The O-Zone Hole
State and national governments sometimes designate “Economic Opportunity Zones,” geographic areas wherein they give tax breaks to incentivize investment. If opportunity zones are such a great idea, though, why not make the whole territory one big opportunity zone? Too often the true purpose of these zones is not to maximize opportunity for everyone but rather to benefit a few well-connected applicants.
The federal 2017 Tax Cuts and Jobs Act provided for the creation of opportunity zones in economically struggling areas. There are currently about 8,700 opportunity zones nationwide, 300 of which are in Pennsylvania. So far opportunity zones look like a failure. Spotlight PA reported on Pennsylvania’s opportunity zones and noted that the zones receiving new investment appear to be the ones that were already improving in the first place.
The New York Times concludes that investors are gaming the system. Since investors are looking for low-risk, high-reward projects, they don’t generally invest in truly struggling communities. The Times, like Spotlight PA, notes that investment largely goes to communities that are already growing, or to projects that only hire a handful of workers. The Brookings Institution’s extensive research on opportunity zones points out numerous shortcomings and identifies them as an accelerating factor in so-called “gentrification,” the displacement of the lower-income citizens they are nominally intended to help.
The greatest beneficiaries from economic opportunity zones appear to be land speculators. A 2019 study cited by the Cato Institute describes how, when a land parcel is designated an opportunity zone, its price generally rises to reflect the tax benefits to its owner but there is little other value creation. The land just becomes that much more expensive for somebody else to purchase and develop, and adjacent land doesn’t rise in value. Simply put, the big beneficiaries of opportunity zones are people who buy vacant land with inside knowledge that its tax status is about to change.
From Erie to Philadelphia one would be hard-pressed to find a clear success attributable to the opportunity zone concept, but that hasn’t stopped Harrisburg from trying to expand it. HB 1102 is part of a collection of bills known as Energize PA, an initiative meant to assist and promote Pennsylvania’s energy sector. The bill aims to create 20 Keystone Energy Enhancement Zones, areas with deteriorated property that could be returned to productive use. These zones would provide state tax exemptions, deductions, abatements and credits. Unfortunately the proposed bill has the same weaknesses as existing opportunity zone programs. The poorest communities are unlikely to reap any benefit.
Reducing the burden of government on business activity is a noble goal but Pennsylvania should be doing this throughout the commonwealth, not just in picked communities or for selected investors. The question bears repeating: if tax breaks increase business activity then why not give tax breaks everywhere?