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Local officials around Vermont are optimistic that Opportunity Zones — designated areas where investors can receive capital gains tax breaks — could spur developments to boost their economies.
Heather Carrington, Winooski’s community and economic development officer, hopes the program — which places the entire city in an Opportunity Zone — will bring housing investments that will grow the city’s tax base. “More money for playground facilities, police officers, library books, sidewalk plows,” she said. “It improves the quality of life here.”
Springfield, Rutland, and other towns and cities with designated tracts are also hoping to benefit. But critics in Vermont and beyond say the program is more likely to lift up wealthy developers and investors rather than community members.
“It’s not a program targeting low- and moderate-income people,” said Michael Monte of the Champlain Housing Trust. “It just doesn’t do that. If anything, it could hurt.”
Monte said that unlike similar incentive programs that encourage housing development, the Opportunity Zone program has no stipulations that projects actually benefit communities. It offers similar tax breaks in low-income areas and gentrifying ones. Plus, there are no requirements that information about Opportunity Zone projects be made public.
“There’s some very basic inventory questions of who, what, when, where, and how much,” said Brady Meixell, a research analyst at the Urban Institute. “If the federal government and taxpayers’ money is going to be giving such a large federal benefit to these investors, we have a right to know what that tax break is being used for.”
On this week’s podcast, VTDigger’s Lola Duffort explains how the Opportunity Zone program works, while boosters and critics weigh in on its potential for Vermont towns.
**Podcast transcript**
This week: A federal tax break on developments in designated opportunity zones is starting to gain traction in Vermont. But critics worry that the program could end up benefiting the wrong people.
Duffort: The idea behind opportunities zones is basically that in distressed communities, what is needed is an infusion of investment capital, right? So opportunity zones are supposed to entice mostly wealthy individuals into investing in businesses or developments in places that have been very disinvested.
Our reporter Lola Duffort has been looking into the program’s rollout in Vermont.
Duffort: The U.S. Treasury designated a whole bunch of census tracts as eligible for the program, based on the demographics of those census tracts — if you’re a low-income community, basically. And then the governor of each state got to pick from those eligible census tracts which ones would kind of make it into the final pot and be designated qualified opportunity zones.
Governor Phil Scott designated Vermont’s opportunity zones about a year ago, I want to say, and they are in a lot of historic population centers. So you have Rutland City, you have Springfield, you have Winooski, you have Burlington. I think in total, you have 17 different municipalities, over quite a few counties. There’s a pretty good geographic distribution.
Where did this program come from?
Duffort: The big sponsors and boosters of this were Senator Cory Booker from New Jersey. He’s running for president…
Booker: We’re letting people know that of all the things that happened since the recession, this is probably the biggest economic development tool that local government leaders have to attract capital and investment into their communities, to create jobs and economic opportunity.
Duffort: And then also Tim Scott, a senator from South Carolina, who’s a Republican. So this was a bipartisan initiative. And another key figure in coming up with this idea was Sean Parker, who was an early investor in Facebook.
And the idea was that this will be the sweetener that convinces really wealthy individuals to invest in super distressed communities. And so what happens when you are an opportunity zone, what that means, is that investors can take their capital gains… And a capital gain is basically money you make off of money. So if you sell a stock or bond or real estate investment, you made money on the investment, right? You have capital gains. Now, if you take that capital gain and you plowed into a project that is based in an opportunity zone, you can defer paying taxes on that capital gain.
Booker: You’re an investor. And you now suddenly have this major capital gains obligation in your investment going well. You can roll over that investment, not pay your capital gains, you can roll it over into an investment targeted in an inner city.
Duffort: And you can also reduce it by a certain amount. If you hold it in that project for like five years, you can reduce it, by a little bit more if you hold it for seven years. And if you hold your investment for 10 years, then the taxes that you would have paid on the capital gain from that project, that’s taxed at zero percent.
You’re just not taxed anymore.
Duffort: Yes. At least at the federal level. You are just not taxed at all on the profit in that opportunity zone.
Booker: That is a huge tool in the toolbox. If I was still mayor of Newark, New Jersey, I would have been stalking my governor telling him to designate my city.
So this is a tax break, is the simplest way to describe it.
Duffort: Yes. And it’s a potentially huge tax break.
Because when you’re talking about things like large commercial developments, those can be pretty large sums of money.
Duffort: Yes.
Got it.
Duffort: This ended up getting stuck into the Trump tax cut package of 2017.
Trump: Opportunity zones…is one of the hottest things anyone’s ever done with respect to inner cities and with respect to minorities. It is working out far beyond anybody’s expectations.
Duffort: So this often gets reported as a Trump tax cut, and Trump is very proud of opportunity zones, and it was part of that package, but he actually isn’t where this idea came from.
Trump: People are investing that would have never invested in these locations in a million years, and they’re investing a lot of money.
Duffort: Another thing to keep in mind is that the benefits of these tax breaks are directly correlated to how much money you can potentially make, right? So the biggest tax break will come if you invest in a project that is hugely profitable, right?
There is no incentive here to invest in something that is going to have smaller margins, which is part of the concern for a lot of people, because things that make a lot of money are not always necessarily things that are awesome for the distressed communities where these projects are located.
You’ve been talking to people from different cities and towns around Vermont. What are you hearing from local officials about what this program means for them?
Duffort: A lot of local economic development folks seem excited about it. Heather Carrington in Winooski was pretty enthusiastic.
Heather Carrington: We’re excited about it. The way that we really think it could benefit Winooski is an infusion of long-term investment into a low-income community like this.
Duffort: Carrington really hopes that this helps bring in projects that can just grow the tax base in Winooski.
Carrington: That helps us to expand the resources we have available for public services and infrastructure. And those can be a huge benefit to a community like Winooski. We’re a resource restricted community. So whether that looks like more money for playground facilities, police officers, library books, you know, sidewalk plows, it could be any of those things could improve the quality of life here.
Duffort: When we spoke, she said that she was in conversations kind of early conversations with people. So it was too early to say what would come of it.
Carrington: I’ve been approached by multiple businesses, developers and potential investors that are seeking to locate or invest in Winooski and utilize the opportunity zone designation, but at this point in time, those are exploratory, confidential conversations.
Duffort: I talked to a person in Springfield. And I believe all of Springfield is also an opportunity zone. Bob Flint. He’s in charge of trying to make economic development happen there. And he said, yeah, it’s stimulated some really interesting projects, that a few residential units had been purchased with it, I think there were a few commercial industrial things potentially in the works.
The Putnam Block, which is a really big project out of Bennington, is tapping into opportunity zones. And one thing that I found really interesting about the conversations I had with economic development consultants down in Bennington, is they said, yes, we got some money through the OZ program, but the money came from folks that were already kind of committed to local economic development. They were from the area.
They’re like, it’s hard to know whether or not that investment wouldn’t have happened with the OZ. Because they said, unless you’re going to make money off the project, there’s not a huge tax benefit. The huge tax benefit comes if the project makes money. Right? So they’re like a project like ours is probably not going to be huge profit. So outside investment, not entirely super likely, even using OZs, which I thought was really interesting because it seemed to kind of — the whole idea behind OZs is we can get outside capital to flow into these super poor communities. And a local project, which had tapped into the program, kind of said ‘eh.’
Duffort: I’ve definitely heard a lot about housing projects tapping into it. So I talked to Michael Monte over at the Champlain Housing Trust about whether or not they had thought that OZs could help them. There are two opportunity zones in Burlington. One of the tracts covers basically the waterfront, and Church Street. And then there’s a little second tract that kind of abuts that. Not a lot of the Old North End, though. And so when I talked to him, he said, well, we’d originally hoped that maybe we could use it to kind of complement stuff that we’re doing at the Old North End Community Center. But in the end, it wound up that we weren’t in a designated zone.
Monte: I think it was probably a hard decision. But I think, you know, it turned out to be fairly unfortunate for us. We’re not too sure if opportunities zones work yet. And we thought, well, there might have been an opportunity.
Duffort: I mean, one thing that he said was like, I mean, I don’t really know that this will help us much because the Champlain Housing Trust has a lot of expertise tapping into complicated federal tax incentives to finance affordable housing projects, but usually those tax incentives include requirements that the project actually benefit the distressed communities that are supposedly being helped, and he was like, there’s none of that here.
Monte: Our point of view, looking at the opportunity zone program, indicates that you know, sort of a program with intentions that don’t seem to really solidify any kind of gains for low-income people or really support or have a clear community benefit. There may be, on occasion, opportunities for someone like CHT or another organization to take advantage of using some of these capital gains to support community facilities or something like that, but for the most part, this is not a program to benefit, you know, moderate income people, low income people. It really is a tax opportunity.
Duffort: There’s just zero requirement that the project benefit the local community.
There’s just an assumption that any new development in a community like this is going to lift everything up?
Duffort: Right, yes. It’s very much — it’s trickle-down economics.
Some of these criticisms kind of mirror things that we’re hearing nationally about this program. Can you tell me a little bit about other folks that you’ve talked to who have described ways that this program might have some issues going forward?
I talked to Brady Meixell from the Urban Institute. He was talking a lot about the way it is structured, incentivizes people to tap into this program to invest in highly profitable projects.
Meixell: I think there will certainly be some good things and good projects that come of opportunity zones, and I think you see some impact investors, maybe this brings them over the finish line, getting, you know, a deal to pencil out whether that be affordable housing or, or whether, you know, that’s something other that benefits the communities. But I think the open-ended nature of this incentive also means on the flip side, you know, you could have an affordable housing, multifamily development, you could tear that down and put up luxury condos, and you could get a big check from the federal government for doing so.
Duffort: What’s the surest bet? And that’s, you know, a real estate development project in an area where property values are on the rise.
Meixell: Through that mechanism of a capital gains tax, you’re incentivizing — the more appreciation you get on your investment, the more capital gains tax you’re going to avoid. So the best returns will be on neighborhoods that are undergoing rapid change and property value, i.e. they’re gentrifying.
Duffort: Because if you’re just like a wholly rational actor that only cares about maximizing your tax incentive, you’re going to invest in a pretty surefire bet.
So like, if somebody were trying to decide between putting their money in a project on the Burlington waterfront, or in downtown Randolph, something on the Burlington waterfront would probably look a lot more desirable, even though downtown Randolph might benefit more from that kind of investment?
Duffort: Right. And another key thing he said is that, because you can get the same tax break by going to downtown Burlington as you can going to St. Johnsbury, where are you going to sink your investment, if you’re going to get the same tax benefit?
Meixell: And that also means that’s also an issue for those areas that are truly disinvested, whether that be St. J or Rutland, I believe you mentioned as well, but these areas are truly disinvested just because they are named an opportunity zone, you’re on the same tax pedestal as these 12% of tracts across the country. But you know, they still have to compete. St. J still has to compete with downtown Burlington for these investments and you get the same tax benefit if you go either place. So if investors are incentivized to pick appreciating tracts, that doesn’t necessarily spell the most positive outcome for tracts that are truly disinvested.
Duffort: That was echoed by another guy that I talked to who is an economic development consultant based in Rutland. And he actually said that he was way less worried about gentrification and the program in the Vermont context, just because there is quite a bit of housing. He was like, what I am worried about is the fact that the economic development infrastructure in Rutland and Bennington is not as sophisticated as it is in Boston, where you can also get this tax break. So in terms of being able to really attract those investors that are from outside, we’re at a disadvantage.
Another reason that people like Brady are studying the effects of Opportunity Zones is that the program itself can’t be evaluated. Under the federal law, there’s no requirement to disclose even basic information about these investments.
Brady Meixell: It’s gonna be very hard to know the true impact of opportunity zones. We’ll have to look at it using kind of proxies, the way the current regulation is structured. You know, there’s some very basic inventory questions of who, what, when, where, and how much, you know, that could very easily be asked. These opportunity zones will have that information on hand already tracking their own investments. And, frankly, if the federal government and the taxpayers money is going to be getting such a large federal benefit to these investors, we have a right to know what that tax break is being used for.
If it were being used for really good things, and in the end if it were this like, amazing tool, we wouldn’t even know then, right?
Duffort: No, we wouldn’t know. We would not know. Ted Brady from the Department of Commerce and Community Development was like, yeah, I guess it’d be great if we could know, because then we would be able to talk about all the great work that’s being done using this, but at the same time, we don’t want this to be more burdensome than it has to be.
So they’re essentially operating as if they were completely private developments and there was no government role in them whatsoever.
Duffort: Yes. I mean, the state is certainly taking an active role in promoting this tax break. They’re holding summits and workshops and bringing developers together with consultants and tax experts and a lot of local economic development folks to, you know, give them ideas about how to tap into the program, how to market their communities to investors using the program. So the state is taking an active role in promoting this as a tool for economic development. But they are certainly not trying to track where this is happening in any systematic way.
I feel like OZs are interesting because they’re just like a hyper deregulated version of an economic development logic that has been very popular for a long time. We had empowerment zones and enterprise zones before this, TIFs are all over Vermont —
That’s tax increment financing districts?
Duffort: Yes. This is always the question: is giving tax breaks to wealthy individuals, developers, does that actually trickle down and create a benefit to the larger community? And I think what’s particularly frustrating I think, from our perspective as journalists, and also just for the general public and a lot of policy experts, with opportunity zones, is because there’s zero reporting requirements, there’s really just no way to answer that with any systematic analysis.
OK, you had this amount of investment here. What were the outcomes? Did home ownership increase? Did unemployment go down? Did poverty go down? Did gentrification increase? Were people displaced? Did the rents go up? You can answer none of these questions, unless the people who tap into this program voluntarily disclose that they did so.
What does that leave us with? Like, is there anything that we can keep an eye on going forward, other than one-off projects that volunteer that they’ve taken advantage of this? Are there any other ways that we, or members of the public, can look at this going forward and try to suss out what it means for their communities?
Duffort: I think it’s very important to keep in mind that while the Legislature can’t, it seems, impose reporting requirements, one very important lever that remains is local zoning laws. Municipalities actually have pretty tremendous power over what gets built in their communities.
If you live in an OZ community and you’re concerned — or excited — about what this could mean for your community, I think it is useful to remember that your local zoning board, or aldermen or selectmen actually have a lot of power over the kind of projects that take place. Right? So just because a tax incentive is available does not mean that an investor or developer can use it and can build that project unless they also get approval from local officials.
They basically have the same levers that they would have in any development project.
Duffort: Exactly. It’s useful to remember that like, actually municipalities hold a lot of power over development. I think it’s always useful to keep in mind that local officials should be talking seriously about what kind of economic development is good for their city, and the people that actually live there.
Thanks.
Duffort: No problem.
