We’ve begun to see the fruits of the initiative, introduced originally in the 2017 Tax Cuts and Job Act. Some of the 8,800 target census tracts from coast to coast – including here in the Salinas Valley – have already benefited from investor capital flowing into their communities.
This strategy has the potential to positively impact our local population, a fraction of the 35 million people residing in state- and federally-identified areas: residents struggling with poverty, unemployment, lack of access to education or health care resources, failing infrastructure in their neighborhoods, and social ills such as crime and drugs.
As originally laid out, there were three primary incentives provided to QOZ investors. First, by reinvesting their capital gains into a Qualified Opportunity Zone Fund (QOF), investors could defer paying taxes until 2026. Second, if the investment was made by Dec. 31, 2021, and held for five years, investors enjoyed a 10% reduction in those initially-deferred capital gains. This incentive expired at the end of last year. Three, if the investment was held for 10 years, any appreciation on the investment in the QOF would be tax-free.
A bipartisan cohort has recognized the importance of this initiative and introduced legislation to extend it further. The legislation, titled Improving Opportunity Zones Act, is spearheaded by Sen. Cory Booker of New Jersey and other Democrats as well as Republicans.
They propose to extend the program for two years; thus the deadline that ended on Dec. 31, 2021, would be extended to Dec. 31, 2023, restoring the incentive for investors to obtain a 10% reduction on initially-deferred gains. Those deferred and reduced capital gains could now be paid in 2028.
The new legislation also calls for Opportunity Funds to be organized as a “fund of funds,” meaning that one QOF can invest in another. This enables smaller dollar-amount investments to reach areas that need them most, and provides flexibility for investors to receive more diversified exposure to Opportunity Zone investments.
Another proposed change is the early sunset for Opportunity Zones that are non-impoverished. Originally, a small number of zones, whose median family incomes were at or above 130% of the national average, were designated as OZs. With the new legislation, these can be phased out or replaced one by one by high-need communities.
Finally, the proposal outlines changes to reporting requirements, promoting transparency, ensuring that the initiative operates as intended, and creating an easy mechanism for data collection and tracking.
Imagine the QOZ initiative working in sync with Biden’s $1 trillion infrastructure spending bill in, for example, our ag industry. Congress set aside tens of billions of dollars for agricultural infrastructure repair, upgrade, and development. His bill literally earmarked money for California agriculture. Those funds, if actively claimed by our representatives, in conjunction with private investor equity channeled into industrial real estate, could fix so much of what is broken in our state: the degraded roads, the congested ports and waterways, the obsolete facilities.
Add to this (if only Dems could agree) the funding from any resurrected parts of Build Back Better, like the billions of dollars in clean energy tax credits that were originally laid out, and California could end up with a high-tech, efficient, environmentally friendly agricultural infrastructure. The financial, social and employment implications are enormous.
For now, delegates in Washington on both sides of the aisle recognize the immense value and foresight of Opportunity Zones … and so should our representatives. The initiative creates jobs and adds to our local and state revenue rolls in the form of property tax and sales tax. Funds can be channeled to our region’s entrepreneurs. Businesses reeling under the impact of the pandemic can be saved. Desperately needed improvements can be made in rural areas like ours for the essential industry of agriculture.
We urge California to get behind this proposed legislation. Ensuring the plan continues successfully will help advance racial equity, small business development, and home ownership in low-income urban, rural, and tribal communities, all of which highlights the multi-layered benefits of Qualified Opportunity Zones.