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

The Republicans' tax revolt

Senate Republican Leader Mitch McConnell (R-Kentucky) celebrates passage (swiped from nytimes.com)

There can be no more caviling about the accomplishments of the Republican-led federal government in 2017: the tax bill that cleared December 20, and was signed by President Donald J. Trump two days later, represents major policy change. Unfortunately, in addition to achieving some legitimate objectives the bill pushes policy in some very dubious directions.

First, the good news. The bill includes a long-overdue overhaul of corporate taxation. The U.S. relies to an unusual degree on business taxes, and the complex provisions of the tax code had pushed the top rate (which nobody really pays) far above that of other advanced democracies. The current bill closes some loopholes and reduces the top tax rate from 36 to 21 percent, making American business taxation more transparent and possibly more internationally competitive. Some advocates expect this to result in more hiring with higher wages. (I'm dubious, given that corporate profits have already been doing well for most of this decade, far outpacing wages.) The provision is not revenue-neutral, but could have been offset with higher individual rates. (It wasn't.)

I'm also fine with what's happened to the home mortgage interest deduction: the amount of debt on which interest is deductible was reduced from $1,000,000 to $750,000 for homes purchased after 2017, and nearly doubling the standard deduction drastically reduces the amount of people who will take it. This provision of the code has inflated prices, encouraged communities to sprawl and individuals to over-build (see Zuegel 2017 and Williamson 2017); the presumption that homeowners make better citizens was dubious from the start.

Other positives: Using chained CPI to make year-to-year adjustments should more accurately reflect the impact of inflation on taxpayers, even though it will mean lower benefits from, say, the Earned Income Tax Credit.... The child allowance has been increased for the first time in awhile, to $2000, albeit offset by eliminating personal exemptions. For low income filers, $1400 of that credit can be refunded in a sort of "negative income tax"... And some ideas got removed from earlier versions: reducing or ending tax credits for historic preservation, as well as provisions affecting higher education like taxing tuition benefits for employees of colleges and graduate student fellowships. (Maybe those last are neutrals rather than positives, since nothing was changed.)

If the bill had gone only that far, it might have been more widely supported, in and out of Congress, although that's hard to say given Washington's toxically partisan divide. But the sponsors had to go and:

• skew the individual cuts to the wealthy. In part that's because the wealthy pay most of the income taxes in America, but that's not true of all taxes. (ITEP 2017 shows the distribution of tax payments by income level, and how that would have been affected by an early version of the 2017 tax bill.) This exacerbates an already-widening income and wealth gap in America. The skew does appear worse if you include the expiration of individual cuts after ten years, which was included to make the bill fit under budget caps, so a lot of opposition analysis focuses on 2027 numbers. In fact those cuts may or may not expire, but if they don't, they will clearly worsen the bill's impact on the deficit (discussed below.)
• double the estate tax exemption, which was absurdly high even before Republicans tried to end it in their 2001 tax cut. The ability of the very rich, some but not all of whom got that way by doing socially-productive things, to pass on huge fortunes to their heirs, all of whom got that way simply by coming out of the right vagina, is absolutely contrary to an opportunity society. We're making the world safe for aristocracy, pure and simple. And since whites got several centuries' head start on making money, this approach does racial harm as well.
• expand pass-through provisions, by which individual income can be taxed at the lower business rate. This option is not available to typical working people, of course, only to those in a position to declare themselves independent contractors. A special provision related to real estate partnerships will provide substantial benefits to the Trump family as well as Senator Bob Corker (R-Tennessee), a late convert to the yes column, all of which is giving cynics a field day.
• retain the obscene carried interest loophole, whereby the income of financial wizards is taxed as capital gains rather than income, and therefore at a much lower rate. This has cost the government $18 billion over the last ten years, besides which it irrationally favors financial wizardry over any other work. Hello-o-o, 1 percenters!
• run as much of a deficit as they legally could claim. The official estimate of revenue loss, $1.4+ trillion over 10 years, assumes a substantial economic stimulus effect, which as I said may or may not result, and steady and considerable economic expansion throughout the period. Otherwise the impact on the deficit is substantially worse. Fiscally stimulating the economy at all in the eighth year of a bull market with the country at or near full employment is hard to justify. The capacity of the federal government to deal with future events (natural disasters, security threats, economic downturns, funding for retirement and health care programs, maintaining infrastructure), not to mention regular disruption in our high-tech economy, has been damaged, which is inexplicable. In the near term, higher deficits would trigger funding cuts for Medicare and Medicaid.
• add legislative matters to the bill. Republicans have repeatedly attempted over the years to repeal the individual mandate provision of the Affordable Care Act and open the Alaska National Wildlife Refuge to oil drilling, without success. Both are included in this bill. The ACA change cuts health care policy off at the knees--"We have essentially repealed Obamacare," President Trump proclaimed Wednesday--roiling individual insurance markets, without any recourse for the most vulnerable.
• do all this in an all-fired hurry, without so much as a committee hearing. Senator John S. McCain (R-Arizona) complained last summer about his leadership's abandonment of "regular order" in considering legislation. This bill was a most egregious example, but he supported it anyway.

The tax bill does some good, but considering its effects on vulnerable individuals as well as American society as a whole, it does a lot more bad.

DATA STUDIES
Tax Policy Center: http://www.taxpolicycenter.org/publications/distributional-analysis-conference-agreement-tax-cuts-and-jobs-act/full
Institute on Taxation and Economic Policy: https://itep.org/finalgop-trumpbill/

Reuven S. Avi-Yonah et al.: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3089423

American Planning Association: https://www.planning.org/blog/blogpost/9140260/
US Treasury Dept: https://www.treasury.gov/press-center/press-releases/Documents/TreasuryGrowthMemo12-11-17.pdf 

SEE ALSO:
William G. Gale and Leonard Burman, "Congress Missed an Opportunity to Reform the Corporate Tax," Up Front, 26 December 2017
Alejandro Ortiz and Kathleen Powers, "So, What's in the Tax Bill?" Vote Smart, 13 December 2017