Opportunity Zones in CR

Construction on 12th Ave in New Bohemia;
does this look under-invested?

Three census tracts in the center of Cedar Rapids have been designated Opportunity Zones by the U.S. Department of the Treasury. The program, included in the Tax Cuts and Jobs Act of 2017, attempts to improve economic growth in poor areas by making investors in the zones eligible for special treatment of capital gains income. The city chose four out of  13 tracts that met the AAA's criteria; three were submitted by Iowa Governor Kim Reynolds, among 62 selected statewide (Patane 2018a, Patane 2018b).

The combined area of the three Opportunity Zones--Linn County tracts 1900, 2200 and 2700--includes Kingston Village on the west side of the river, as well as Downtown, the MedQuarter, New Bohemia and Oakhill Jackson on the east side. Parts of Wellington Heights and Mound View are included as well. Coe College, which among other distinctions employs me, is part of tract 1900. The combined area is bounded by 16th Street East, the railroad tracks that cross the river, 11th Street West, and the Cedar River as far as 19th Street SE.

The purpose of the Opportunity Zone program is to revitalize economically-distressed areas. The premise is that low-to-no taxes will shift investors' calculus and make these areas more attractive. Only a few kinds of businesses are excluded, so commercial development, housing construction, new businesses, existing businesses, and infrastructure are all eligible. It's a new name for an old approach, previously incarnated as Enterprise Zones, Empowerment Zones and New Market Tax Credits. Performance under those programs was mixed (Hirasuna and Michael 2005, Busso et al. 2013); the particularly positive effects on employment and wages of the Empowerment Zones  program (which also had a substantial social services component) were mitigated by program costs as well as the degree of regulation which deterred much participation (Looney 2018a).

Tract #1900: Another medical building coming
where there used to be a church and some rooming houses

As a resident of Cedar Rapids, the choice of the our three Opportunity Zones is puzzling; I would have taken note of the rapid redevelopment of Downtown, New Bohemia and Kingston Village since the 2008 flood, whose anniversary we're celebrating this week. I would have liked to use the Opportunity Zone incentives to help connect the new prosperity to residents of the core neighborhoods that border them. But the governments' choices are clarified by looking at the statistical criteria--see the datasets produced by the Brookings Institution and Smart Growth America, cited and linked below--and given the super-fast rollout of the program they didn't have time to do much else. The three census tracts have the highest rates of poverty and child poverty in Linn County. This table compares the three Opportunity Zones with three low-income, bordering tracts. (Of these three, only #2600 was eligible for inclusion; it was included in the city's application but not chosen by the state.)

Census Tract	Rough Description	Poverty Rate 2016	Child Poverty Rate 2016	Brookings Distress Index (scale is 0 to 1)
2700	New Bohemia, Oakhill Jackson	41.3	63.1	.954
1900	Downtown, MedQuarter	38.8	57.2	.805
2200	Kingston Village, Taylor Area	26.3	34.5	.885
2600	Czech Village	19.9	18.4	.864
2300	Johnson Avenue W	18.7	28.6	.749
2500	Linwood Cemetery	18.6	17.2	.861

 [Source:Brookings Institution]

In part, we are constrained by the boundaries of census tracts, which are small but can be diverse. Tract #2700, for example, has experienced massive investment and an ongoing commercial and condo construction boom from the river to about 6th Street. It is also the only one of the three Cedar Rapids Opportunity Zones that has already experienced sufficient housing investment to qualify as gentrifying according to the Brookings measure. Above 6th Street, though, is where the distress remains, and where the poverty has in fact increased since 2012. Tract #1900 similarly includes high- and low-investment chunks. It's experienced more displacement than Oakhill Jackson as the medical facilities and the college have expanded their footprints. Poverty in that zone was stable between 2012 and 2016.

Tract #2700: Will whatever prosperity is brought to Opportunity Zones

 benefit poorer residents?

It will be interesting, then, particularly for those who care about their cities, to see how the Opportunity Zones program plays out. Broadly speaking there are three possibilities:

1. No impact on places or people. In these already-burgeoning areas, investors score generous tax treatment for actions they would have taken anyway. Essentially, they get rewarded for being physically near poor people. Nothing changes on the ground, but the U.S. government takes a significant revenue hit which will eventually be felt most heavily by the most vulnerable people.
2. Positive impact on places, negative impact on people. Tax expenditures spur increased economic development in Opportunity Zones, reflected on the ground in new and expanded businesses and new middle class residents. Poverty drops like a rock, but in part because poor residents can't afford the jonesed-up housing market, and are displaced to less expensive but harder-to-fix locations.
3. Positive impact on places and people. Tax expenditures spur increased economic development that creates jobs and career opportunities for existing residents, as well as attracting new middle class residents. Poverty declines, both within the district and nationwide, because we've addressed the problems rather than just displacing them. Maybe there is even some positive spillover to adjoining tracts.

Is there anything we can do to help outcome #3 happen, given the program's loose structure and capital-based incentives? "[T]he value of the tax subsidy is ultimately dependent on rising property values, rising rents, and higher business profitability," not inclusive housing (Looney 2018a), job creation or locally-based business. Research is inconclusive on cities' attempts to embrace new investment while regulating the negative effects on existing residents ("smart gentrification," cf. Cortright and Mahmoudi 2014, Grabinsky and Butler 2015). But it seems to me that it's up to localities like Cedar Rapids to manage the impact of Opportunity Zones, mainly by supplementing the federal tax expenditure with a more service-based approach aimed at local businesses and lower-income individuals.

SEE ALSO:

Economic Innovation Group page on opportunity zones


Don Hirasuna and Joel Michael, "Enterprise Zones: A Review of the Economic Theory and Empirical Evidence," Minnesota House of Representatives Research Department, January 2005

Adam Looney, "The Early Results of States' Opportunity Zones Are Promising, But There's Still Room for Improvement," Brookings, 18 April 2018

Matthew Patane, "Downtown Cedar Rapids Designated as an 'Opportunity Zone,'" Cedar Rapids Gazette, 21 May 2018 [includes map of OZs in Linn and Johnson Counties]

Smart Growth America's Opportunity Zone navigator: https://smartgrowthamerica.org/program/locus/opportunity-zones/

Smart Growth America webinar "Understanding Your Opportunity Zones", 26 June 2018: https://smartgrowthamerica.org/watch-the-recorded-webinar-on-understanding-your-opportunity-zones/ 

Brett Theodos, Brady Meixell and Carl Hedman, "Did States Maximize their Opportunity Zone Selections?" Urban Institute, 21 May 2018