Trump’s Tax Cuts and Jobs Act.
22.02.2018
The sweeping overhaul of the US tax system passed in 2017 has attracted widespread debate across America. Many believe that multinational corporations and the extremely wealthy are set to benefit while the rest of America get precious little. At the same time, Trump is loosening regulation on payday lenders and many fear he is planning a revision of the Community Reinvestment Act, potentially leaving thousands of poor people vulnerable.
The reality of the Tax Cuts and Jobs Act does not match up with its apparent goal: to benefit the whole country, boosting economic development and job opportunities for all. Despite this, p.130 of the Act introduces Opportunity Zones which have the potential to benefit low income communities.
US investors hold trillions of dollars in unrealised capital gains that are a significant untapped resource for economic development. The new tax package contains the Investing in Opportunity Act: a federal program to incentivise investors to put these capital gains into rural and low-income urban communities that have official designation – Opportunity Zones. As of 22nd December 2017, governors and territory chiefs in the US have 90 days to designate their Opportunity Zones.
Opportunity Zones must be created within communities with a poverty rate of at least 20% or where the median family income does not exceed 80% of state-wide median family income. The Act allows 25% of a state’s low-income community population census tracts to be designated.
Investors benefit by gaining either temporary deferral or permanent exclusion from capital gains tax, depending on how long they hold their investment for. The gains must be invested in Opportunity Funds: Treasury-certified investment vehicles that deploy capital into Opportunity Zone businesses and business property.
Due to record highs in the stock market, the new provision has the potential to draw significant investment into low-income communities, many of which are underserved by traditional sources of capital for community development. It is anticipated that the program will be fully implemented by early 2019.
The New York Times welcomed the legislation, calling it ‘a plan to help distressed America.’ It remains cautious, but says that ‘if the zones succeed, they could help revitalise neighbourhoods and towns that are starved for investment’.
There has been huge diversity in local economic development programs in the US and UK over time, and evaluations have shown mixed conclusions. Two examples of such schemes are Enterprise Zones in the UK and Empowerment Zones in the US.
The new Opportunity Zones in the US look similar to Enterprise Zones in UK. Enterprise Zones were established in 2012 and are designated areas across England that support businesses to grow, offering tax incentives and generous grants. London’s Canary Wharf is one of the original and most successful examples.
In 1993, the US enacted its Empowerment Zone initiative with the purpose of creating jobs in the most economically distressed urban and rural areas through tax incentives and grants. Like Opportunity Zones, designated communities had to meet a series of eligibility criteria based on economic distress and its potential for economic development. The application required communities to submit a strategic development plan, involving input from all affected members of the community, and identify sources of private funds and support for the renewal effort. They also had to develop baseline measurements and goals to evaluate the success of the programme.
There has been much debate surrounding outcomes of Enterprise Zones in the UK and Empowerment Zones in the US. Some new large private sector investments in these zones were reportedly in the works before the designations were announced, and some experts believe that in urban areas they are a zero-sum game, merely diverting investment from one part of the city to another.
In the UK, it has been said that they have little or no impact on jobs, economic growth or poverty, and because of generous tax reliefs, the zones have been criticised for depleting the revenues of local governments. In Wales there is fresh controversy as the zones are to be put under scrutiny. Welsh Conservative leader Andrew RT Davies said that there had been ‘very little to show’ for the money spent.
In the US, the implementation period of the zones was criticised for being lengthy and characterised by infighting amongst politicians and interest groups. However, the fact that communities were involved in creating their own plans is a positive characteristic of the scheme. Research has shown that compared to equivalent tracts in rejected Empowerment Zones, designated neighbourhoods experienced substantial improvements in the labour market outcomes of residents.
It is easy for these top down solutions to by-pass community involvement and intelligence. But economic development that truly supports sustainable local economic growth is most effective when it builds on and mobilizes local community assets.
Our partner, Responsible Finance, was involved in the work of the Community Economic Development programme in the UK. The programme is designed to support communities who want to deliver real economic change in their area. These communities lead the process of economic development in their areas. One resident led-led project supported by the programme is Ambition Lawrence Weston (ALW).
Lawrence Weston is a housing estate that suffers from poor and neglected housing stock and high levels of unemployment. The area lacks recreational and retail facilities, and limited council funding has left local services in disrepair. Despite this, the area maintains a strong sense of community. Residents work together to improve the neighbourhood, with a community farm, green spaces, and facilities for older residents, including a Community Transport scheme. ALW aims to improve the lives and wellbeing of local residents and has been successful in bringing together key stakeholders and networks around planning and tackling local neighbourhood issues.
The full case study can be found here.
It is early days for the new Opportunity Zones and too early to assess the influence of community involvement and whether the Zones will have tangible impact on deprived communities in the US. The centrality of local communities to the location, design and evolution of the zones is more likely to result in sustainable impact.