Are Opportunity Zones Working as Intended?

Politicians continue to tout the benefits of opportunity zones, but economists continue to be skeptical. The findings from a new study underscore concerns that the Opportunity Zones program, while it may be welcomed by those directly benefiting from the program’s taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. breaks, may not broadly revitalize economically distressed communities.

Economists Alan Sage, Mike Langen, and Alex Van de Minne looked at the effect of opportunity zone designation on property prices. Their study finds that the Opportunity Zone program is associated with an increase in the price of depreciated property and vacant land within zones, all relative to property in census tracts that were not designated as opportunity zones. However, the authors do not find evidence that opportunity zone designation has had an impact on the price of all property within opportunity zones.

Opportunity zones are another iteration of a place-based incentive program, enacted late in 2017 by the Tax Cuts and Jobs Act. The program provides three capital gains taxA capital gains tax is levied on the profit made from selling an asset and is often in addition to corporate income taxes, frequently resulting in double taxation. These taxes create a bias against saving, leading to a lower level of national income by encouraging present consumption over investment. breaks to investors who transfer recently realized capital gains into certain investment funds within generally low-income census tracts designated as opportunity zones. These funds then invest these tax-advantaged resources in projects within zones with the goal of developing these economically distressed communities. While well-intentioned, decades of research on the effectiveness of place-based incentive programs is mixed, with some of it suggesting these programs fail to provide widespread development within the economically distressed communities they are supposed to develop.

Ideally, opportunity zone designation would result in economic development for a low-income census tract as a whole. The program would not just boost the rate of return on investments receiving tax breaks, but also result in development for properties not directly receiving tax breaks.

One way to see if development is occurring (or expected to occur) is to look at the price of different types of property within zones. If property and land values are increasing generally, it could be a sign that opportunity zone tax incentives are increasing productivity in a census tract as a whole. On the other hand, price increases only in the property most likely to directly benefit from tax breaks could be a sign that the program is simply providing a windfall to certain types of property without spurring broader development.

This particular study looked at the effect of opportunity zone designation on the price of three different types of property within opportunity zones—existing property, redevelopment property (or “depreciated properties likely to be redeveloped”), and vacant land. As the authors point out, in order to qualify for opportunity zone tax incentives, “properties must undergo a capital improvement at least equal to the initial acquisition expense within 30 months of purchase, thereby privileging new development and significant rehab.” In other words, the property most likely to qualify for the program’s tax breaks is redevelopment property and vacant land.

The authors found that opportunity zone designation is associated with a 14.2 percent increase in the price of redevelopment land, and a 20.9 percent increase in the price of vacant land. Yet the authors found no evidence of price increases in existing property within opportunity zones. The authors explain what this might mean:

If the tax benefit would spur the local economy, one would expect price increases for all properties, not just the ones getting the actual tax benefit. Instead, we find that only properties that benefit from the tax break – redevelopment properties and vacant land – see their prices increase. The tax break is essentially factored into the land price.

The authors conclude that their “findings cast doubt on the capacity of the (Opportunity Zones Program) to achieve its ostensible goal of creating value in low-income communities.”

While it is still very early on in the program’s life cycle to determine its overall effectiveness, this study suggests opportunity zones may not be working as intended.

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