An important milestone in America’s economic recovery was reached last month when the Treasury Department approved the last round of Opportunity Zone designations.
The Tax Cuts and Jobs Act of 2017 created a new financial product called “Opportunity Funds,” which allow investors to defer and reduce their capital gains tax bills in exchange for investing in projects located in economically distressed areas referred to as Opportunity Zones.
An initial review of the 8,700 designated Opportunity Zones reveals just how far removed these communities are from the national economic recovery. The average unemployment rate is a stubbornly high 14.4 percent. These communities typically have 38 percent of prime age adults out of the workforce — nearly 10 points higher than the country as a whole. Median household income is lower, and these areas are twice as likely as other communities to be located in a county where (at the very least) 20 percent of the population has been living below the poverty line for 30 years.
While it’s clear that these communities are in dire need of investment to help fuel their revitalization, there is no guarantee that investors will materialize. State and local leaders need to quickly implement policies to make their zones more attractive to investors.
These policies should include the development of an investment prospectus by each Opportunity Zone to showcase their distinctive assets and investible projects. Community leaders should also make sure that Zone-related infrastructure is high quality and meets performance standards, with enough affordable housing for workers.
Other goals should include:
- Combine and Align Incentives
States and cities can increase the impact and reach of Opportunity Fund investments by aligning existing state economic development incentives and anti-poverty programs with Opportunity Zones. For example, Tennessee Governor Bill Haslam’s broadband initiative could bring connectivity to Opportunity Zones serving new technology entrepreneurs. As another example, the Colorado Parent Employment Program (CO-PEP) – which helps non-custodial parents overcome barriers to employment – could be used within the state’s Opportunity Zones as a way to hire more Zone residents for newly created jobs.
Opportunity Fund investments could be combined with other government funding by using the Opportunity Zone designation as a category defining need, augmenting traditional measures like poverty thresholds or Title I education funding for low-income students. For example, existing educational programs within schools located in the Zones would get priority for competitive grants allocated by the federal Every Student Succeeds Act.
- Human Capital Attracts Financial Capital
Governors and mayors will need to strengthen K-12, college, and career pathways to foster business growth in Opportunity Zones. Finding skilled workers tops the needs of almost every employer survey, from the National Federation of Independent Business to the Business Roundtable. As AEI economist Eric Hanushek has shown, the economic gains to states from improving their schools are enormous and justify significant changes to state policies.
New school models offer students the chance to learn technical skills and explore science programs. Purdue University launched a charter school in Indianapolis to prepare low-income and minority students for STEM careers. Maryland recently provided planning grants for six P-TECH schools in the state that offer students the chance to graduate with a high school diploma and a two-year associate degree.
States should use the flexibility offered by the 2013 Workforce Innovation and Opportunity Act (WIOA) to align these funds with projects in Opportunity Zones. Services could include job search assistance, career counseling, and training to reflect local economic needs. States should also expand apprenticeship programs and other work-based learning opportunities. Wisconsin could use its Fast Forward initiative – a program to train and retain highly skilled workers – to offer grants to Opportunity Zone employers who provide six months of work-based training. South Carolina’s celebrated Apprenticeship Carolina provides a $1,000 employer tax credit for every worker hired as a registered apprentice, an approach that could be duplicated in Opportunity Zones.
- Regulatory Spring Cleaning
States and cities can make Opportunity Zones more attractive for investment by reducing burdensome regulations. Kentucky’s Red Tape Reduction Initiative, for example, is reviewing 5,000 regulations to eliminate duplicative or unnecessary ones and simplify or modernize others.
One area of growing importance is the reform of occupational licensing. Overly burdensome requirements create barriers that slow economic mobility, depress wages, and inhibit worker mobility across state lines. In Arizona, Governor Doug Ducey is requiring all state licensing boards to establish minimal requirements for occupational licenses. The executive order also contains elements of criminal justice reform by forcing boards to disclose how they handle applications by people with criminal convictions.
- States Should Open Up
Officials in economic development agencies should share the information they have with their counterparts in other cities and states, as well as with the growing number of organizations dedicated to helping identify best practices for Opportunity Zones. Increased collaboration would help identify investment opportunities, economic trends, and state-approved “shovel-ready” or “certified” sites.
Governors can also direct state agencies to collaborate and share data with each other to better meet workforce needs. For example, the Indiana Knowledge Network – a partnership between the Governor’s Office and four state agencies – has successfully implemented cutting-edge data techniques to analyze labor market trends and identify the skills students need for future jobs.
- States Should Leapfrog, Not Just Catch Up
Finally, state and community leaders should establish conditions that help communities in need catch the next wave of technological and economic innovation. The “leapfrog model,” takes its name from the distribution of mobile phones in African populations that lacked landlines. “Leaping” to the front of technological innovation unleashed an array of services (like mobile banking) that improved the quality of life for previously underserved populations.
State and city leaders can take a similar approach and use their Opportunity Zones as pilots for new technologies. For example, autonomous vehicle pilot programs could be expanded to help workers with disabilities connect with new employment opportunities in some localities, while industrial 3D printing could revitalize manufacturing in others.
The adage “good things come to those who wait” does not apply to the work facing America’s governors and mayors. In this case, good investments will come to those who hustle and adopt the boldest policies to best position their Opportunity Zones to succeed.
John Bailey is a visiting fellow at the American Enterprise Institute, a former White House domestic policy advisor who helped create President Bush’s Opportunity Zone proposal, and an advisor to The Governance Project.
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