentives for those with wealth gains that have investments in low-income and under-capitalized regions are known as Opportunity Zones (Theodos et al., 2019). By providing tax incentives to developers who spend qualified money in specific locations, such zones are meant to stimulate economic growth and the creation of employment in underprivileged areas around the country and U.S. properties. Taxpayers who make an appropriate investment in the Qualified Opportunities Fund and meet other requirements can defer tax on qualified capital gains (Theodos et al., 2019). The establishment of Opportunity Zones, which was included in the 2017 Tax Cuts and Jobs Act, has significant consequences for local governments aiming to encourage equitable economic growth.
The opportunity zone clause allows investors to postpone paying taxes on capital gains – profit margins earned by selling assets, such as stock – by “rolling” those gains through O.Z. funds that invest in low-income areas. O.Z. can help any individual or firm with capital gains. The concept provides three tax breaks for unquantifiable investment revenue spent in Opportunity Zones (Tax Policy Center, 2020). First, there is a short postponement of taxes on capital gains that have recently been realized. Investors can put existing investments in the Opportunity Funds that have accrued capital returns. Current capital gains won’t be taxed until 2026 or when the asset is sold. The second is a straightforward step-up of previously collected capital gains. The investor’s basis on the initial investment rises by 10% when capital gains are invested in the Opportunity Funds for five years. Investing for seven years would yield a 15 percent return on the initial investment (Tax Policy Center, 2020).
Tax Cuts and Jobs Act of 2017
The United States’ Congressional Revenue Act (Pub. L. 115–97), sometimes called the Tax Cuts and Jobs Act (TCJA), modified the Internal Revenue Code of 1986. The changes include lowering tax rates for individuals and corporations, raising statutory deductions and incentives of family tax. The Act enabled restructuring according to Titles II and V of the Concurrent Resolution on the 2018 Budget (Watkins, 2017). It also entails lowering the other least tax for people while lowering it for businesses, decreasing the sum of estates affected by the estate tax, and exempting the fine imposing the Affordable Care Act’s (ACA) personal mandate (Watkins, 2017).
The House Tax Cuts and Jobs Act proposes to revamp both the corporate and individual revenue tax systems and change the U.S. to a regional corporate tax system. According to the Growth Model and Taxation of Tax Foundation, the proposal would result in a 3.5 percent increase in GDP over time, 2.7 percent higher incomes, and an extra 890 000 full-time corresponding employments (Tax Foundation, 2020). According to such policies, the project is expected to improve economic output by $908 billion over the next ten years. This potential revenue would significantly decrease the program’s stagnating costs. Based on the premise used to create the plan, government policy, or established law, the increased taxes may drive the program closer to tax neutrality. According to statistics, it will boost all taxes by 0.9 percent after-tax collections in 2027 and 3.4 percent after-tax revenues for the wealthiest 1 percent (Tax Foundation, 2020). On a long-term basis, all taxpayers’ earnings will grow by 3.8 percent in terms of GDP growth (Tax Foundation, 2020).
Impacts of Opportunity Zones on housing and community development
The Opportunity Zones program increases flexibility and encourages a variety of financing sources to help diverse sections of the city with economic progress. For instance, new equity opportunities could be created for developers, utility suppliers, and other small businesses critical to the supply of low-income housing. Investment in Opportunity Zones can help low-income areas get much-needed products or services, create or maintain affordable housing, and provide various other benefits (Policy Link, 2020). Equity sponsors, investors, entrepreneurs, urban and public representatives, philanthropists, and federal authorities should proactively pursue the following effects to lead the investment opportunities zone to them. In other terms, opportunity zones have the subsequent impact on housing and community development:
First, it is the most effective means of ensuring equal growth. Opportunity Zones frequently use fiscal stimulus to create good jobs, improve economic stability, and reduce disparities in ethnic resources (Policy Link, 2020). Regional projects can contribute to wages with a reasonable standard of living, maximum pensions, team member interests, and safe and healthy work environments. Developers and investors should be able to determine the zones’ contracting options. Second, O.Z.’s impact development initiatives require no structural or other facility changes (Policy Link, 2020). There is a lack of progress if there is no movement. The construction of opportunities zones can improve household prosperity and protection for the most disadvantaged families, notably low-income families and vibrant homes, in addition to bringing economic wealth and prosperity to disinvested communities (Policy Link, 2020). Finally, O.Z.’s are the best at guaranteeing healthy, prosperous communities. Investment in established low-income households and populations of color in the regions could help to promote long-term growth and prosperity.
Opposition to Opportunity Zones
The legislation compelled state decision-makers to define comparatively wealthy capacities as Opportunity Zones, which required contributions from really underprivileged societies. While the most recent tax cut encourages developers to raise more capital, it does not allow local communities to benefit from tax breaks. As a result, rather than providing homes and jobs for low-income communities, this tax cut could lead to “gentrification subsidies” in some aspects (Jacoby, 2019). Potential legal loopholes and the first bundle of new Treasury guidelines – which investors are pressing for reorganization – will provide tax advantages for investors while preventing genuine business development in the opportunity zones. As the Treasury completes its first set of recommendations, which provide instructions on complying with the law, the scope of tax evasion, which has received insufficient attention to date, becomes more evident. According to the Joint Tax Committee of Congress, the latest tax reform will cost around $1.6 trillion in federal income over ten years.
Incentive fueling neighborhood development
Allentown’s $1 trillion tax credit enhancement for New Growth is an excellent example of a community development plan. Senator Patrick Browne of Pennsylvania drafted a measure approved in 2009 to give NIZ tax benefits to aid rehabilitation in downtown Allentown and along the region’s rivers (Jacoby, 2019). Firms, jobs, and investments are being attracted to the city by government officials. Economic incentives for selecting firms, such as tax cuts and subsidies, are also used to achieve this. However, the costs borne by taxpayers are applied to cash incentives offered to businesses (Jacoby, 2019). The collective tax credit accounted for around 40 percent of the $8.5 million restoration cost, making the development fiscally feasible.
Tax incentives are a way for corporations and people to pay less tax in interchange for particular positive acts or spending on their part. Their goal is to inspire socially positive actions and rewards for these businesses and individuals (Rabinowitz, 2020). For entrepreneurs, companies, and private individuals, tax credits are one way to encourage community-based projects. They make it considerably easier to use cash on or donate to environmentally friendly causes. It is done by allowing people to return the majority of their earnings in tax breaks for various sorts of income.
References
Rabinowitz, P. (2020). Section 3. Using tax incentives to support community health and development. Web.
Jacoby, S. (2019). Potential flaws of Opportunity Zones loom, as do risks of large-scale tax avoidance. Center on Budget and Policy Priorities. Web.
Policy Link. (2020). Opportunity zones – Guiding principles and perspectives | Policy Link. Web.
Tax Foundation. (2020). Details and analysis of the 2017 Tax Cuts and Jobs Act. Web.
Tax Policy Center. (2020). What are opportunity zones, and how do they work? Web.
Theodos, B., Meixell, B., & Hedman, C. (2019). Did states maximize their opportunity zone selections? Web.
Watkins, E. (2017). The Republican tax plan stuck with a lengthy title. Web.