As part of the Tax Cuts and Jobs Act introduced in December, investors can direct their money to investments in low-income areas around the country, labeled “opportunity zones” and receive tax breaks. Under the program, taxpayers can invest in designated Opportunity Zones around the country, and reap the reward of deferred or reduced taxation on their gains. In addition, a portion of gains may even permanently avoid taxation, making the concept attractive to investors who foresee windfalls with the right investment opportunities.
The impetus behind the initiative is the desire to help economically-distressed communities by incentivizing people to invest in them. Through the IRS, investors can create a Qualified Opportunity Fund to invest in a designated opportunity zone, with the stipulation that 90% of assets in the Fund must be held in the opportunity zone. There are two views on opportunity zones. Proponents see a chance to pour much needed investment into communities that are struggling. They see underserved communities being rebuilt, and jobs being created in the places that need them the most. Opponents, however, see the potential displacement of existing businesses, reduced affordable housing, and employment opportunities brought into opportunity zones that don’t match the skill sets of low-income residents who reside in these areas.
So, who is right? It’s too early to tell. But one thing we do know is that we won’t actually be able to determine whether or not opportunity zones will have any positive impact if we are not tracking indicators such as: how many jobs are created; how many of those jobs are being given to low-income people in the community; whether or not minority business owners in the area are being given more business as a result of these projects; and much more. Without these types of analytics, it will be impossible to determine whether or not the program had a discernable impact, or if it was just another way to line the pockets of people who already own the lion’s share of economic resources.
Earlier this year, the U.S. Impact Investing Alliance and the Beeck Center for Social Impact and Innovation at Georgetown University announced a proposal for measuring the impact of investment into opportunity zones across America. Written with input from academics, nonprofits, investors, asset managers, community stakeholders and other market actors, the voluntary reporting framework seeks to understand whether funds that invest in economically distressed areas will have a positive, significant, and lasting impact. While the Treasury mulls what reporting is critical, and whether or not the agency truly has the authority to mandate it, AEO wants to reiterate the power of data. As an organization known for creating research-based solutions in the small business ecosystem we are confident that the right data will give the government, investors, and advocacy groups the ability to make assessments and implement critical changes if needed, to bring the intent of the legislation to fruition.
There’s no easy fix or magic solution to strengthening the areas around the country whose communities are struggling. But, we do know that entrepreneurship is a powerful weapon in combating wealth inequality in America. Using just the Black business community as an example, AEO’s research has shown that the median net worth for Black business owners is 12 times higher than Black non-business owners.As of 2017, there were 2.58 million Black-owned businesses in the United States, generating $150 billion in annual revenue and supporting 3.56 million U.S. jobs (U.S. Census). According to the 2012 Survey of Business Owners, 27.7 percent of all businesses in Mississippi and 27.6 percent of businesses in Georgia are Black-owned– more than one fourth of the businesses in each of those states. Currently, there are 100 designated opportunity zones in Mississippi and more than 250 in Georgia. That represents a significant opportunity for Black business owners that could see an increase of much-needed capital into their businesses. But it’s not just Black business owners that should be paying attention– there are also more than 227,000 microbusinesses in Mississippi and more than 905,000 in Georgia, many of whom may fall in the distressed areas that impact investors are considering.
What does all this mean? There is real potential for opportunity zones to make a lasting difference on underserved populations, but only if we are able to measure the actual impact in an efficient and useful manner. It starts with establishing clear priorities for the program, and ensuring that investors are just as vested in empowering OZ communities as they are in reaping profits from them. If we want opportunity zone efforts to achieve the intended goal of lifting distressed areas, we need to get capital into the hands of the entrepreneurs who are intentional about turning the tide of their local economies. Only nationwide data will show if that occurs as a result of the program. And if it doesn’t, then it’s all just another tax break for the wealthy.