Special Report: Panel Talks Opportunity Zones, Could Help Struggling S.C. Communities
Friday, December 7th, 2018
Current and former elected officials are hoping a new federal tax break will boost portions of South Carolina that have been bypassed during the economic recovery.
“We know they’ve been discarded, they’ve been marginalized and they’ve been forgotten,” state Treasurer Curtis Loftis said at the University of South Carolina’s 38th Annual Economic Outlook Conference. “This is a wonderful tool.”
The new tool is the Opportunity Zone program. It was created as part of the tax cut package passed by Congress at the end of 2017. It allows taxpayers to defer taxes on capital gains – and potentially erase some or all of the tax liability – by rolling those gains into investments in economically distressed areas of the country.
Loftis, Columbia Mayor Steve Benjamin and ex-Gov. Jim Hodges participated in a panel at the conference, held Dec. 4 at the USC Alumni Center. Jeanne Milliken Bonds, community development officer with the Federal Reserve Bank of Richmond, led the discussion.
“As the economy has been growing, there has been some unevenness across the country as far as growth,” Bonds told the audience.
As America’s rebound from the recession enters its tenth year, there is evidence of that unevenness in South Carolina. Six counties – Allendale, Barnwell, Bamberg, Clarendon, Marion and Orangeburg – have lost jobs during the rally.
Some of the losses in rural South Carolina communities go back to the passage of NAFTA in 1993, which shifted many manufacturing jobs to Mexico.
“There are places in this state that lost employers and never fully recovered,” said Doug Woodward, director of research at USC’s Darla Moore School of Business.
Hodges, who served from 1999-2003, said many of those areas are plagued by chronic poverty, poor education and lack of access to capital.
“Those were – and those continue to be – the toughest areas to deal with,” he said.
The Opportunity Zone program could address some of the issues regarding capital. The zones are identified by census tract, using data on household income and poverty. Governors could nominate up to 25 percent of the eligible tracts in their state.
The Internal Revenue Service has certified 8,762 tracts nationwide. There are 128 in South Carolina, with at least one in each county.
Investments can be made in those tracts through a Qualified Opportunity Fund. The fund can be a partnership or corporation and must hold at least 90 percent of its assets in Opportunity Zones.
Investors roll their capital gains into the funds, which invest in real estate or business development in Opportunity Zones. The investor can defer their capital gains tax liability while they remain invested in the fund. Depending how long they stay in, they also may be able to exclude 10 percent or more of the deferred gain.
“The potential is for trillions of dollars in deferred or avoided gains to be invested,” Benjamin said.
The panel said investment opportunities could include rural infrastructure such as water/sewer, solar and broadband.
“There are states that are looking at workforce housing,” Bonds said.
The Opportunity Zones may overlap with areas that are already subject to other federal benefits, such as the New Market Tax Credit, which also promotes investment in low-income communities. This will make the Opportunity Zone benefits “stackable,” as Benjamin put it.
U.S. Sen. Tim Scott (R-S.C.) was one of the sponsors of the Opportunity Zone legislation. His office will join with Gov. Henry McMaster and the Council of Development Finance Agencies to host a daylong summit on Opportunity Zones on Jan. 25 at the Columbia Metropolitan Convention Center.
Regulations are still being worked out by the Treasury Department and IRS. The panel pointed out, however, that unlike some programs that promote investment in low-income communities, there won’t be a lot of strings attached to Opportunity Zones.
“There could be positive and negative impacts for low or moderate-income communities,” Bonds said. “Gentrification is one of those areas. Instead of addressing uneven growth, you start to move people around.”
Another possibility is that the Qualified Opportunity Funds focus only on census tracts near large, rapidly developing metro areas. The panel expressed hope that the program benefits struggling communities as much as it will investors.
“We’ve got to be sure we’re helping people on the ground,” Benjamin said. “We have to ensure we’re good stewards of this program or it won’t be here for us.”