I. INTRODUCTION
What do a superyacht marina in West Palm Beach, Florida; the city in Minnesota that is home to the Mall of America; and a blighted East Harlem, New York, have in common? They are all opportunity zones.1 This may be a striking fact, considering the first two areas are affluent while the third is home to many low-income families with an average income for elderly citizens below twenty thousand dollars.2 The problem with the opportunity zones program, as we currently know it, is that it does not serve the right communities, and when it does, it is not always in the right way.
Blighted neighborhoods have long been considered a legal matter.3 Historically, the law has implemented tools to aid in "fixing" neighborhoods at issue; for example, the eminent domain doctrine allows the government to take land from private owners, placing rebuilding and redevelopment in the hands of the government.4 Moreover, in the case of Kelo v. City of London, the United States Supreme Court held that the government can transfer eminent domain properties to private owners.5
After attempting to take control of urban blight, the government began diversifying its methods through programs and incentives to promote the privatized improvement of these neighborhoods.6 In 2017, the Qualified Opportunity Zone ("QOZ") program was formed out of the Tax Cut and Jobs Act ("TCJA") with the intention to relieve poverty.7 QOZ was created to incentivize privatized improvements of low-income or blighted neighborhoods.8 The program provided favorable tax treatment for investment in businesses within designated tracts referred to as "opportunity zones."9 These zones are designated by the governors of each state, who are tasked with choosing areas that fall within the criteria laid out in the tax code.10
Because Congress enacted the program in 2017, we have yet to see a full ten-year cycle of the program.11 As a result, it faces the same challenges as most new government programs—growing pains that arise from identifying issues through practical implementation and data collection.12 Consequently, several issues with the QOZ program have emerged, including increased gentrification and tracts that fail to meet the intended criteria.13
Some consequences, such as the influx of luxury and high-end businesses, are adverse to the legislative goals of the program.14 These investments do not aid the population that needs economic growth. Instead, the investments harm at-risk populations by forcing them out of their neighborhoods through increased living costs resulting from expensive amenities and high-end housing.15 This Article proposes a remedy for some of the unintended results the program has caused.
In Part II, this Article will discuss the origins and purpose of the QOZ program.16 This part will explain how the program is designed to work, describe the legislative goals behind the program, and identify the provisions that may be holding the door open for abuse.17
Part III will discuss how the code sections are applied and the consequences of that application. Notably, this part will discuss the investments that the opportunity zone program has enabled because of how it is written. Due to the current drafting, the code has made it more attractive to invest in high-end businesses.18 Businesses within opportunity zones largely comprise ventures such as luxury apartments.19 These investments do not aid the individuals the program is intended to help. This has resulted in pushing the communities meant to be served out of their homes and neighborhoods.20
In Part IV, this Article will propose a change to the language of the code to curb abuse of its tax incentives. Specifically, this Article argues that the current definition of Qualified Opportunity Zone Business ("QOZB") is too broad, which has allowed for misuse. Redrafting this definition to require approval by local economic development boards will allow for a narrower stream of investments, such as grocery stores or low-income housing, to serve the community living in these areas and take a holistic approach to fighting urban blight.
II. WHAT IS A QUALIFIED OPPORTUNITY ZONE?
The QOZ program was enacted with significant bipartisan support.21 The program was intended to act as a jump-start for economic activity in blighted or low-income areas.22 During the Joint Economic Committee hearing, opportunity zones were said to "offer an additional path to spur economic development."23 Specifically, lawmakers intended to use the program to "seed new startups, accelerate business expansions, create jobs, increase and improve housing options, and revitalize the built environment in distressed communities across the country."24
To facilitate this result, the QOZ program provides tax incentives for investors who invest in a business or qualified opportunity fund within tracts that have been designated as "opportunity zones."
Three main categories of tax incentives are available: a zero-percent tax on new gains, deferred taxation, and a basis boost. First, the zero-percent tax on new gains means that if an investor holds a stake in a Qualified Opportunity Fund ("QOF") for ten years, any capital gains from the QOF investment are taxed at a federal rate of zero percent. Capital gains refer to income from the sale of property, including stocks, business property, and financial instruments, and are distinct from ordinary income, such as wages, rents, dividends, and interest.25
An investor must invest in an opportunity zone to take advantage of these benefits.26 An area becomes a designated opportunity zone after two steps. First, it must meet the specified criteria to be considered a low-income census tract ("LIC") as defined under the New Markets Tax Credit ("NMTC") Program or, in limited situations, a census tract adjacent to an LIC.27 An area meeting this definition will be eligible for designation by the governor of its respective state.28 Second, the area must be designated by the governor. The governor of each state or U.S. territory and the mayor of the District of Columbia are allowed to designate tracts as opportunity zones.29 A maximum of twenty-five percent of eligible tracts within a state can be designated as opportunity zones.30 Additionally, up to five percent of these designated zones may be contiguous to low-income census zones.31
Investments must also satisfy the requirements of Code Section 1400Z-2. First, QOZ investments may be made directly in a QOZ business property or through a QOF.32 A QOF is a corporation or partnership that is organized to invest in QOZ property.33 At least ninety percent of a QOF's assets must be qualified opportunity zone property.34 Opportunity zone property comes in three forms: stock, partnership interest, or qualified opportunity zone business property.35
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Footnotes
1. See The Editorial Board, Opportunity Zones–For Billionaires, N.Y. TIMES (Nov. 16, 2019), https://www.nytimes.com/2019/11/16/opinion/trump-tax-opportunityzones.html; David J. Bartoletti, A Primer on Qualified Opportunity Zones, 36:1 PRAC. TAX LAW. 1, 6 (2021) ("In Minnesota, the area south of the regional airport is a QOZ (Qualified Opportunity Zone). It includes a 'distressed' area called The Mall of America, the largest shopping center in the United States."); see also CHRISTOPHER A. COES & TRACY HADDEN LOH, NATIONAL OPPORTUNITY ZONES RANKING REPORT 60, 63 (2018).
2. THOMAS P. DINAPOLI & KENNETH B. BLEIWAS, AN ECONOMIC SNAPSHOT OF THE EAST HARLEM NEIGHBORHOOD 1, 3 (2017) ("Almost one-third (29 percent) of the households had incomes below the federal poverty level, much higher than the citywide share (18 percent).").
3. See generally Wendell E. Pritchett, The "Public Menace" of Blight: Urban Renewal and the Private Uses of Eminent Domain, 21 YALE L. REV. 1, 3-6 (2003) (discussing the view and thoughts behind beating urban blight).
4. See id. at 3; see also William Reis, Eminent Domain and Land Disposition: Urban Renewal in Upstate New York (May 2019) (M.S. Thesis, Colum. Univ.) (on file with Colum. Univ. Acad. Commons) ("Through various methods of urban renewal, including land disposition and eminent domain . . . cities have created disasters for the residents of the cities and the character of the environment during the period of heavy American urban renewal in the mid-20th century.").
5. Kelo v. City of New London, 545 U.S. 469, 478 (2008).
6. See Pritchett, supra note 3, at 48.
7. See DONALD J. MARPLES, TAX INCENTIVES FOR OPPORTUNITY ZONES 1 (2022). 8. Tax Cut and Jobs Act, Pub. L. No. 115–97, 131 Stat. 2054 (hereinafter "TCJA"); 26 U.S.C. §1400Z-1.
9. 26 U.S.C. §1400Z-2; see Ruta R. Trivedi, Opportunity Zones Providing Opportunity for Whom?: How the Current Regulations Are Failing and a Solution to Uplift Communities, 27 WASH. & LEE J. CIV. RTS. & SOC. JUST. 745, 748 (2021).
10. 26 U.S.C. §1400Z-1(b)(A); see Bartoletti, supra note 1, at 6.
11. See TCJA § 2054.
12. TCJA § 2054; 26 U.S.C. §§ 1400Z-1, 1400Z-2.
13. Samuel Dastrup & Ingrid Gould Ellen, Linking Residents to Opportunity: Gentrification and Public Housing, 18 CITYSCAPE:J. POL'Y DEV. & RSCH. 87, 88 (2016) ("As a result [of gentrification], some of the subsidized housing developments that were created in racially concentrated areas of high poverty are now seeing increases in incomes, educational levels, and White population shares in their surroundings.").
14. The Promise of Opportunity Zones: Hearing Before the Joint Econ. Comm., 115th Cong. 36-37 (2018) (statement of Hon. Martin Heinrich, Ranking Member, U.S. Sen. from N.M.).
15. Trivedi, supra note 9, at 770.
16. See infra Part II: What is a Qualified Opportunity Zone.
17. Id.
18. See id.
19. See Trivedi, supra note 9, at 745.
20. See Jesse Drucker & Eric Lipton, Meant to Lift Poor Areas, Tax Break Is Boon to Rich, N.Y. TIMES (Sept. 1, 2019), https://www.nytimes.com/2019/08/31/business/ tax-opportunity-zones.html (noting the gentrification of some opportunity homes and the disparity in investment between high-end development projects and poorer communities).
21. History of Opportunity Zones, ECON. INNOVATION GRP., https://eig.org/opportunityzones/history (last visited Jan. 9, 2024) ("The policy as we know it today is based on the bipartisan Investing in Opportunity Act, which was championed by Senators Tim Scott (R-SC) and Cory Booker (D-NJ) and Representatives Pat Tiberi (R-OH) and Ron Kind (D-WI), who led a regionally and politically diverse coalition of nearly 100 congressional cosponsors in the House and Senate.").
22. See Trivedi, supra note 9, at 768.
23. The Promise of Opportunity Zones: Hearing Before the Joint Economic Committee, 115th Cong. 36-37 (2018) (statement of Hon. Martin Heinrich, Ranking Member, U.S. Sen. from N.M.); SEAN LOWRY ET AL.,TAX INCENTIVES FOR OPPORTUNITY ZONES: IN BRIEF 8 (2018) ("OZs are an addition to the array of geographically targeted, federal programs and incentives for economic development").
24. Trivedi, supra note 9, at 768.
25. Daniel Marcin, Opportunity Zones: A Place Based Incentive for Investment in Low Income Communities, 22 CITYSCAPE: J. POL'Y DEV. & RSCH. 101, 105 (2020)
26. 26 U.S.C. §1400Z–2.
27. Bartoletti, supra note 1, at 6.
28. See id.
29. Id.; 26 U.S.C. § 1400Z-1(b)(1)(A).
30. 26 U.S.C. §1400Z-1(d)(1); Bartoletti, supra note 1, at 6 ("However, states or territories in which there are fewer than 100 LICs could designate up to 25 LICs. In addition, substantially all of Puerto Rico is a QOZ.").
31. 26 U.S.C. § 1400Z-1(e)(2).
32. 26 U.S.C. § 1400Z-2(d)(1); I.R.C. §1400Z-2(d)(2)(D).
33. 26 U.S.C. § 1400Z-2(d)(1); I.R.C. §1400Z-2(d)(2)(D).
34. 26 U.S.C. § 1400Z-2(d)(1); I.R.C. §1400Z-2(d)(2)(D).
35. 26 U.S.C. §1400Z-2(d)(2)(A).
Originally Published by American University Journal of Gender, Social Policy & the Law
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