The entry of South Carolina Senator Tim Scott into the Republican presidential campaign could bring the idea of “Opportunity Zones” back to the policy debate. Scott has been a champion of the concept for years, including a successful push to have them included in the 2017 tax reform legislation.
Opportunity Zones, once called “enterprise zones,” have been a conservative staple at least since the era of Jack Kemp and Ronald Reagan. They are designed to provide targeted tax incentives to encourage businesses to locate in impoverished or underserved neighborhoods. Currently, there are at least 8,764 Opportunity Zones across the United States.
In recent years, the concept has fallen out of favor, with a number of studies suggesting that Opportunity Zones do little to generate new investment or create additional jobs. Specifically, evidence has suggested that the zones merely move businesses from one area to another and have primarily benefited landowners while doing little to benefit low-income communities. Landowners within the designated zones saw property values increase by as much as 50 percent, often at the expense of landowners just outside the zone. One study from the National Bureau of Economic Research found “little or no evidence of positive effects of the Opportunity Zone program on the employment, earnings, or poverty of zone residents.”
In effect, Opportunity Zones give governments the power to pick winners and losers through tax policy. As a result, they have opened the door to lobbying frenzies and can sometimes lead to corruption. In fact, in some cases, it appears that the areas chosen as Opportunity Zones were not necessarily those most in need, but already up-and-coming neighborhoods favored by politically connected developers. At their worst, Opportunity Zones can deteriorate into a bizarre amalgamation of central planning and crony capitalism.
In the last few months, however, a pair of new studies has suggested that there might be merit to the Opportunity Zone idea after all. The first, by University of California-Berkeley economist Harrison Wheeler, found that Opportunity Zones resulted in ““economically significant” levels of investment per capita.” Specifically, he found a nearly 20 percent increase in monthly development after an area was designated as an Opportunity Zone. The second, a Treasury Department study, also found that Opportunity Zones appear to be funneling investment to low-income areas.
We should be careful of how far we go in interpreting the new data. The authors of the Treasury report warn that “It is too soon to reach conclusions regarding the effectiveness of the OZ tax incentive.” Nevertheless, the new data is intriguing.
Opportunity Zones are likely a second-best solution to the larger problems of excessive taxation and regulation that discourage new investment and entrepreneurship, especially in those higher-risk, lower-return communities that need it most. They are certainly not the panacea envisioned by some conservatives.
Still, as we gather additional evidence, it is possible that Opportunity Zones may have a place in the anti-poverty toolbox. It is a public policy debate that we should continue to watch closely.