Opportunity Zones were conceived as an innovative approach to spurring long-term private sector investments in low-income communities nationwide.
The Opportunity Zones provision is based on the bipartisan Investing in Opportunity Act, which was championed by Senators Tim Scott (R-SC) and Cory Booker (D-NJ) and Representatives Pat Tiberi (R-OH) and Ron Kind (D-WI), who led a regionally and politically diverse coalition of nearly 100 congressional cosponsors.
The concept was originally introduced in a 2015 paper, “Unlocking Private Capital to Facilitate Economic Growth in Distressed Areas,” to help address the persistent poverty and uneven recovery that left too many American communities behind. The idea has since been championed by a wide-ranging coalition of investors, entrepreneurs, community developers, economists, and other stakeholders.
In 2015, the Economic Innovation Group (EIG) – a bipartisan public policy firm – developed the Opportunity Zone concept, which was conceived as a systematic approach to helping address the uneven economic
recovery and persistent lack of growth that have left too many American communities behind. The concept was introduced in the Investing in Opportunity Act (IIOA) during the 114th Congress, and reintroduced
in the 115th Congress by Senators Tim Scott (R-S.C.) and Cory Booker (D-N.J.) and Congressmen Pat Tiberi (R-Ohio) and Ron Kind (D-Wis.), gaining nearly 100 congressional cosponsors in 2017. This is the first new community development tax incentive program enacted since the Clinton administration, providing an opportunity for mainstream private investors to support businesses and distressed communities. The
expectation is that Opportunity Funds will ease the execution of “impact investments” for investors, and tax benefits derived from these investments will incent participation in the Opportunity Zones Program.
The Opportunity Zone program was created through the Investing in Opportunity Act, which was nestled into the Tax Cuts and Jobs Act. In bipartisan support of the program, more than 100 legislators sponsored the bill across both houses of Congress. It has also been heavily championed by Senators Tim Scott and Cory Booker, the two Senators who introduced the Investing in Opportunity Act to the Senate, and Sean Parker, the ex-Napster entrepreneur who founded the Economic Innovation Group, an independent think tank that helped create the framework of the program.
The passage of the bill established two new Internal Revenue Code (IRC) sections, which outline the Opportunity Zone program: IRC sections 1400Z-1 and 1400Z-2. IRC section 1400Z-1 governs Opportunity Zones and IRC section 1400Z-2 governs Opportunity Funds.
The Opportunity Zone program was created to stimulate private investment in Opportunity Zone communities in exchange for capital gain tax incentives. Instead of dedicating taxpayer money to developing thousands of low-income census tracts across the US, this program aims to stimulate the investment of the estimated $6.1 trillion of unrealized private gains held by US households. In exchange for investing in communities within Qualified Opportunity Zones, investors can access capital gains tax incentives both immediately and over the long term.
Unlike existing programs designed to encourage private investment in low-income areas through tax advantages, the Opportunity Zone program is less restrictive, less costly, and less reliant upon government agencies to function. Existing programs, such as the New Markets Tax Credit (NMTC) Program and Low Income Housing Tax Credit (LIHTC) Program, are more limited in supply and subject to annual Congressional approval and/or tax credit allocation authority. Because the tax credit system limits the number of credits issued each year, it inherently limits the number of investors who can participate, and therefore the amount of money that can be invested into the development of a community under the program.
Opportunity Zones don’t operate through a tax credit program. Instead, Opportunity Zone designation and investment are governed through two Internal Revenue Code sections. This removes any limitation on the number of Opportunity Funds that can exist, making them more the product of an entirely new IRS rule that changes the tax treatment of capital gains than the subject of a more traditionally structured tax credit program.