The US is drawing private investors to depressed communities

When US President Donald Trump gave his inaugural address in spring 2017, he bellowed to the crowd that his election marked the end of a period in which “the establishment protected itself, but not the citizens of our country”. The president’s detractors wouldn’t all share that analysis, but many of them agree at least that his victory served as a reminder of the inequalities that persist in American society.

For Steve Glickman, CEO of the Economic Innovation Group (EIG) think tank, the America Trump leads is in fact “two Americas”. One is recovering from the recession, the other isn’t.

Now Trump has decided to act on an intervention, first proposed by the EIG, to boost investment into that second America. The “opportunity zones” program, buried in the tax bill the president signed into law last year, aims to bring a surge of big capital to left-behind locales.

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The US has experimented with place-based investment policies before, with mixed results. And some critics argue that the design of the new program could encourage rampant gentrification. So will opportunity zones heal divisions, or let them widen further?

In the money

The principle behind the policy is straightforward. State authorities propose economically distressed locations that need extra investment, subject to approval by the treasury secretary. Investors in these designated opportunity zones then put their cash into a new investment vehicle called an “opportunity fund”, which channels the money into businesses or property developments within the zone.

In return, investors are offered a set of tax breaks on their investments. For example, if the investor invests capital gains into an opportunity fund, they temporarily defer paying tax on the gains. Capital gains reaped from selling an opportunity zone investment after 10 years are exempt from tax.

Previous US attempts at trying to draw money into poorer places, such as the “empowerment zones” and “enterprise communities” introduced in 1993, didn’t just offer tax breaks for investors and businesses. They also gave government grants to be spent on initiatives such as skills training or welfare-to-work programmes. According to Brookings, empowerment zones proved expensive but saw some success, while there is insufficient evidence to judge the other policies by.

Opportunity zones, by contrast, get no government grant money, and investors have few hoops to jump through. The aim here is to bring a turbo charge of hard cash into places used to being overlooked.

The right places?

But this simplicity comes with risks. Adam Looney, a Brookings senior fellow, warned that the policy could become a “subsidy for gentrification”.

The opportunity zones program is intended to direct capital into poor places but does not require the development of inclusive housing or the retention of current residents within the zone. As such, Looney argued, the temptation for investors will be to put their money in already-gentrifying areas rather than the very poorest, and to promote the arrival of “higher-income professionals and the businesses that cater to them” even if it means pushing out locals.

This, Glickman retorted, is where state and city authorities come in. He said that they can use their existing powers to oversee development in order to restrict the growth of undesirable businesses or too much luxury housing. Meanwhile, he argued, the state of many of the communities designated as opportunity zones is desperate. “Their chief worry is not that there are too many people coming but that everybody is leaving," Glickman said.

An illustrative example of how the policy might feed into existing tensions over gentrification is Detroit, Michigan’s long-diminished former car capital, where pockets of tentative recovery sit alongside swathes of more profound desolation. Many of the opportunity zones proposed for the city by the state of Michigan are positioned in those better off areas. “It seems like you’re focusing on areas that aren’t impoverished at all,” one community advocate complained to the local Bridge Magazine.

For Sarah Pavelko, senior real estate manager at the Detroit Economic Development Corporation, a nonprofit that advised Michigan on where the city’s opportunity zones should be placed, controversy arises because selecting opportunity zones is different to selecting targets for other community development tools, which may be more focused on places with even greater poverty.

“We see this as helping markets that are just on the cusp of being competitive and attracting investment,” Pavelko said. The program, she argued, is not best directed at “an area where there’s no market”.

Pavelko is cautiously optimistic, and hopes the zones can bring new cash to places that are, in a US-wide context, still troubled. But she said there also needs to be more nationwide action on other issues like the lack of quality affordable housing, which blight the most deprived in her city and elsewhere.

Opportunity zones could bring fast cash to struggling places, but whether this comes with costs to poorer local residents could be down to authorities to manage. As for healing the two Americas, that will probably take more than one spate of investments.

(Picture credit: Flickr/Geoff Llerena)

Josh Lowe
josh.lowe@apolitical.co