GuidingPrinciplesforOpportunityZonesBruceKatzandJeremyNowakTheGovernanceProject*1

ExecutiveSummaryTheTaxCutsandJobsActof2017establishedanOpportunityZonestaxincentive,whichprovidesafederalcapitalgainstaxdeferralandpartialexemptionforinvestmentsindesignatedOpportunityZones.GovernorsineachstatewillselectOpportunityZonesfromaneligiblegroupoflow-incomecensustracts.SelectionsmustbemadebythethirdweekofMarch2018(orthirdweekofApril2018ifanextensionisrequested).Giventhesignificantinterestamongmanyprivateinvestors,itispossiblethatOpportunityFundswillattracttensofbillionsofdollarsinprivatecapital,makingthisoneofthelargesteconomicdevelopmentprogramsinU.S.history.ThispolicybriefputsforwardfourprinciplestoguidetheselectionanddevelopmentofOpportunityZones.Theprinciplesaredesignedtoenablethegreatestjobcreationpotentialandthemostsignificantadvantagesforlowerincomeresidentemployment,both,insideandoutsidetheeligiblezones.Throughoutthedocumentwestresstheuseofdataanalytics,localknowledge,andtheneedtoseetheseincentivesasjustonepartofabroadereconomicdevelopmentstrategy.

1. PrincipleOne:Identifyareasthatdemonstratebothsocialneedandmarkettraction.Useasocialneedsindexandjobclusterdataastheprimaryscreen

1ThispolicybriefwascommissionedbyTheGovernanceProject,andpreparedbyNewLocalismAdvisors,afirmco-foundedbyBruceKatzandJeremyNowak.TheGovernanceProjectisanonprofitorganizationsupportingtheworkofabipartisangroupofhighimpactgovernorsandmayorsacrossarangesocial,economicandpolicyissues.LaunchingitsfirstinitiativeinSpring2018,TGPwillofferstateandlocalgovernmentsanalytics,expertiseandcapitalsourcesforpolicyinitiatives.TGPwillbeginwithafocusoneconomicopportunitystrategiesindistressedurbanandruralcommunitiesandexpandtoinitiativesinotherpolicyareasincludingeducation,infrastructure,healthcareandmore.

andthenidentifythedeeperpotentialforequitabledevelopmentbyanalyzingadditionalemploymentdataalongwithtransportationaccessdata.

2. PrincipleTwo:Linkcapitalinvestmentstohumancapitalstrategiesto

maximizeimpactforlowerincomeresidents.Focusonaligningskillsupgradingwithexistingandfuturejobgrowthbothwithinandoutsideeligibleinvestmentareas.

3. PrincipleThree:ViewOpportunityFundinvestmentcapitalasintegraltoa

comprehensive,multi-yearinvestmentstrategythatleveragesandpartnerswithadditionalpublic,private,andindependentsectordebtandequityproviderstobuildsustainablebusinesses,ensureaskilledworkforceandstrengthencommunitydevelopmentbothwithineligiblezonesaswellasincontiguousareas.

4. PrincipleFour:Ensureahighqualitydatasystemtocollectinformationon

investmentsandprovideafeedbackloopforongoingmeasurementandimprovement.Wearelessinterestedinexpensiveevaluationmodelsthantheongoingdisciplineduseofdatatoinformongoingoperationsandmaintainlong-termaccountability.

TaxCutsandJobsActof2017TheTaxCutsandJobsActof2017establishedanOpportunityZonetaxincentive,whichallowstaxpayerstodeferpayingfederaltaxoncapitalgainsfromthesaleofpropertyifthosegainsareinvestedinQualifiedOpportunityFundsthatinvest90%oftheirassetsinbusinesseslocatedorpropertyusedinadesignatedlow-incomecommunity.InvestorsreceivemodestreductionsintheireventualtaxbilliftheymaintaintheirOpportunityFundinvestmentsforatleastfiveandthensevenyears.InvestorsthatholdcapitalinthosefundsforafulltenyearsalsodonothavetopaycapitalgainstaxontheappreciationoftheirOpportunityZoneinvestments.ThecensustracteligibilitycriteriafortheOpportunityZoneincentivemirrorthelow-incometractcriteriafortheNewMarketsTaxCreditprogram.UnliketheNewMarketsTaxCreditprogramwheretherewasuniversaleligibilityforalllow-incomecensustracts,theOpportunityZonesprogramdirectsthechiefexecutiveineverystateandterritory(includingWashingtonD.C.)tochooseupto25%oftheirtractstobeeligible.Inaddition,fivepercentofOpportunityZonetractsmayalsobenonlow-incomeaslongastheyarecontiguoustoaqualified,nominatedtractandtheirmedianincomedoesnotexceed125%ofthecontiguousqualifiedtract.

Makingselectionswillgeneratedemandforequitabledistributionacrossurban,suburban,andruralcommunities.Thosestatesthatdothebestjobwillalsowanttoapplycriteriaandsupportingdataasthebasisforselections.Astrongselectiontheoryholdspotentialformaximizingthenumberofinvestableprojectsandbusinesses,ontheonehand,andaccessforlow-incomeresidentstothosejobs,ontheother.21stCenturyPlace-BasedStrategiesPublicpolicyanalystscommonlydistinguishbetweenplace-basedandpeople-basedapproachestopovertyreduction.Place-basedapproachesinvestorincentinvestmentsinspecificcommunitiesbasedonassumptionsregardingadeficitofcapital,jobs,housingorinfrastructureinthoseareas.People-basedinvestmentsflowdirectlytohouseholds(e.g.earnedincometaxcredit)irrespectiveofwheresomeonelivesorworks.Thehistoryofplace-basedpublicpolicyinAmericaiscomplexandincludesearly20thcenturyruralelectrification,WaronPovertyprogramsliketheAppalachianCommissionandModelCitiesandavarietyofbusinessincentiveandcapitalinvestmentstrategiesincludingenterprisezones,empowermentzonesandNewMarketsTaxCredits.Inadditiontofederaleffortsmanyplace-basedprogramsaresponsoredbystateandlocalgovernments.Philanthropyhasalsoutilizedplace-basedstrategiesinsupportofcommunitydevelopmentandpovertyalleviation.EverycityandcountyinAmericacanpointtogeographiczoneswithspecificincentivestiedtoitsredevelopmentfrommainstreetstoindustrialcorridors.Thehistoryofplace-basedprogramsisunevenwithrespecttobothcommunityrevitalizationandpovertyreductionoutcomes.Onelimitationofmanyplace-basedprogramsisthefailuretotakeintoaccountthedynamismofdemography,markets,andcounter-incentives(schoolquality,regionaleconomictrends)insocietyatlarge.OpportunityZoneswillsucceedifstatestakeadynamic,market-orientedperspectiveinselectingthemthattakesintoaccounthowintegratedthezonesarewithsurroundingcommunitiesandpaysattentiontoissuesoflaborsupplyaswellascapitaldemand.Place-basedprogramsina21stcenturyeconomymustrecognizefourcharacteristicsofeconomicreality.

1. EmploymentClustering:Jobgrowthisincreasinglyclusteredinrelativelysmallgeographiesarounddowntowns,medicalandresearchinstitutions,andcommunitieswheretherearestrongentrepreneurialecosystems.Theadvancedeconomyincreasinglyfavorsplaceswheretalent,research,qualityamenities,andstartupinnovationsco-locate.Itisalsoimportanttolookatemergingjobclustersinmoreruralareas.Thenumberofjobsdifferbuttheco-locationdynamicsarethesame.

2. TrainingandAccess:Themajordriveroflabormarketattachmentiswork

forcequalityandjobaccessibility.Whilejobrequirementschangerapidlydueinlargeparttotechnology,thereisapremiumplacedonadaptivetechnicalandinter-personalskills.Communitieswithstrongtrainingprogramslinkedtoindustryandqualitytransportationholdanadvantage.

3. NewFormsofCapitalIntermediation:Thereisanabundanceofglobal

capital,butitisplaceagnosticandnotalwayssuitableforeverystageofbusinessgrowthorprojectdevelopment.Moreover,globalcapitalflowsfocusonsectorsandproductsmorethanplaces.OpportunityFundscreatethepotentialforexpandingthequalityofintermediariesthathavetwoessentialqualities:localknowledgeandcapitalmarketscredibility.

4. TechnologicalDisruption:Advancesintechnologyareradicallyalteringhowresidentsandinstitutionsunderstand,navigate,experienceandcommunicatewithinandacrossplaces.OpportunityFundsshouldtakeadvantageoforexperimentwithtechnologiestoboostresidentengagement,strengthenemploymentlinkages,accelerateproductandprocessinnovationandenhancequalityplacemaking.Thismaybeparticularlyimportantforruralcommunitiesthatlacklargeemploymentclustersbuthavestrongworkforcecapacity.

Place-basedprogramsmustinternalizethesefacts.Inorderforplace-basedprogramstoreachtheirfullestpotential,however,placesthemselvesneedcomplementarystrategiestoaddresstheseeconomicrealitiesandpositiontheirresidentstoaccessnewemploymentopportunitiesinachangingeconomy.Taxincentivesarenotamagicsolutiontothebasicsrelatedtojobgrowthandlaborquality.TheOpportunitytaxincentiveisatoolandnotaprogram.Itmustbereinforcedbyothereconomicdevelopmentstrategiestomaximizeitsvalue,particularlyforinclusivegrowth.AnInitialScreen:MarketTractionandSocialNeed

Ourprimaryscreenfortheidentificationofpreferredtractsistheco-existenceofmarkettractionandsocialneed.Bymarkettractionwerefertoplaceswherethereissignificantbutunrealizedpotentialforjobgrowthasevidencedbyexistingjobclustersorrelativeproximitytojobclusters,aswellastransportationaccessforlow-incomeresidentstothosejobs.Bysocialneedwerefertocommunitieswhereincome,labormarketparticipation,povertyrates,andeducationalattainmentdemonstratealimitedcapacitytoattractinvestmentabsentapolicycarrotandyetsignifythepotentialtobenefitinordinatelyfromaresuscitationofmarketactivity.Therearemanywaystoidentifytheintersectionofmarkettractionandsocialneed.Webeganbymappingsocialneedbasedontheinterplayofvariableslistedbelow.

• %Populationbelowpoverty• %Householdswithrentormortgagesgreaterthan30%ofincome• %Populationnotinthelaborforce• %ofPopulationwithlessthanahighschooldegree• Giniindexofconcentratedincome

Weappliedafactoranalyticmethodologytothevariablesinordertoconstructaweightedcompositeindexofsocialneed.Wethenmappedalleligiblecensustractsusingtheindex.ThemapbelowshowsthecityofPhiladelphia’seligiblecensustractsmappedwithrespecttolevelsofneed.TherankisrelativetoallothereligibletractsinPennsylvania.Wedifferentiatedamongtenlevelsofneed.Themapshows296eligibletractswithvaryinglevelsofsocialneed.Thequestionthenishowtobestmakechoicesamongtheseeligibletracts.Tohelpmakechoicesalongoursocialneed-markettractionaxis,weappliednationalemploymentdatafromtheLongitudinalEmployer-HouseholdDynamicsdatabase.Thedataiscollectedattheblocklevelandcanbeaggregateduptocensustracts.Moreover,itisupdatedannuallyandcanbeeasilymapped.ThemapbelowshowsPhiladelphiawiththecensustractdifferentiationbasedonsocialneedscoresandthejobsclusterdataforareasthathaveatleast1,000jobsclusteredattheblocklevel.Thelargerthecircle,thegreaterthenumberofjobs.Theoverlayofjobsandneedisoneinitialscreentoidentifystronginvestmentchoices.Inmakingselectionstheremaybetrade-offsbetweensocialneedandmarkettractionamongeligibletracts.Incensustractswheretherearejobrichclustersandahighlevelofsocialneed,theselectionprocessisrelativelyeasy.

Iftherearenoclearinstancesofhighlevelsofjobgrowthandhighlevelsofsocialneed,wefavortrade-offsthatemphasizejobclusterswithineligibletracts,evenininstanceswherethesocialneedisnotthehighestamongalllow-incomeeligibletracts.Thisstrategicchoiceisdrivenbyaprimaryemphasisonjobgrowthandourunderstandingthatjobaccessandemploymentskillswilldomoretoincreasehouseholdincomethantheabsoluteproximityofjobsandsocialneed.Whilemanyruralcommunitiesdonothavethesameemploymentclustersasurbanizedcounties,theselectionprincipleremainsthesame.Identifymainstreetsandbusinessparkswherethereareexistingjobsandgrowthpotentialincludingcommunitiescontiguoustothoseplaces.Localknowledgeiscriticaltoidentifyingemergingbusinessgrowthopportunitiesinruralareas.Itisimportanttonotethatthisisamarket-basedprogramthatdoesnotguaranteeinvestmentinanyselectedcensustract.Tractswithsomepre-existingemploymentbase,includingnewlyemerginghubs,willoftenprovideastrongersignalfornewinvestmenttofollowsuit.Highsocialneedtractsadjacenttojobhubsmaybecandidatesforincreasedinvestmentfromthejobanchorstoadjoiningcommunities.

he

Camden

Montgomery

Philadelphia

Bucks

Gloucester

Delaware

Burlington

Esri, HERE, DeLorme, MapmyIndia, © OpenStreetMap contributors, and the GISuser community

Jobs!( 1001 - 2000

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!( 6001 - 8000

!( >8000

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10 (High Need)