The Opportunity Zone Program and Who It Left Behind (U.S. House Committee on Ways and Means, Subcommittee on Oversight)

Hearing	The Opportunity Zone Program and Who It Left Behind
Committee	U.S. House Committee on Ways and Means, Subcommittee on Oversight
Date	November 16, 2021

 

Hearing Takeaways:

• The Opportunity Zone Program: The hearing focused on the Opportunity Zone program, which is a place-based tax incentive to encourage investments in certain low-income communities (known as Opportunity Zones). The program encourages such investments through providing investors with capital gains tax relief if their investments met the program’s criteria. Under the program, states, U.S. territories, and the District of Columbia are provided with the power to designate where Opportunity Zones would be located within their states.
  • Characteristics of Opportunity Zones: Ms. Lucas-Judy testified that the nearly 9,000 census tracts designated as Opportunity Zones were home to more than 10 percent of the U.S.’s population and had lower income, higher poverty, and larger non-White populations than other eligible but non-designated census tracts. She noted how IRS data indicated that more than 6,000 funds consisting of 18,000 investors held almost $29 billion in qualified property for the Opportunity Zone program in the 2019 tax year.
  • Opportunity Zone Data Issues: Ms. Lucas-Judy remarked that Opportunity Zone program data were limited due to the U.S. Internal Revenue Service’s (IRS) processing backlogs (which the COVID-19 pandemic contributed to). Del. Stacy Plaskett (D-VI) expressed concerns over how there did not exist Opportunity Zone program data on the smaller U.S. territories (including the U.S. Virgin Islands).
• Support for the Opportunity Zone Program: There was general support for the Opportunity Zone Program. However, Subcommittee Republicans, Sen. Tim Scott (R-SC), and Mr. Persinger were more in enthusiastic in their support of the program. They contended that the program was supporting substantial investments in underserved communities.
  • Ease of Navigation: Mr. Persinger discussed how the Opportunity Zone program did not require his organization to chase scarce resources from the federal government or a community development entity with no ties to his community. He commented that this dynamic was unique when compared to other tax credit programs and mentioned how his organization had been unsuccessful in its numerous attempts to make use of the New Markets Tax Credit (NMTC) program. He also noted how the Opportunity Zone program did not entail any extended application and funding cycles, which meant that Opportunity Zone projects did not need to await on approvals from the federal government. 
  • Long-Term Interest from Investors: Mr. Persinger further stated that the Opportunity Zone program’s ten-year hold period provided Opportunity Zone investors with a vested interest in the long-term success of Opportunity Zone communities.
• Concerns regarding the Opportunity Zone Program: Subcommittee Democrats, Dr. Theodos, and Mr. Wessel expressed concerns that the Opportunity Zone program’s current structure provided an overly generous tax benefit to wealthy investors and did not always spur investments in the neediest areas. They called for enacting reforms to the program.
  • Concentration of Benefits Amongst Wealthy Investors: Subcommittee Democrats, Dr. Theodos, and Mr. Wessel noted how wealthy Americans were the main beneficiaries of the Opportunity Zone program due to its capital gains structure.
  • Concerns about Program Targeting: Subcommittee Democrats, Dr. Theodos, and Mr. Wessel raised concerns that Opportunity Zone program investments were mainly going to areas that were already ripe for development and that the program was simply boosting investment returns for wealthy investors. Dr. Theodos noted how research from the U.S. Joint Committee on Taxation (JCT) had found that a small percentage of Opportunity Zones had received the vast majority of all Opportunity Zone investments. 
  • Lack of Qualifications Needed to Patriciate in the Program: Subcommittee Democrats, Dr. Theodos, and Mr. Wessel asserted that the Opportunity Zone program imposed few conditions on the parties seeking to obtain capital gains relief from the program. They highlighted how traditional metrics of community benefit, including job and new business creation or the addition of affordable housing units, were not required to qualify for the Opportunity Zone program’s capital gains tax relief. Mr. Wessel stated that the absence of these requirements made it difficult to assess whether investments were reaching the neediest communities and were enabling the program to support the development of hotels, self-storage facilities, condominiums, and high-end student housing in university towns.
  • Lack of Reporting Conditions Imposed upon Program Participants: There existed widespread concerns at the hearing over the current lack of reporting requirements for Opportunity Zone projects. Rep. Ron Kind (D-WI) explained that the Tax Cuts and Jobs Act of 2017 (TCJA) did initially contain project reporting requirements that were later stripped out due to budget reconciliation rules. Sen. Tim Scott (R-SC) expressed support for robust reporting requirements for Opportunity Zone investors and mentioned how he had introduced bipartisan legislation that would establish such requirements.
  • Lack of Community Involvement in Making Program Allocations: Rep. Steven Horsford (D-NV) raised concerns over the Opportunity Zone program’s lack of requirements for community involvement. He noted how investors participating in the program did not need to inform community, local, state, or federal officials of their Opportunity Zone investments. He commented that this often led to projects that did not meet the actual needs of communities.
  • Politicized Nature of Opportunity Zone Designation Process: Rep. Kind also remarked that the Opportunity Zone census tract designation process had been overly politicized and asserted that his Congressional District had received fewer designated census tracts than it deserved. He expressed interest in working to reform the Opportunity Zone census tract designation process.
  • Weakness of the Program’s Incentive: Dr. Theodos contended that the ten-year time horizon of Opportunity Zone investments was not long enough for many beneficial projects, such as affordable housing, health care centers, and schools. He argued that the Opportunity Zone program provided relatively weak incentives for investors that led investors to over focus on real estate and not focus enough on other beneficial projects.
  • Inability to Support Affordable Housing: Dr. Theodos also asserted that the Opportunity Zone program was ill-suited for encouraging the development of affordable housing. He noted how Opportunity Zone program participants wanted their investments to appreciate in value so that they could take advantage of reduced capital gains taxes. He commented however that the appreciation in value of affordable housing would undermine the housing’s affordable nature.
• Recommendations for Improving the Opportunity Zone Program: Subcommittee Members and the hearing’s witnesses made several recommendations for improving the Opportunity Zone program.
  • Requiring the U.S. Department of Treasury Collect Program Data and Assess Program Performance: Ms. Lucas-Judy and Mr. Wessel recommended that Congress provide the U.S. Department of Treasury with the authority and responsibility to collect Opportunity Zone program data and report on an Opportunity Zone’s performance, as well as identify questions about the program’s effects that the U.S. Department of Treasury ought to address. Ms. Lucas-Judy indicated that no legislation had been introduced to date that would do this in the current 117th Congress.
  • Having the IRS Address Risks Posed by Certain Types of Investors and Funds: Ms. Lucas-Judy recommended that the IRS address the risks caused by limited data ability and research compliance risks associated with certain types of investors and funds. She discussed how the U.S. Government Accountability Office (GAO) had found risks for the Opportunity Zone program resulting from certain complex transactions and taxpayers. She noted that while the IRS Small Business/Self Employed (SB/SE) Division was the lead overseer of the Opportunity Zone program, she indicated that many Opportunity Zone funds and investors typically fell under the purview of the IRS Large Business and International (LB&I) Division.
  • Bolstering Eligibility and Certification Requirements for Opportunity Zone Projects: Dr. Theodos and Mr. Wessel called for narrowing the types of projects that would be eligible for the Opportunity Zone program. Dr. Theodos also recommended that Congress develop a more rigorous certification process for Opportunity Zones and reduce the ability of funds to self-certify their qualifications for Opportunity Zone projects.
  • Conditioning Program Participation on Certain Outcomes and Community Input: Rep. Lloyd Doggett (D-TX) and Mr. Wessel expressed support for linking Opportunity Zone tax breaks with certain requirements or incentives (such as job creation and affordable housing construction).
  • Preferencing Mission-Controlled Investment Vehicles: Rep. Judy Chu (D-CA) and Dr. Theodos suggested that Congress give preference to Community Development Financial Institutions (CDFIs) and other mission-controlled vehicles to participate in the Opportunity Zone program.
  • Increasing the Flexibility of Investments: Rep. Chu, Del. Stacy Plaskett (D-VI), and Dr. Theodos expressed interest in reforming the Opportunity Zone program to enable community stakeholders to participate in Opportunity Zone investments. Dr. Theodos commented that this participation would entail alternative financial structures and vehicles (such as refundable tax credits and flexible debt structures).
  • Expanding Opportunity Zone Eligibility to Census Tracts without Population: Rep. Dan Kildee (D-MI) expressed support for allowing census tracts without population to qualify for the Opportunity Zone program. He commented that this policy change could spur redevelopment on abandoned manufacturing and industrial sites within his Congressional District.

Hearing Witnesses:

Panel I:

1. Sen. Tim Scott (R-SC)

Panel II:

1. Ms. Jessica Lucas-Judy, Director, Strategic Issues, U.S. Government Accountability Office
2. Dr. Brett Theodos, Senior Fellow, Urban Institute
3. Mr. David Wessel, Director, Hutchins Center on Fiscal and Monetary Policy & Senior Fellow, Brookings Institution
4. Mr. John Persinger, CEO, Erie Downtown Development Corporation

Member Opening Statements:

Subcommittee Chairman Bill Pascrell (D-NJ):

• He stated that the Opportunity Zone program was the latest among a series of efforts meant to promote economic growth, investment, and job creation in distressed communities through providing federal tax benefits.
  • He commented that the U.S. had experienced “limited success” in its previous efforts to leverage the tax system to achieve the aforementioned economic goals.
• He discussed how the Opportunity Zone program was based off of a proposal from Sen. Tim Scott (R-SC) and Sen. Cory Booker (D-NJ) to create a new place-based tax incentive to encourage investments in certain low-income communities (known as Opportunity Zones).
• He stated that the Opportunity Zone program was different from previous programs in that it focused on the lack of capital investment in poor communities.
• He indicated that the Opportunity Zone program provided “generous” capital gains tax relief for investments in areas chosen by a state’s governor.
  • He commented that areas of his hometown of Patterson, New Jersey were prime candidates for participation in the program.
• He stated however that the Opportunity Zone program had started with “some embarrassing hiccups” and alleged that Opportunity Zone designations had been used to benefit the friends of politicians.
• He also asserted that the Opportunity Zone program provided few conditions on the parties seeking to obtain capital gains tax relief from the program.
  • He added that there did not exist a cap on the amount of capital gains tax relief that one could obtain through the program.
• He discussed how traditional metrics of community benefit, including job and new business creation or the addition of affordable housing units, were not used for determining eligibility for the Opportunity Zone program’s capital gains tax relief.
  • He commented that the failure to consider these metrics had made it difficult to assess whether investments were reaching the neediest communities.
• He remarked that the Opportunity Zone program needed more reporting requirements in order to ensure that the program met its stated objectives.
• He raised concerns that Opportunity Zone program investments were mainly going to areas that were already ripe for development and that the program was simply boosting investment returns for wealthy investors.
• He also mentioned how the GAO had recently issued a second report on the Opportunity Zone program and expressed his interest in looking into the program’s effectiveness.

Subcommittee Ranking Member Mike Kelly (R-PA):

• He stated that the Opportunity Zone Program was based off of a bipartisan proposal and was intended to revive economically distressed communities.
• He remarked that Opportunity Zones were now on track to spur investment into thousands of communities and indicated that the Opportunity Zone program was responsible for more than $29 billion in private money investments in 2019 alone. 
  • He commented that the program remained very nascent and that IRS data on the program was still incomplete.
• He asserted however that the currently available data on the Opportunity Zone program indicated that the program was successful.
  • He expressed frustration with the composition of the witness panel and argued that it was biased against the program.
• He also mentioned how Congress had worked in a bipartisan fashion to develop legislation that would add more reporting requirements for parties engaging in Opportunity Zone transactions.
• He then discussed how the Erie Downtown Development Corporation was successfully leveraging the Opportunity Zone program to support economic development within his Congressional District.
• He concluded by calling on Congress to work on strengthening the Opportunity Zone program.

Panel I Opening Statements:

Sen. Tim Scott (R-SC):

• He first noted how governors were provided with the power to designate where Opportunity Zones would be located within their states.
• He also expressed support for robust reporting requirements for parties that made use of the Opportunity Zone program.
  • He mentioned how he had introduced the Improving and Reinstating the Monitoring, Prevention, Accountability, Certification, and Transparency Provisions of Opportunity Zones (IMPACT) Act, which establish such reporting requirements for Opportunity Zone projects.
• He then remarked that the U.S. should not rely upon government spending programs to combat poverty and contended that promoting investments in underserved communities constituted a better approach for reducing poverty.
  • He commented that the Opportunity Zone program sought to facilitate such investments.
• He stated that it was easier to measure the results of policies that promoted investments in underserved communities and mentioned how the GAO had found that the Opportunity Zone program had led to $29 billion in investments in such communities.
• He further indicated that the gentrification rate in Opportunity Zones was less than 5 percent, which meant that the program was actually benefiting the residents of these areas.
  • He discussed how local leaders across the U.S. had touted the benefits for their residents resulting from the program.
• He also mentioned how the GAO had found that Opportunity Zones had lower income, higher poverty, and larger non-White communities within their census tracts.
• He then remarked that the Opportunity Zone program created incentives for local businesses to invest in their communities and improved education opportunities for the residents of these areas.

Panel II Opening Statements:

Ms. Jessica Lucas-Judy (U.S. Government Accountability Office):

• She discussed how the GAO’s analysis had found that the nearly 9,000 census tracts designated as Opportunity Zones were home to more than 10 percent of the U.S.’s population and had lower incomes, higher poverty rates, and larger non-White populations than other eligible but non-designated census tracts.
• She remarked however that not much was currently known about Opportunity Zone investments.
• She noted how IRS data indicated that more than 6,000 funds held almost $29 billion in qualified property for the Opportunity Zone program in the 2019 tax year.
  • She added that almost 18,000 investors reported being invested in these funds in the 2019 tax year.
• She stated however that the aforementioned figures on 2019 Opportunity Zone investments were based on partial data.
• She remarked that Opportunity Zone program data were limited in part due to longstanding issues that were not unique to Opportunity Zones.
  • She indicated that the IRS’s decisions regarding the transcriptions of paper-filed tax returns contributed to these data issues.
  • She also mentioned how the COVID-19 pandemic had led to delays in tax reporting, which contributed to a processing backlog.
• She also stated that there existed limited data for assessing the outcomes of the Opportunity Zone program and mentioned how GAO had suggested in October 2020 that Congress consider having the U.S. Department of Treasury collect data to evaluate outcomes within the program.
  • She indicated that no legislation had been introduced to date that would address the issue in the current 117th Congress.
• She then mentioned that while the IRS had developed a plan to ensure Opportunity Zone program compliance, she noted that the IRS’s plan partially relied upon matching data that were not readily available for analysis.
• She testified that the GAO had recommended that the IRS assess and mitigate risks caused by this limited data and indicated that the IRS had agreed to implement this recommendation.
• She further discussed how the GAO had found risks for the Opportunity Zone program resulting from certain complex transactions and taxpayers.
  • She noted that while the IRS SB/SE Division was the lead overseer of the Opportunity Zone program, she indicated that many Opportunity Zone funds and investors typically fell under the purview of the IRS LB&I Division.
• She mentioned how the GAO had recommended that the IRS research and mitigate the aforementioned risks and testified that the IRS had “generally agreed” with these recommendations.
• She concluded her opening statement by listing the GAO’s recommendations for Congress and the IRS for improving the integrity of the Opportunity Zone program.
  • She recommended that Congress provide the U.S. Department of Treasury with the authority and responsibility to collect Opportunity Zone program data and report on the performance of Opportunity Zones, as well as identify questions about the program’s effects that the U.S. Department of Treasury ought to address.
  • She also recommended that the IRS address the risks caused by limited data ability and the research compliance risks associated with certain types of investors and funds.

Dr. Brett Theodos (Urban Institute):

• He first discussed how rural areas tended to receive significantly smaller investments on a per-person basis as compared to urban areas, Black and Latino businesses received very low percentages of revenue relative to their respective shares of the population, and wealth was increasingly concentrated within the U.S. amongst a small share of locations and people.
• He asserted that Opportunity Zones were not helping to reverse the aforementioned trends and noted how research from the JCT had found that just one percent of Opportunity Zones had received nearly half of all Opportunity Zone investments.
  • He added that five percent of Opportunity Zones had received nearly 90 percent of Opportunity Zone investments.
• He stated that the areas that received Opportunity Zone investments were better off than the areas that did not receive these investments.
  • He noted how JCT data showed that Opportunity Zone capital had been spatially concentrated and gravitated towards census tracts with higher education levels, incomes, and population growth.
• He remarked that the fundamental design of the Opportunity Zone incentive was biased against smaller and rural projects, operating businesses, and the types of mission aligned projects that could deliver benefits.
• He stated that the Opportunity Zone program disadvantaged projects that could best help underserved communities in four key ways.
  • He commented that the Opportunity Zone tax exemption was structured to provide the largest financial benefits to projects that provide the largest returns (rather than the largest impacts).
  • He asserted that the Opportunity Zone incentive did little to broaden community investing or ownership.
  • He contended that the ten-year time horizon of Opportunity Zone investments was not long enough for many beneficial projects, such as affordable housing, health care centers, and schools.
  • He argued that the Opportunity Zone program provided relatively weak incentives for investors that led investors to over focus on real estate and not focus enough on other beneficial projects.
• He remarked that impactful Opportunity Zone projects had tended to rely upon “highly altruistic” investors or have drawn in substantial government subsidies from other sources.
• He recommended that Congress develop a more rigorous certification process for Opportunity Zones and reduce the ability of funds to self-certify their qualifications for Opportunity Zone projects.
  • He added that Congress could give preference to CDFIs and other mission-controlled vehicles to participate in the Opportunity Zone program.
• He also stated that Congress could adopt legislation to provide a more narrowly defined set of needs for Opportunity Zone-eligible projects.
  • He suggested these needs could include real estate where the operating business is the owner-occupant or affordable housing.
• He further recommended that Congress consider introducing a “but for” or substitution test for Opportunity Zone investments, deepening the step-up in basis with very strict conditions for Opportunity Zone investments, creating a refundable tax credit for parties seeking to invest in their own communities, and requiring basic transaction level reporting on Opportunity Zone projects.
• He then remarked that the U.S. Department of Treasury should consider instituting a rigorous certification process for Opportunity Zone funds, empowering a subagency with staff to oversee Opportunity Zone funds, and requiring transaction level reporting through the certification process.
• He concluded that the Opportunity Zone program was currently inefficient in terms of its support for underserved communities in accessing capital markets.

Mr. David Wessel (Brookings Institution):

• He noted that while the Opportunity Zone program was meant to spur economic growth and job creation in low-income communities, he contended that the program was largely failing to achieve these objectives.
  • He acknowledged however that there were places where the Opportunity Zone program was meeting its stated objectives.
• He noted how there were no laws or regulations that required Opportunity Zone investors to put their money into census tracts that were most in need of capital or into projects that would benefit the people that lived within the Opportunity Zones.
• He stated that there existed little data on where Opportunity Zone investments were actually occurring.
• He mentioned how the JCT had found that Opportunity Zone investments had tended to go to a narrow subset of census tracts that were already improving prior to the TCJA’s implementation.
  • He called this situation unsurprising given how most investors tended to seek to obtain high returns at low risks (rather than high social impact).
• He stated that there existed no requirements or incentives for Opportunity Zone funds to create new quality jobs for Opportunity Zone residents or increase the supply of affordable housing within a given Opportunity Zone.
• He commented that this absence of requirements and incentives had led to the development of hotels, self-storage facilities, condominiums, and high-end student housing in university towns.
  • He explained that areas of university towns were often eligible for Opportunity Zone investments because students tended to have very low incomes.
• He remarked that the U.S. needed better data regarding the Opportunity Zone program and that this data should be made publicly available.
  • He commented that the U.S. Department of Treasury could demand better data from Opportunity Zone program participants or Congress could require the U.S. Department of Treasury to collect this data.
• He also contended that the U.S. should revisit Opportunity Zone designations and mentioned how the GAO had found that half of U.S. states and territories would like to change the census tracts designated as Opportunity Zones.
• He stated that the U.S. must limit the types of projects that could take advantage of the Opportunity Zone program and commented that the program should not support self-storage facilities or high-end student housing.
  • He called on Congress to consider bigger tax incentives for projects located within the most economically depressed communities.
• He lastly suggested that the U.S. link Opportunity Zone tax breaks with requirements or incentives for the hiring and training of Opportunity Zone residents.

Mr. John Persinger (Erie Downtown Development Corporation):

• He remarked that Opportunity Zones had been the “single most impactful federal policy” for his city of Erie, Pennsylvania.
• He discussed how his organization, the Erie Downtown Development Corporation, and its partners were investing more than $100 million to develop projects within Erie over the next three years.
  • He stated that these projects would lead to new and revitalized space, the restoration of historic properties, new residential units, new businesses, new jobs, and a grocery store located within a U.S. Department of Agriculture (USDA) designated food desert.
• He testified that $40 million of this $100 million in investments would come from Opportunity Zone funds.
• He discussed how Erie had experienced deindustrialization and a shrinking population for decades and commented that these trends left the community with numerous blighted properties.
• He remarked that the Opportunity Zone program was very beneficial to Erie and asserted that the program was superior to other types of federal programs.
• He stated that the Opportunity Zone program did not require his organization to chase scarce resources from the federal government or a community development entity with no ties to the Erie community.
  • He commented that this dynamic was unique when compared to other tax credit programs and mentioned how his organization had been unsuccessful in its numerous attempts to make use of the New Markets Tax Credit (NMTC) program.
• He also noted how the Opportunity Zone program did not entail any extended application and funding cycles, which meant that Opportunity Zone projects did not need to await on approvals from the federal government.
  • He stated that this feature of the Opportunity Zone program enabled his organization to swiftly pursue development projects.
• He remarked that the Opportunity Zone program provided flexibility for communities, which enabled communities to attract investments that best met their needs.
• He also discussed how Opportunity Zone projects were easier to navigate and did not require the expensive consultants, lawyers, and accountants that were needed to apply for tax credit programs.
  • He testified that his organization had previously spent significant amounts of money on consultants, lawyers, and accountants to make use of the Federal Historic Preservation Tax Incentives program.
• He further stated that the Opportunity Zone program’s ten-year hold period provided Opportunity Zone investors with a vested interest in the long-term success of Opportunity Zone communities.
• He lastly remarked that Opportunity Zones were having an underreported economic impact in that these areas created construction jobs, supported new workforce housing opportunities, and provided an economic boost for school districts, cities, and counties.

Congressional Question Period:

Subcommittee Chairman Bill Pascrell (D-NJ):

• Chairman Pascrell noted how the GAO’s October 2020 report on the Opportunity Zone program had found there was insufficient data available for evaluating Opportunity Zone performance. He asked Ms. Lucas-Judy to address why sufficient data was not being collected on the Opportunity Zone program. He also asked Ms. Lucas-Judy to address how the Opportunity Zone incentive compared to similar tax incentive programs.
  • Ms. Lucas-Judy first noted that while some data on the Opportunity Zone program was being collected and reported to the IRS, she indicated that this data was not necessarily being transcribed or being provided in an electronic format. She commented that the failure to transcribe the data or provide the data in an electronic format rendered the data difficult to evaluate. She also mentioned how there existed some privacy concerns surrounding federal taxpayer data, which made it difficult to report this information at the census tract or project level. She then discussed how outcomes data for Opportunity Zone projects were not being reported and noted how no federal agencies had been tasked with evaluating the outcomes of these projects. She recommended that Congress consider tasking the U.S. Department of Treasury with collecting Opportunity Zone outcomes data and reporting this data. She further stated that Congress should specify the information and goals for the Opportunity Zone program that ought to be collected and evaluated.
• Chairman Pascrell then asked Mr. Wessel to indicate whether the Opportunity Zone program ought to be repealed.
  • Mr. Wessel expressed doubts that there would exist the political will to repeal the Opportunity Zone program given the program’s popularity with mayors and governors. He remarked that the U.S. ought to first work to see if the Opportunity Zone program could be fixed. He stated that the U.S. should repeal the Opportunity Zone program if it were to conclude that the program cannot be fixed.
• Chairman Pascrell then asked Dr. Theodos to expand on his recommendations that the U.S. Department of Treasury could immediately take in order to improve the Opportunity Zone program.
  • Dr. Theodos remarked that the U.S. Department of Treasury ought to develop a certification process for the Opportunity Zone program. He asserted that such a certification process would be consistent with the TCJA’s original intent. He noted how the Trump administration had elected to create a self-certification process for Opportunity Zone investors. He stated that a robust certification process for the Opportunity Zone program would ensure that the program was actually achieving its goals.
• Chairman Pascrell then noted how Mr. Wessel had previously been critical of efforts to use the Opportunity Zone program for certain types of activities that produced little or no benefits for Opportunity Zone residents. He asked Mr. Wessel to indicate whether the list of prohibited activities within the Opportunity Zone program ought to be expanded. He specifically mentioned how former New Jersey Governor Chris Christie had led an Opportunity Zone project to develop a four-story self-storage facility. He asked Mr. Wessel to indicate whether this type of project ought to be disallowed.
  • Mr. Wessel stated that the four-story self-storage facility project described by Chairman Pascrell ought to be disallowed. He noted how Congress had only made certain types of projects ineligible for Opportunity Zone program participation, which were golf courses, country clubs, massage parlors, hot tub facilities, racetracks, other gambling facilities, and liquor stores. He then mentioned how there was an Opportunity Zone fund that was currently raising money to acquire large inventories of computers to engage in cryptocurrency mining. He stated that there were many Opportunity Zone projects that were not creating jobs and therefore should not receive taxpayer subsidies. He remarked that Opportunity Zone projects ought to benefit the communities in which they were located. He stated that appropriate Opportunity Zone projects included affordable housing developments and small businesses.

Subcommittee Ranking Member Mike Kelly (R-PA):

• Ranking Member Kelly remarked that the Opportunity Zone program’s objective was to encourage investments in properties that would otherwise be unattractive for investment. He then discussed how the Erie Downtown Development Corporation’s Opportunity Zone projects would generate economic activity and tax revenue. He asked Mr. Persinger to discuss how his organization’s Opportunity Zone projects were benefiting Erie and driving economic activity to a previously underserved area.
  • Mr. Persinger testified that his organization had originally paid $176,000 in property taxes on the 12 projects that it was developing. He stated that his organization anticipated that the property taxes on these projects would increase to between $2.3 million and $2.5 million when the projects were completed. He stated however that this increase was suboptimal because it meant that the properties would appraise at only 65 percent of what was being spent on them. He remarked that a property should appraise for 100 percent of what was being spent to acquire and transform said property in a healthy market. He remarked that the Opportunity Zone program was necessary for his organization to make its projects economically viable. He testified that his organization had repeatedly attempted to qualify for the NMTC program and indicated that all of these attempts had been unsuccessful. He stated that the Opportunity Zone program had enabled his organization to obtain a large amount of development funding within a very short period of time. He concluded that the Opportunity Zone program supported local jobs, transformed infrastructure, and supported all levels of government.

Rep. Judy Chu (D-CA):

• Rep. Chu expressed interest in identifying ways that Congress could reform the Opportunity Zone program to ensure that small businesses could better access the program. She noted how small businesses had only received $680 million of the $20 billion that have been invested in Opportunity Zones. She mentioned how Dr. Theodos had contended that the Opportunity Zone program’s ten-year investment window was too long for attracting investors to small business investments. She asked Dr. Theodos to discuss the changes that ought to be made to the Opportunity Zone program in order to encourage investments in small businesses. She also asked Dr. Theodos to indicate whether Small Business Investment Companies (SBICs) or CDFIs would constitute good vehicles for Opportunity Zone investments.
  • Dr. Theodos first noted how three states accounted for 75 percent of venture capital investments. He remarked that the U.S. therefore needed publicly supported programs to promote small business investments and commented that Opportunity Zones could support these investments. He then stated that the U.S. needed to reform the fundamental structure of the Opportunity Zone incentive. He suggested that the U.S. consider enabling small business investors to make use of debt with equity-like features, convertible debt, and debt with royalties.
• Rep. Chu then discussed how CDFIs had been successful in distributing Paycheck Protection Program (PPP) funds to small businesses during the COVID-19 pandemic. She noted that while many CDFIs had expressed interest in participating in the Opportunity Zone program, she stated that CDFIs had found the program was ill-suited for many types of neighborhood revitalization programs. She asked the witnesses to discuss how Congress could better leverage CDFIs to ensure meaningful investments within Opportunity Zones.
  • Dr. Theodos mentioned how a “few” CDFIs were currently engaged in successful Opportunity Zone investments. He stated however that most CDFIs had determined that the Opportunity Zone program was not a good fit for their business models. He suggested that the Opportunity Zone program could be reformed to give preference to mission-driven actors through the certification process. He also stated that the Opportunity Zone program could allow for equity investments into the mission-driven actors (or vehicles that they control) and provide more flexibility with respect to payment, exit, and debt structures. He elaborated that debt with equity-like features could be permitted.
• Rep. Chu then noted how wealthy Americans with capital gains had realized the vast majority of the tax benefits stemming from Opportunity Zone investments. She stated that the Opportunity Zone program had failed to support investments from community stakeholders. She noted how Dr. Theodos had suggested that Congress provide a refundable tax credit for parties seeking to invest in their own communities. She asked Dr. Theodos to address why such a refundable tax credit would benefit the investments from traditionally underrepresented groups (including women, immigrants, and minorities).
  • Dr. Theodos noted how 94 percent of taxable capital gains were held by households making over $100,000 annually. He remarked that the U.S. should work to enable Opportunity Zone residents to become financially involved within their communities, which would necessitate alternative financial structures and vehicles (such as refundable tax credits). He asserted that the current capital gains tax structure restricted participation in the Opportunity Zone program to the wealthiest Americans.

Rep. Jackie Walorski (R-IN):

• Rep. Walorski discussed how the Opportunity Zone program was benefiting underserved areas within her state of Indiana. She expressed her disappointment with the hearing and stated that the hearing was seeking to undermine confidence in the program. She then noted how the GAO had found statistically significant differences between census tracts that were designated as Opportunity Zones and census tracts that were eligible for the Opportunity Zone program but not selected. She asked Ms. Lucas-Judy to discuss the key differences between these census tracts. She also asked Ms. Lucas-Judy to address how the average Opportunity Zone compared to other low-income census tracts in terms of economic and demographic indicators.
  • Ms. Lucas-Judy testified that the GAO had found that the census tracts designated as Opportunity Zones had higher proportions of non-White populations, higher proportions of non-English speakers, higher poverty rates, and lower educational attainment levels. She stated that these features held true for both the census tracts designated as Opportunity Zones and the contiguous census tracts that were located nearby.
• Rep. Walorski then asked Mr. Wessel to identify what was the most comprehensive and up-to-date source of data that he was relying upon to draw his conclusions about the Opportunity Zone program.
  • Mr. Wessel remarked that there did not exist a significant amount of Opportunity Zone program data. He testified that his assessments of the program were largely reliant upon available data from GAO, Novogradac, and from economists that were able to access the majority of the 2019 Opportunity Zone tax filings. He stated that the absence of available hard data forced researchers to engage in reporting in order to obtain additional insights into the functioning of the Opportunity Zone program. He expressed his willingness to revise his conclusions if newly released data were to demonstrate that the bulk of Opportunity Zone program funding was going to where it was most needed. He remarked however that the U.S. did not need to wait for hard data in order to fix the Opportunity Zone program given how the program did not require that its funds go to the neediest communities or projects.
• Rep. Walorski noted that the best available data on the Opportunity Zone program was two years out-of-date, covered the period prior to the IRS’s regulatory implementation of the program, and failed to account for the full years’ worth of 2019 tax filings. She also mentioned how the GAO had found significantly more Opportunity Zone investments in 2019 than the study that Mr. Wessel’s testimony had cited. She asked Mr. Wessel to indicate how many of the 8,700 census tracts designated as Opportunity Zones had he personally visited.
  • Mr. Wessel indicated that he had visited “about a dozen” of these census tracts and had talked to people in other census tracts. He reiterated that the U.S. lacked hard data on the Opportunity Zone program and commented that the debate surrounding the program had thus become very dependent on anecdotes.
• Rep. Walorski interjected to comment that Mr. Wessel’s conclusions about the Opportunity Zone program were based on incomplete and outdated IRS data that covered the period before the program’s implementation.

Del. Stacey Plaskett (D-VI):

• Del. Plaskett remarked that the lack of data surrounding the Opportunity Zone program hindered the ability of legislators to assess the program’s effectiveness. She then mentioned how Dr. Theodos had recommended the use of “but for” tests to improve the Opportunity Zone program. She asked Dr. Theodos to elaborate on this recommendation.
  • Dr. Theodos discussed how different federal programs had requirements that the users of those programs certify that they truly need the capital in order to move forward with their projects. He asserted that the Opportunity Zone program simply boosted the returns of projects that would have otherwise been pursued rather than encouraged the pursuit of new projects. He stated that a “but for” or substitution test would ensure that Opportunity Zone tax credits were actually needed in order to advance a given project.
• Del. Plaskett also discussed how Dr. Theodos had recommended that the U.S. restructure incentives to better encourage investments in traditionally underserved areas. She noted how these incentives could include Opportunity Zones, NMTCs, and Build America Bonds (BABs). She then expressed interest in learning about the CDFIs that were receiving Opportunity Zone tax credits and ensuring that diverse groups of investors could make use of the Opportunity Zone program. She asked Mr. Wessel to indicate whether there existed data regarding the amount of minority investors, CDFIs, and new market entrants that had been able to make use of the Opportunity Zone program. She also asked Mr. Wessel to indicate whether there were ways that the U.S. could incentivize community stakeholders to participate in Opportunity Zone projects.
  • Mr. Wessel indicated that he was unaware of any significant data regarding the involvement of CDFIs in the Opportunity Zone program. He remarked that the only parties that could take advantage of the Opportunity Zone program were parties that already had a substantial capital gain. He noted how the JCT had found that the average Opportunity Zone investor had an annual income in 2019 of $1.1 million. He expressed receptiveness to Dr. Theodos’s suggestion that the U.S. consider providing the residents of Opportunity Zones with refundable tax credits to invest in projects within their communities.
• Del. Plaskett then expressed concerns over how there did not exist Opportunity Zone program data on the smaller U.S. territories (including the U.S. Virgin Islands). She asked Ms. Lucas-Judy to indicate whether this lack of data was due to a lack of Opportunity Zone program utilization within certain U.S. territories. She stated that investors were not being incentivized to make investments into the U.S. territories.
• Note: Del. Plaskett’s question period time expired here.

Rep. Brad Wenstrup (R-OH):

• Rep. Wenstrup discussed how there were many Opportunity Zone projects within his Congressional District that were successfully revitalizing distressed communities. He also mentioned how organizations within his Congressional District had made use of NMTC and the Historic Tax Credit (HTC) programs to support these revitalization efforts. He asked Mr. Persinger to indicate whether the recent investments into downtown Erie were the result of the Opportunity Zone program or would have occurred without the program.
  • Mr. Persinger recounted how his organization had needed to obtain $73 million in order to pursue its neighborhood revitalization efforts. He stated that his organization was unable to access either the NMTC program or the HTC program. He remarked that his organization would be unable to successfully pursue its neighborhood revitalization efforts absent the Opportunity Zone program. He also discussed how other communities throughout the U.S. had reached out to his organization to learn about using the Opportunity Zone program to revitalize neighborhoods within their communities. He stated that Congress should work to ensure that small communities were not overlooked in future Opportunity Zone program legislation.

Rep. Steven Horsford (D-NV):

• Rep. Horsford remarked that improving the Opportunity Zone program was one of his top policy priorities. He stated that the Opportunity Zone program was passed as part of a hastily considered legislative package. He lamented how the U.S. did not possess adequate data for assessing whether the Opportunity Zone program was actually benefiting the residents and communities that it was intended to assist. He stated that the Opportunity Zone program should benefit both investors and residents in underserved communities and asserted that investors should not reap the “lion’s share” of the program’s benefits. He then indicated that one of his chief concerns with the Opportunity Zone program was its lack of requirements for community involvement. He noted how investors participating in the program did not need to inform community, local, state, or federal officials of their Opportunity Zone investments. He asked Ms. Lucas-Judy to address how having investors provide data on their Opportunity Zone investments would better enable the public to assess the functioning of the Opportunity Zone program.
  • Ms. Lucas-Judy remarked that it would be important to have Opportunity Zone program outcomes information. She recommended that Congress task a federal body (such as the U.S. Department of Treasury) with collecting and reporting such outcomes information. She commented that this recommended approach would be similar to the U.S.’s approach regarding the NMTC program. She also stated that the U.S. needed to collect Opportunity Zone program compliance information. She recommended that the IRS study the risks posed by the lack of Opportunity Zone program data.
• Rep. Horsford also mentioned how African Americans and Hispanics comprise a disproportionate share of the Americans living within Opportunity Zones. He commented that policymakers therefore ought to be cognizant of how Opportunity Zone policies impact communities of color. He then asked Dr. Theodos to elaborate on his findings regarding job training, affordability, transparency, and collaboration as they related to the Opportunity Zone program.
• Note: Rep. Horsford’s question period time expired here.

Rep. Lloyd Smucker (R-PA):

• Rep. Smucker first recounted his previous experience supporting community revitalization programs while in the Pennsylvania state senate. He then noted how Mr. Wessel had stated that Opportunity Zone tax credits had tended to go to less distressed areas. He asked Mr. Wessel to indicate whether the current definition of what constitutes an Opportunity Zone was too broad.
  • Mr. Wessel noted how the proponents of the Opportunity Zone program believed that the NMTC program’s cap had hampered the program’s ability to support investments. He stated that the Opportunity Zone program did not have a cap due to this concern. He then remarked that the U.S. should revisit the designation process for Opportunity Zones. He specifically recommended that Opportunity Zone designations be subjected to public comment before they were finalized. He also stated that the U.S. needed to use the most current data when making Opportunity Zone designations. He mentioned how previous reliance on out-of-date data had led certain undeserving census tracts to receive Opportunity Zone designations. He lastly stated that the U.S. should narrow the criteria for communities that qualify for the taxpayer subsidy.
• Rep. Smucker asked Mr. Wessel to indicate whether he was concerned about the amount of available tax credits for community revitalization purposes.
  • Mr. Wessel noted how there did not exist a limit on Opportunity Zone program tax credits. He stated that this absence of a limit drove investors to seek out the most lucrative Opportunity Zones to invest in rather than the neediest Opportunity Zones. He remarked that the U.S. should narrow the definition of Opportunity Zones so that the U.S. did not provide additional investment tax breaks to locations that were already attractive to investors.
• Rep. Smucker asked Mr. Wessel to indicate whether the Opportunity Zone program could be effective if certain reforms were to be adopted.
  • Mr. Wessel stated that there were currently many Opportunity Zone investments that appeared to be delivering on the program’s objectives. He remarked however that there did not exist any requirement or incentive for Opportunity Zone investors to invest in the neediest areas. He contended that the U.S. should work to fix the Opportunity Zone program to better encourage investments into the neediest areas. He expressed his disappointment with the U.S. Treasury Department’s failure to work to reform the Opportunity Zone program and with Congress for not addressing the program within the Build Back Better Act. He remarked that policymakers should first attempt to fix the Opportunity Zone program given how the program sought to address an important issue. He stated however that policymakers should consider repealing the program if its efforts to fix the program were to prove unsuccessful.

Subcommittee Chairman Bill Pascrell (D-NJ):

• Chairman Pascrell commented that no one at the hearing was looking to eliminate the Opportunity Zone program. He asserted however that the Opportunity Zone program could be significantly improved and better targeted.

Rep. Lloyd Doggett (D-TX):

• Rep. Doggett remarked that the Opportunity Zone program enabled ultra-wealthy individuals to reduce their taxes and asserted that the program was enacted in a non-transparent fashion without adequate public consideration. He stated that while there existed worthy and beneficial Opportunity Zone projects, he remarked that the Opportunity Zone program was very expensive and that wealthy Americans were the primary beneficiaries of the program. He added that many designated Opportunity Zones would likely have received investments if the program had never existed. He indicated that 87 percent of Opportunity Zone investments were going into just 5 percent of Opportunity Zones. He then discussed how not all Americans could participate in Opportunity Zone investments and noted how only Americans with at least $1 million annual incomes could participate in the Opportunity Zone program. He stated that the U.S. could not close its racial wealth gap if it continued to only permit wealthy Americans to use the Opportunity Zone program as a means of reducing their taxes. He then remarked that he would soon introduce legislation that would close many of the “loopholes” within the Opportunity Zone program, require community input in Opportunity Zone investment decisions, increase Opportunity Zone program transparency and accountability, and link the tax breaks to community benefits (such as job creation and affordable housing construction). He then asked Mr. Wessel to comment on his previous assertion that Opportunity Zones had worsened inequality.
  • Mr. Wessel remarked that more data was needed on the Opportunity Zone program in order to better assess the program’s functioning. He expressed concerns that data would show that the Opportunity Zone program was doing more to reduce the taxes of wealthy people than help the residents of the communities that the program was intended to serve. He commented that this dynamic would result in increased inequality.
• Rep. Doggett asked Dr. Theodos to indicate whether it was important to link Opportunity Zone tax breaks to an actual benefit.
  • Dr. Theodos remarked that policymakers ought to articulate the objectives of the Opportunity Zone program and put into place mechanisms for ensuring that these objectives would be accomplished.
• Rep. Doggett asked Dr. Theodos to discuss how a certification program for Opportunity Zones that required community input and a stated explanation of a proposed project’s benefits could help to improve the Opportunity Zone program.
  • Dr. Theodos expressed support for a certification program for Opportunity Zones that would require community input and a stated explanation of a proposed project’s benefits. He commented that such a certification program would help ensure that Opportunity Zone investors were interested in the communities that they invested in and took a long-term interest in their projects.

Rep. Gwen Moore (D-WI):

• Rep. Moore noted how her Congressional District contained both worthy Opportunity Zone projects currently underway and undeserving Opportunity Zone projects currently underway. She noted how many existing tax credit programs, including the NMTC program and the Low-Income Housing Tax Credit (LIHTC) program, involved community input to determine which investments would receive tax credits. She indicated however that the Opportunity Zone program enabled investors to direct their investments without community input. She asked Mr. Wessel to indicate whether the absence of a requirement for Opportunity Zone projects to receive community input had resulted in many undeserving Opportunity Zone projects.
  • Mr. Wessel expressed agreement with Rep. Moore’s comments on the importance of community involvement in determining which investments would receive tax credits. He remarked that the capped nature of the NMTC program meant that the U.S. Department of Treasury needed to select the worthiest recipients of the tax credit. He also discussed how there were many deserving communities that had been unable to access Opportunity Zone program funds.
• Rep. Moore then discussed how the Opportunity Zone program enabled wealthy investors to avoid paying capital gains taxes. She asked Mr. Persinger to indicate whether the Opportunity Zone program could be reformed in order to ensure that it drove investments to where they were most needed. She also expressed interest in making it easier for CDFIs to participate in Opportunity Zone projects.
  • Mr. Persinger remarked that the NMTC program put federal bureaucrats in control of community revitalization projects. He commented that these federal bureaucrats often did not appreciate the real needs of the communities where these projects would be located. He remarked that the Opportunity Zone program by contrast empowered communities to determine which community revitalization projects would be the most impactful and needed.
• Rep. Moore stated that investors generally failed to fully account for community needs when making Opportunity Zone investments. She contended that the U.S. ought to require community input in determining which projects could access Opportunity Zone tax credits.

Rep. Dan Kildee (D-MI):

• Rep. Kildee remarked that while the intent of the Opportunity Zone program was admirable, he expressed concerns that the program was failing to live up to its goals. He stated that the lack of clear reporting responsibilities was contributing to the program’s problems. He also contended that the Opportunity Zone program’s structure resulted in money going towards lower risk investments rather than deserving investments. He asked Dr. Theodos to comment on the importance of enhancing or adjusting tax incentives for investments in slow growth and chronically distressed communities.
  • Dr. Theodos remarked that the Opportunity Zone program was expensive for the U.S. Department of the Treasury and did not provide significant subsidies when measured on a per-project basis. He stated that he would be supportive of an enhanced subsidy to Opportunity Zone projects and communities that were truly meritorious.
• Rep. Kildee then discussed how there was an abandoned manufacturing site within his hometown of Flint, Michigan that could greatly benefit from the Opportunity Zone program. He noted however that this abandoned manufacturing site was located within a census tract that did not have any people, which meant that it was ineligible for the Opportunity Zone program. He asked Ms. Lucas-Judy to opine on this type of situation 
  • Ms. Lucas-Judy noted how state governors had needed to designate census tracts as Opportunity Zones relatively quickly following the TCJA’s enactment. She stated that these governors made their designations without full information regarding how the program would function. She testified that several states had told GAO that they would likely choose different census tracts as Opportunity Zones if given the opportunity. She also noted how the Opportunity Zone program based its parameters for census tracts off of the NMTC program. She stated that Congress could consider changing the parameters for Opportunity Zone census tracts.
• Rep. Kildee expressed support for allowing census tracts without population to qualify for participation in the Opportunity Zone program.

Rep. Ron Kind (D-WI):

• Rep. Kind mentioned how he was an original sponsor of the Opportunity Zone program and remarked that the program was intended to drive investments towards underserved areas. He discussed how he was working to develop legislation that would establish a “best practices clearinghouse” to help communities that wanted to pursue Opportunity Zone projects. He then disputed some of Mr. Wessel’s characterization of the development process for the Opportunity Zone program and noted how the original legislation establishing the program had contained reporting requirements and transparency provisions. He indicated however that these provisions were subsequently dropped as part of the budget reconciliation process. He stated that Congress was now working on bipartisan legislation to pass the dropped provisions and commented that the GAO’s recommendations were informing these efforts. He asked Ms. Lucas-Judy to clarify the extent to which the IRS could use their existing authority to immediately pursue reforms to the Opportunity Zone program.
  • Ms. Lucas-Judy indicated that the IRS primarily focused on enforcement and compliance matters for the Opportunity Zone program. She stated that the U.S. Department of Treasury would likely be responsible for evaluations of the Opportunity Zone program. She commented that evaluations would likely require direction from Congress.
• Rep. Kind expressed interest in following up with Ms. Lucas-Judy on the topic. He then remarked that the Opportunity Zone census tract designation process had been overly politicized and asserted that his Congressional District had received fewer designated census tracts than it deserved. He expressed interest in working to reform the Opportunity Zone census tract designation process. He also mentioned how his Congressional District did contain several successful Opportunity Zone projects. He concluded by calling for reforms of the Opportunity Zone program.

Rep. Danny Davis (D-IL):

• Rep. Davis remarked that his Congressional District contained many areas that could benefit from the Opportunity Zone program. He asked Mr. Wessel and Dr. Theodos to address how the Opportunity Zone program could support the development of affordable housing in underserved communities.
  • Dr. Theodos criticized the Opportunity Zone program for having overly broad criteria regarding where it could be employed, what it could be used for, and who could use it. He stated that limiting the Opportunity Zone program’s aforementioned criteria could focus the program more on providing community benefits. He then contended that the Opportunity Zone program was ill-suited for encouraging the development of affordable housing. He noted how Opportunity Zone program participants wanted their investments to appreciate in value so that they could take advantage of reduced capital gains taxes. He commented however that the appreciation in value of affordable housing would undermine the housing’s affordable nature. He concluded that the Opportunity Zone incentive would need to be fundamentally changed in order to support affordable housing.
• Rep. Davis contended that affordable housing was an important prerequisite for economic revitalization of distressed industrial and business sites. He expressed interest in identifying ways to revitalize distressed communities.
  • Dr. Theodos remarked that the Opportunity Zone program could help to revitalize distressed communities when combined with LIHTCs. He stated that the Opportunity Zone program was better suited for supporting the development of market rate housing. He asserted however that single tax credit programs were not sufficient for addressing economically distressed communities on their own and contended that significant financial investments over prolonged periods of time would be needed to fully revitalize these communities.