The 2017 tax revision (P.L. 115-97) temporarily authorized Opportunity Zone (OZ) tax incentives for investments held by Qualified Opportunity Funds (QOFs) in qualified OZs.¹ The Community Development Financial Institutions (CDFI) Fund (hereinafter, the "Fund"), organized under the Department of the Treasury,incentives, which are intended to encourage private investment in economical y distressed T communities.1 In 2018, the Community Development Financial Institutions (CDFI) Fund in the Treasury Department designated qualified census tracts that are eligible for OZ tax incentives after receiving recommendations from the head executives at the state level. Qualified OZ designations are in effect through 2026. The tax benefits for these a state’s chief executive officer (CEO), general y the governor. Qualified OZ designations are in effect through the end of 2026. Investments eligible for OZ tax incentives must be channeled through a qualified opportunity fund (QOF). The tax benefits for these QOF investments include (1) a temporary tax deferral for capital gains reinvested in a QOF, (2) a step-up in basis for any investment in a QOF held for at least five years (10% basis increase) or seven years (15% basis increase), and (3) a permanent exclusion of capital gains from the sale or exchange of an investment in a QOF held for at least 10 years.

This report briefly These incentives effectively increase the after-tax rate of return of QOF investments to their investors. This report describes what census tracts have been designated as an OZ, what types of entities can are eligible are eligible as QOFs, the tax benefits of investments in QOFs, and what economic effects can be expected from OZ tax incentives.

, and several issues for Congress regarding the implementation and oversight of OZ tax incentives. For further reading on the CDFI Fund’Fund's other programs and analysis of related policy issues, see CRS Report R42770, Community Development Financial Institutions (CDFI) Fund: Programs and Policy Issues, by Sean Lowry. (Throughout this report, the CDFI Fund is referred to simply as “the Fund”.) For updated guidance regarding OZ tax incentives, including any IRSInternal Revenue Service (IRS) notices and proposed regulations, see websites created by the Fund and IRS.²

Opportunity Zone Designations

To become a qualified OZ, the CEO (e.g., governor) of the state must have IRS.2 Opportunity Zone Designations Opportunity zones were nominated by states’ CEOs (e.g., governors) in early 2018. Specifical y, states’ CEOs nominated, in writing, a limited number of census tracts to the Secretary of the Treasury.³Treasury to be designated eligible for OZ tax incentives.3 These nominations were due by March 21, 2018.4 A nominated tract must have been either (1) a qualified low-income community (LIC), using the same criteria as eligibility under the New Markets Tax Credit (NMTC),⁴5 or (2) a census tract that was contiguous with a nominated LIC if the median family income of the tract doesdid not exceed 125% of that contiguous, nominated LIC.6 In principle, these requirements appear to have 1 T hese provisions amend the Internal Revenue Code (IRC) as Sections 1400Z-1 and 1400Z-2. 2 CDFI Fund, “Opportunity Zone Resources,” at https://www.cdfifund.gov/Pages/Opportunity-Zones.aspx; and IRS, “Opportunity Zones Frequently Asked Questions,” at https://www.irs.gov/newsroom/opportunity-zones-frequently-asked-questions. 3 For the purposes of OZ tax incentives, a “state” includes the District of Columbia and any U.S. possession. 4 IRS Rev. Proc. 2018-16, p. 3, at https://www.irs.gov/pub/irs-drop/rp-18-16.pdf. 5 See IRC Section 45D(e). Qualifying LICs, under the NMT C, include census tracts that have at least one of the following criteria: (1) a poverty rate of at least 20%; (2) a median family income below 80% of the greater of the statewide or metropolitan area median family income if the LIC is located in a metropolitan area; or (3) a median family income below 80% of the median statewide family income if the LIC is located outside a metropolitan area. In addition, designated targeted populations may be treated as LICs. For more information, see CRS Report RL34402, New Markets Tax Credit: An Introduction, by Donald J. Marples and Sean Lowry. 6 See IRS Rev. Proc. 2018-16, p. 2, at https://www.irs.gov/pub/irs-drop/rp-18-16.pdf. Congressional Research Service 1 Tax Incentives for Opportunity Zones: In Brief been intended to provide governors with the ability to identify LICs, or low - to moderate-income areas adjacent to LICs, in which to direct OZ tax benefits.7 P.L. 115-97 explicitlyexceed 125% of that contiguous, nominated LIC.⁵ Nominations were due to the Fund by March 21, 2018.⁶

Figure 1 provides a screenshot of the Fund's online mapping tool, which displays census tracts that have been designated as a qualified OZ by the state or territory's CEO and approved by the Fund. A complete list of qualified OZs has been published as an IRS Internal Revenue Bulletin and is available on the Fund's "Opportunity Zone" website.⁷

Figure 1. CDFI Fund Mapping Tool Showing Designated Opportunity Zones (OZs)

Source: CRS screenshot of CDFI Fund, CIMS mapping tool, accessed November 11, 2018, at https://www.cims.cdfifund.gov/preparation/?config=config_nmtc.xml. Notes: Designated OZs are shown in blue. Congressional district borders have been enabled in the above screenshot.

P.L. 115-97 limits the number of census tracts within a state that can be designated as limits the number of census tracts within a state that can be designated as qualified OZs based on the following criteria:

•  If the number of LICs in a state is less than 100, then a total of 25 census tracts may be designated as qualified OZs.
•  If the number of LICs in a state is 100 or more, then the maximum number of census tracts that may be designated as qualified OZs is equal to 25% of the total number of LICs.
•  Not more than 5% of the census tracts designated as qualified OZs in a state can be non-LIC tracts that are contiguous to nominated LICs. This effectively limits the number of census tracts that are not economical y distressed or low income from receiving the OZ designation. The official list of designated Opportunity Zones was published in IRS Notice 2018-488 and IRS Notice 2019-42.9 Qualified Opportunity Funds P.L. 115-97 defined a QOF as any investment vehicle organized as a corporation or partnership for the purpose of investing in a qualified opportunity zone property (other than another QOF) and which holds at least 90% of its assets in qualified OZ property. A qualified OZ property can be a stock or partnership interest in a business located within a qualified OZ or tangible business property located in a qualified OZ. Examples of potential QOF investments in qualified OZ property include purchasing a building located in a qualified OZ, purchasing stock in a business located in a qualified OZ, or purchasing machinery used by a business located in a qualified OZ. A qualified OZ property must have been acquired by the QOF after December 31, 2017. For each month that a QOF fails to meet the 90% requirement it must general y pay a penalty. The penalty is calculated based on the monthly shortage multiplied by an underpayment rate (short-term federal interest rate plus three percentage points). The IRS instructs a corporation or partnership seeking to become a QOF to self-certify its status by fil ing out Form 8996 as part of its annual income tax filings.10 (This self-certification process differs from the NMTC, in which the Fund takes prospective action to certify “community development entities” (CDEs) before they can receive an NMTC al ocation.) 7 See Senator T im Scott, “Op-ed: Opportunity Zones Are Really Working,” Washington Examiner, October 18, 2019, at https://www.washingtonexaminer.com/opinion/op -eds/sen-tim-scott-opportunity-zones-are-really-working. In his op-ed, Senator Scott, who co-sponsored the original, standalone bill proposing OZs, says that “ …instead of taking a top-down approach to addressing poverty, Opportunity Zones empower our community leaders, mayors, and governors to come together to decide for themselves which of their neighborhoods should be designated to pa rticipate.” T hat standalone bill in the 115th Congress was the Investing in Opportunity Act (H.R. 828; S. 293). 8 Internal Revenue Service, Internal Revenue Bulletin, Bulletin No. 2018-28, Washington, DC, July 9, 2018, https://www.irs.gov/pub/irs-drop/n-18-48.pdf. 9 Internal Revenue Service, Internal Revenue Bulletin, Bulletin No. 2019-29, Washington, DC, July 15, 2019, https://www.irs.gov/pub/irs-drop/n-19-42.pdf. 10 For more information, see IRS, “Opportunity Zones Frequently Asked Questions,” at https://www.irs.gov/newsroom/opportunity -zones-frequently-asked-questions. Congressional Research Service 2 link to page 7 link to page 7 Tax Incentives for Opportunity Zones: In Brief Tax Benefits for Qualified OZ Investments P.L. 115-97 provides three main tax incentives to encourage investment in qualified OZs. These benefits are briefly summarized, followed by an il ustrative example showing how the three benefits reduce the amount of capital gains subject to taxation for OZ investors: 1. Temporary deferral of capital gains that are reinvested in qualified OZ property:be non-LIC tracts that are contiguous to nominated LICs.

Table 1 displays the maximum number of census tracts in each state or territory that were eligible for OZ designation under each of the two nomination criteria. These data, current as of February 27, 2018, were posted on the Fund's website before the qualified OZ recommendations issued by state or territory CEOs were certified.

What Is a Qualified Opportunity Fund?

What Are the Tax Benefits for Qualified Investments?

• 1. Temporary deferral of capital gains that are reinvested in qualified OZ property: Taxpayers can defer capital gains tax due upon sale or disposition of a (presumably non-OZ) asset if the capital gain portion of that asset is reinvested within 180 days in a QOF.⁹11 Under current law, the deferral of gain is available on qualified investments up until the earlier of: (a) the date on which the investment in the QOF is sold or exchanged, or (b) December 31, 2026.¹⁰
• 2. 12 In other words, this deferral is only in effect until December 31, 2026. Any reinvested capital gains in a QOF made before this date must be realized on December 31, 2026. Thus, investors would realize the deferred gain in their 2026 income filings, even if they do not sel or dispose of their investment in a QOF. Any reinvested capital gains in a QOF after this date are not eligible for deferral. 2. Step-up in basis for investments held in QOFs: If the investment in the QOF is held by the taxpayer for at least five years, the basis on the original gain is increased by 10% of the original gain. Basis is general y the value of capital gain when the investment is sold, before it is reinvested in a QOF.13 (An increase in basis, al else unchanged, reduces the amount of the investment subject to taxation and hence reduces tax liability.) increased by 10% of the original gain. If the OZ asset or investment is held by the taxpayer for at least seven years, the basis on the original gain is increased by an additional 5% of the original gain.
• 3. Exclusion 3. Exclusion of capital gains tax on qualified OZ investment returns returns held for at least 10 least 10 years: The basis of investments maintained (a) for at least 10 years and (b) until at least December 31, 2026, will wil be eligible to be marked up to the fair market value of such investment on the date the investment is sold. Effectively, this amounts to an exclusion of capital gains tax on any gains earned from the investment in the QOF (over 10 years) when the investment is sold or disposed.

Table 2 illustrates Table 1 il ustrates the tax benefits toof a hypothetical investment of $100,000 in a QOF made in 2019. This investment could be $100,000 in capital gains earned from the sale or disposition of another asset (e.g., real property) from outside of an OZ that is reinvested into a QOF within 180 days from the date of that sale or disposition. Taxes on these capital gains are deferred while the investment is held in a QOF.

Column A shows the investment'’s value over time, assuming a 7% annuallyannual y compounded rate of return. This hypothetical investment is simplified to assume that an initial investment is made in a QOF investment in a QOF is 11 For more background on capital gains taxation, see CRS Report 96-769, Capital Gains Taxes: An Overview, by Jane G. Gravelle; and p. 391 in CRS Committee Print CP10003, Tax Expenditures: Com pendium of Background Material on Individual Provisions — A Com m ittee Print Prepared for the Senate Com m ittee on the Budget, 2018 , by Jane G. Gravelle et al. 12 IRC Section 1400Z-2(b)(1). 13 For example, an investor buys a piece of commercial real estate for $500,000 and then sells it two years later for $600,000. Although the investor realized $100,000 in capital gain on the sale of the real estate, the gain would not be recognized (subject to tax) upon sale if reinvested within 180 days in a QOF. T he “ basis adjustments” would affect the $100,000 reinvested capital gains. T his calculation is illustrated in Table 1. Congressional Research Service 3 link to page 8 Tax Incentives for Opportunity Zones: In Brief made in year one and the QOF constantly reinvests any returns to that initial investment (i.e., the in year one and the QOF constantly reinvests any returns to that initial investment (i.e., the QOF does not pay out periodic dividends to the investor during the life of the investment).

Column B shows the increase in adjusted basis earned from holding that investment in a QOF over time: 10% of the original capital gain of $100,000 after the investment is held in a QOF for at least five years (10% of $100,000 = $10,000), and 15% after the capital gain is held for at least seven years.

(15% of $100,000=$15,000). Column C shows the mandatory recognition of reinvested capital gains at the end of 2026.¹¹14 Even if the investor retains their investment in the QOF beyond 2026, they must still recognize $85,000 in capital gains under this hypothetical.¹²

Column D shows the basis for capital gains taxstil recognize or pay capital gains tax on $85,000 in capital gains under this hypothetical example. This adjustment amount is calculated as $100,000 in capital gains initial y rolled over into the QOF in 2019 (i.e., tax deferred) minus the $15,000 in basis adjustment for holding their investment in the QOF for seven years. Column D shows the amount of capital gains subject to taxation if the investment in a QOF is sold or disposed in any of the 10 years shown in the table. Of note, if the investment was sold after being held for 10 years, then any capital gains earned on the initial y reinvested $100,000 would be completely excluded from tax. In the hypothetical example, the investor earned an additional $96,715 from their initial investment of $100,000. Therefore, if they held that QOF investment for 10 years and then sold it, they would not pay tax on the $96,715 in gains as wel as not paying tax on $15,000 worth of the original investment. (They would have realized $85,000 in capital gains in 2026, and paid capital gains tax on that amount.) In other words, for their investment valued at $196,715 in 2029, the investor would have paid tax on $85,000 of this amount in 2026, with the remainder being tax-free. This calculation il ustrates that a major economic incentive to investing in a QOF is the permanent exclusion of capital gains earned after the acquisition of the QOF investment.15 Table 1. Illustration of Opportunity Zone (OZ) Tax Benefits sold or disposed in any of the 10 years shown. One of the three major economic incentives to investing in a QOF is the permanent exclusion of capital gains earned after the acquisition of the QOF investment.¹³ This is shown in the last year of the table where no additional capital gains would be due if the investment was sold—as $85,000 was previously recognized at the end of 2026 (as shown in Column C).

Note that Note that Table 2 1 only shows the tax-related benefits of investing in a QOF. It does not include the economic benefits of temporarily deferring capital gains tax on the initial $100,000 investment, which would depend on the time value of money, which is the economic concept that an amount of money available at the present time is general y worth more than the same amount in the future. Accordingly, investors would prefer to defer paying tax because the money they would use to otherwise pay the tax could be put to some other use with a higher rate of return (e.g., investing in other assets) while their tax bil is deferred. From an income tax collection . From an income tax perspective, though, deferral of capital gains tax just delays a tax liability from one period to another.

Actual QOF investment structures could differ from the arrangement inin Table 2. As seen in1. With a similar tax benefit, the New Markets Tax Credit (NMTC), investors have developed financial structures that increase the amount of other funding from either private or public sources that are used with the NMTC (i.e., increasing leverage on the NMTC investment).¹⁴16 Additional layers of financing structures could increase the complexity of investment arrangements and costs attributed to fees and transactional costs instead of development.¹⁵

16 Under the NMT C, the investor receives a credit equal to 5% of the total amount paid for the stock or capital interest at the time of purchase. For the final four years, the value of the credit is 6% annually. Investors must retain t heir interest in a qualified equity investment throughout the seven -year period. T he NMT C value is 39% of the cost of the qualified equity investment and is claimed over a seven-year credit allowance period. For more information, see CRS Report RL34402, New Markets Tax Credit: An Introduction, by Donald J. Marples and Sean Lowry. Congressional Research Service 5 Tax Incentives for Opportunity Zones: In Brief of development, which could ultimately reduce investment in development projects, al else being equal.17 OZ tax incentives are in effect from the enactment of P.L. 115-97 on December 22, 2017, through December 31, 2026. There is no gain or deferral available with respect to any sale or exchange made after December 31, 2026, and there is no exclusion available for investments in qualified OZs made after December 31, 2026.

Proposed Regulations

Implementing Regulations The Department of the Treasury hasand IRS have issued multiple sets of proposed regulations related to investments in a QOF (under Section 1400Z-2). The most recent notice of proposed rulemaking (NPRM) wasNotices of Proposed Rulemaking (NPRM) were published in the Federal Register on October 29, 2018, and May 1, 2019.18 The final regulation was published in the Federal Register on January 13, 2020.19 These regulations inform investors, QOFs, and other parties that have invested in or are considering investing in projects located within qualified OZs. A comprehensive analysis of the lengthy, final regulation is outside the scope of this report.20 With that said, commentators have noted that the final regulation provides guidance on a range of transactional matters, such as what types of capital gains may be invested, what qualifies as qualified OZ business property, when QOF transactions trigger or do not trigger recognition of capital gain, when capital gains qualify for the purposes of the 10-year exclusion, and other exit considerations for investors.21 Some of these positions are consistent with those established in the regulations proposed in 2018 and 2019, whereas other positions in the final regulation represent a change from the previous regulations. The final regulation became official y effective on March 13, 2020, but commentators and practitioners have noted that it appears to have mixed guidance for retroactive application. The preamble of the final regulation notes that taxpayers may choose to either rely on the final regulation or the proposed regulations, as long as they pick one or the other consistently.22 17 For more discussion, see Government Accountability Office (GAO), New Markets Tax Credit - Better Controls and Data Are Needed to Ensure Effectiveness, GAO-14-500, July 2014, pp. 5-20, at https://www.gao.gov/assets/670/664717.pdf. 18 Internal Revenue Service (IRS), Department of the Treasury, “Investing in Qualified Opport unity Funds,” 83 Federal Register 54279-54296, October 29, 2018; and 84 Federal Register 18652-18693, May 1, 2019. The regulatory docket (including public comments) on the May proposed rule is available at https://www.regulations.gov/document?D=IRS-2019-0022-0001. 19 IRS, Department of the Treasury, “Investing in Qualified Opportunity Funds,” 85 Federal Register 1866-2001, January 13, 2020. 20 T he final regulation is 136 pages long in the triple-column version printed in the Federal Register, above, and is 544 pages long in the preliminary version posted on the IRS website at https://www.irs.gov/pub/irs-drop/td-9889.pdf. 21 For shorter summaries of the final regulation, see Marie Sapirie, “Do You Hear the People Sing? A Guide to the Final O-Zone Regs,” Tax Notes Federal, January 6, 2020; and John Sciarretti and Michael Novogradac, Final OZ Regulations - Quick Take, Novogradac, December 19, 2019, https://www.novoco.com/notes-from-novogradac/final-oz-regulations-quick-take. For more detailed summaries of the final regulation, see Lisa M. Zarlenga, John Cobb, and Caitlin R. T harp, Final Opportunity Zone Regulations Provide Som e Much -Needed Clarity, Steptoe & Johnson LLP, December 27, 2019, at https://www.steptoe.com/en/news-publications/final-opportunity-zone-regulations-provide-some-much-needed-clarity.html; and Lisa M. Brill et al., Opportunity Zones: Final Regulations Provide Additional Flexibility, Shearman & Sterling, January 14, 2020, at https://www.shearman.com/perspectives/2020/01/opportunity-zones-final-regulations-provide-additional-flexibility. 22 Some commentators have noted that this choice in applicable regulations could increase short -term complexity and decisions for taxpayers. Stephanie Cumings, “O-Zone Rules Applicability Date Raises Dilemma for Investors,” Tax Congressional Research Service 6 Tax Incentives for Opportunity Zones: In Brief Individual sections of the final regulation, though, appear to al ow a taxpayer to apply either the final or a proposed version of the regulations on a section-by-section basis.23 IRS and Treasury could clarify this issue in subsequent communications. Expected Economic Effects of OZs Because OZs are a relatively new tax benefit, there are limited data that can be used to assess their specific impacts on economic development. Nonetheless, economic theory and examination of several other geographical y targeted federal programs and incentives for economic development may provide insights on the expected economic effects of OZs. Examples of similar economic development incentives that are administered through the tax code include the NMTC,24 the low-income housing tax credit (LIHTC),25 and the tax credit for the rehabilitation of historic structures.26 Below is a brief discussion of potential economic effects of OZs. Effects on Employment Current place-based economic development tax polices tend to be structured to directly benefit owners of capital who invest in particular communities or in particular types of projects and to indirectly benefit the residents of low-income communities. The OZ tax incentives follow this structure by delivering a direct benefit to the owners of capital through capital gains tax relief. Benefits delivered in this manner effectively reduce the cost of investment (i.e., the cost of capital). Economic theory would predict that tax subsidies for capital would not directly benefit workers (e.g., in the form of higher wages).27 While it is too soon for detailed analysis of the OZ tax incentives, research on the NMTCs has shown limited effects on employment.28 Effects on Investment Studies find that place-based economic development incentives tend to shift investment from one area to another, rather than result in a net increase in aggregate economic activity.29 Previous analysis of economic development tax incentives suggests that any one of these tax incentives on its own might be insufficient to generate a positive investment return from an otherwise unprofitable development project. However, developers may be able to “stack” the benefits of Notes Federal, January 15, 2020. 23 For example, see Stephanie Cumings, “Confusion Looms About Which Set of O-Zone Regs to Apply,” Tax Notes Today Federal, January 29, 2020. 24 See CRS Report RL34402, New Markets Tax Credit: An Introduction, by Donald J. Marples and Sean Lowry. 25 See CRS Report RS22389, An Introduction to the Low-Income Housing Tax Credit, by Mark P. Keightley. 26 See National Park Service, “T ax Incentives for Preserving Historic Properties,” at https://www.nps.gov/tps/tax-incentives.htm. 27 Economic theory suggests that the substitution effect (the use of more capital, relative to labor) could offset the benefits of the output effect (the use of more labor, due to more investment and expanded economic activity). The net effect of these tax subsidies will depend on which effect is larger. For more discussion on the effects of economic development policies targeting capital versus labor, see CRS Report R42770, Com m unity Developm ent Financial Institutions (CDFI) Fund: Program s and Policy Issues, by Sean Lowry. 28 Harger, K., A. Ross, and H. Stephens, “What matters the most for economic development? Evidence from the Community Development Financial Institutions Fund,” Papers in Regional Science 98, no. 2, pp. 883 -904, 2019. 29 For a discussion of the economic literature on geographically targeted development policies, see CRS Report R42770, Com m unity Developm ent Financial Institutions (CDFI) Fund: Program s and Policy Issues, by Sean Lowry. Congressional Research Service 7 Tax Incentives for Opportunity Zones: In Brief multiple federal tax incentives (as wel as any state and local incentives). The sum of these benefits could make a project located in one area more profitable than alternatives. OZs and New Markets Tax Credit (NMTCs) With limited information currently available on the economic effects of OZs, policymakers may compare them to another economic development tax incentive—the NMTC. The NMTC is a nonrefundable tax credit intended to encourage private capital investment in eligible, impoverished, low-income communities. NMTCs are al ocated by the CDFI under a competitive application process. Investors who make qualified equity investments reduce their federal income tax liability by claiming the credit. While both the NMTC and OZs are geographical y targeted and provide tax incentives to investors, several differences between OZs and NMTC discussed below may lessen the applicability of any findings on the NMTC to OZs. One key difference is that OZ tax benefits are available to most investment in OZs, whereas NMTC tax benefits are available to a more limited set of approved investments. This fol ows from the NMTC being limited to a set amount per year ($3.5 bil ion most recently) while the OZ benefits are uncapped. A second difference is that there are no statutory requirements for outcome-based reporting of OZ tax benefits, whereas NMTC tax benefits are subject to such reporting. A Government Accountability Office (GAO) report found a lack of statutory authority for OZ data col ection.30 In contrast, NMTC investments are subject to more statutory restrictions and structural layers of accountability to low-income populations and communities than OZs. For example, the Fund evaluates NMTC applications based on a set of factors. One factor is the potential impact that the investments supported wil have on “community outcomes,” including benefits to low-income persons and jobs directly induced by the investments.31 Investments made by QOFs are eligible to benefit a broad range of potential projects, regardless of their potential “community outcomes.”32 A final difference concerns community focus (investment vehicles for OZs are not required to have a community focus, whereas those for NMTCs are required to have a primary mission of serving or providing investment capital to low-income communities). As a result of these differences between NMTCs and OZs, research findings from the NMTC may not be applicable to OZs. In addition, studying OZs is further complicated because they could direct more investment to low-income communities than the NMTC (as a result of being uncapped), but the investment may be less focused to achieve community outcomes. Revenue Effects The Joint Committee on Taxation initial y estimated that the OZ tax incentives would result in a revenue loss to the federal government of $1.6 bil ion over 10 years.33 Subsequent tax expenditure estimates were higher: a revenue loss of $8.2 bil ion over 5 years.34 The revenue loss within the initial 10-year and most recent 5-year budget windows is due to the relatively smal 30 U.S. Government Accountability Office, OPPORTUNITY ZONES: Improved Oversight Needed to Evaluate Tax Expenditure Perform ance, GAO-21-20, October 8, 2020, https://www.gao.gov/products/GAO-21-30#summary. 31 For examples of such criteria, see the “Community Outcomes” section of CDFI Fund, NMTC Program —Allocation Application Frequently Asked Questions, June 7, 2018, at https://www.cdfifund.gov/Documents/Updated%202018%20NMT C%20Application%20FAQs%20Document%20-For%20Posting%20MAST ER.pdf. 32 QOF investments made in the following categories are not eligible as investments in “qualified OZ business property”: any private or commercial golf course, country club, massage parlor, hot tub facility, suntan facility, racetrack or other facility used for gambling, or any store the principal business of which is the sale of alcoholic beverages for consumption off premises. See IRC 1400Z-2 and IRC Section 144(c)(6)(B). Further, any capital gains earned from investments from the above types of projects are not be eligible for OZ tax benefits. 33 Joint Committee on T axation, Estimated Revenue Effects of the Conference Agreement for H.R. 1, The “Tax Cuts and Jobs Act,” JCX-67-17, December 18, 2017, p. 6, at https://www.jct.gov/publications.html?func=startdown&id=5053 . 34 U.S. Congress, Joint Committee on T axation, Estimates of Federal Tax Expenditures for Fiscal Years 2020-2024, committee print, 116th Cong., October 5, 2020, JCX-23-20, at https://www.jct.gov/publications/2020/jcx-23-20/. Congressional Research Service 8 link to page 13 link to page 13 Tax Incentives for Opportunity Zones: In Brief revenue losses associated with the deferral of capital gains tax and the OZ basis adjustments in years 5 and 7. The largest tax benefit associated with OZ tax incentives, the exclusion of capital gains tax on qualified OZ investment returns in year 10, would fal outside of the 10-year budget window. Those revenue losses would not be expected until 2028 (i.e., FY2028-FY2029). Issues for Congress Changing Designation of Qualified Opportunity Zones Some Members of Congress have inquired whether Treasury or IRS have the authority to change designation of qualified OZs from one eligible census tract to another. One potential reason to change an OZ designation could be to support investment in an area that has more viable development projects for investors. However, IRS has stated that such requests cannot be accommodated, and that IRC Section 1400Z-1 authorized only one determination and designation period for Treasury and IRS to certify and designate census tracts as qualified OZs.35 Under this reasoning, new legislation would need to be enacted to change the amount of qualified OZs, open a new round of OZ designations (e.g., using the most recent economic data), or change criteria for qualified OZs. Roles of Federal and Subnational Governments The federal government played an active role in establishing the rules for OZs and continues to administer the tax benefits to QOFs that engage in OZ-eligible activities. Congress enacted OZs as part of the 2017 tax revision (P.L. 115-97). The Fund formal y designated census tracts as QOFs that were eligible under the statutory criteria and nominated by state governors. Treasury and the IRS then promulgated regulations on qualified OZ designations and issued additional transactional guidance. As discussed more in “Coordination of Federal Economic Development Programs with Opportunity Zones,” other agencies could assume a larger role in providing financial incentives for investment in qualified OZs. Absent further congressional legislation, subnational governments wil likely play a larger role in the types of individual projects and activities that wil be supported by OZ investment. For example, governors and state legislatures could seek to promote OZs within their jurisdictions as attractive options for investment, or enact state-level incentives to enhance potential private-sector returns in OZs.36 Like state officials, local government entities can also provide further incentives to attract OZ investments. Local zoning agencies and mayoral offices have the most direct effect on what projects can proceed within specific OZs. These officials can approve or deny building permits, or grant approval of permits based on the projects meeting certain conditions (e.g., building height variances, promotion of certain goals about population density, mixed-income housing units). 35 Letter 2019-0025 from William A. Jackson, Chief, Branch 5, IRS Office of Associate Chief Counsel, to Honorable Donald Norcross, Member, U.S. House of Representatives, September 27, 2019, at https://www.irs.gov/pub/irs-wd/19-0025.pdf. 36 For example, see J. Brian Charles, “States, Cities Add Sweeteners to Attract 'Opportunity Zone' Investors,” Governing, April 17, 2019, at https://www.governing.com/topics/finance/gov -opportunity-zones-extra-incentives.html; and Novogradac, “State Opportunity Zones Legislation,” at https://www.novoco.com/resource-centers/opportunity-zones-resource-center/state-opportunity-zones-legislation. Congressional Research Service 9 Tax Incentives for Opportunity Zones: In Brief Coordination of Federal Economic Development Programs with Opportunity Zones In 2018, President Trump issued an executive order that developed the interagency White House Opportunity and Revitalization Council, whose goal was to “encourage public and private investment in urban and economical y distressed areas, including qualified opportunity zones [sic].”37 This council, chaired by the Secretary of the U.S. Department of Housing and Urban Development, was tasked with assessing actions that each federal agency could take under its existing authority to prioritize or focus federal programs in economical y distressed communities, including qualified OZs, and reduce regulatory and administrative costs that could discourage such public and private investment. Pursuant to the President’s executive order, some agencies have promulgated regulations or issued press releases explaining how they are working toward these goals.38 Proponents of such activities could argue that federal coordination of benefits could enhance the incentive effects of OZs. Examinations of past federal economic development incentives, such as the NMTC, have indicated that one federal incentive, alone, might not be sufficient to drive private-sector investment in distressed communities.39 By “stacking” multiple government benefits in qualified OZs, though, economic development assistance could be more successful in driving private and public investment in qualified OZs. Critics of this approach, though, could argue that such coordination could undermine assessments of the OZ tax incentives, and could make the OZ tax incentives appear to be more effective in increasing economic outcomes than they would otherwise if measured in isolation. Timeline of Tax Benefits In order to benefit from the 15% step-up in basis for capital gains rolled over into a QOF and held for seven years, investors would have needed to roll over their capital gains into a QOF by the end of calendar year 2019. By doing so, investors would be able to obtain a full seven years holding period needed for the 15% basis adjustment. (Investments made after 2019 can stil benefit from a 10% step-up in basis.) Congress could decide that two calendar years (2018 and 2019) were not sufficient time for QOFs to form and raise money from investors, who might have waited to participate in OZ investments until they conducted more research or reviewed developing regulations. To al ow for more investments to qualify for the 15% step-up in basis, the mandatory recognition of deferred capital gains in IRC 1400Z-2 could be delayed (e.g., to December 31, 2027). Critics of such a proposal, however, could oppose such a policy, citing a concern that the OZ tax incentives largely benefit investors, rather than low-income communities and their current residents. 37 Executive Order 13853, “Establishing the White House Opportunity and Revitalization Council,” 83 Federal Register 65071, December 18, 2018, at https://www.federalregister.gov/documents/2018/12/18/2018 -27515/establishing-the-white-house-opportunity-and-revitalization-council. 38 For example, see U.S. Department of Commerce, “Review of DOC Policy in Opportunity Zones,” 84 Federal Register 45946-45949, September 3, 2019. 39 For example, see p. 34 in U.S. Government Accountability Office, Tax Policy: New Markets Tax Credit Appears to Increase Investm ent by Investors in Low-Incom e Com m unities, but Opportunities Exist to Better Monitor Com pliance , GAO-07-296, January 2007, https://www.gao.gov/new.items/d07296.pdf. Congressional Research Service 10 Tax Incentives for Opportunity Zones: In Brief Congressional Oversight Congressional oversight of OZs has focused on how they are designated, their efficacy as a means to increase investment in low-income areas, and their reporting requirements. Each issue is discussed below. Designation of Qualified Opportunity Zones Some Members of Congress have expressed concern that certain individuals with ties to the Administration could have had an unfair or improper influence on the geographical designation of certain census tracts as qualified OZs. These reports have been published in various media outlets.40 While engagement and lobbying with state and federal officials on tax incentives are not unusual activities, some Members have raised concern that the qualified OZ designation process could have been conducted in a way “to enrich political supporters or personal friends of senior administration officials.”41 For example, Representative Bil Pascrel wrote a separate letter to Treasury Secretary Steven Mnuchin requesting a response to the media reports and questions related to meetings held by the Secretary and his staff with certain types of potential stakeholders in OZ investments. Senator Cory Booker, Representative Emmanuel Cleaver, and Representative Ron Kind sent a letter to Acting Treasury Inspector General (IG) Richard Delmar asking that the designation process be investigated.42 The Treasury IG has reportedly accepted that request, although the exact scope of the investigation has not been publicly disclosed.43 Efficacy of OZs to Improve Economic Conditions of Low -Income Areas House Ways and Means Committee Chairman Richard E. Neal, Senate Finance Committee Ranking Member Ron Wyden, Former Ways and Means Oversight Subcommittee Chairman John Lewis, and Senator Cory Booker wrote a letter to GAO requesting it to “study the program to review its effectiveness in spurring investment in low-income areas compared to other federal incentives, zone designations and program compliance.”44 Among several research questions, the request asks GAO to compare OZ tax incentives to other economic development tax incentives, such as the NMTC and the low-income housing tax credit (LIHTC), and analyze the characteristics of census tracts that were eligible but not designated to those that were designated. GAO issued its final report in October 2020 and found that OZs have fewer limits on permissible 40 For example, see Jeff Ernsthausen and Justin Elliott, “One T rump Tax Cut Was Meant to Help the Poor. A Billionaire Ended Up Winning Big,” ProPublica, June 19, 2019, at https://www.propublica.org/article/trump-inc-podcast -one-trump-tax-cut-meant-to-help-the-poor-a-billionaire-ended-up-winning-big; Eric Lipton and Jesse Drucker, “Symbol of ’80s Greed Stands to Profit From T rump T ax Break for Poor Areas,” NY Times, October 26, 2019, at https://www.nytimes.com/2019/10/26/business/michael-milken-trump-opportunity-zones.html; and Jeff Ernsthausen and Justin Elliott, “How a T ax Break to Help the Poor Went to NBA Owner Dan Gilbert,” ProPublica, October 24, 2019, at https://www.propublica.org/article/how-a-tax-break-to-help-the-poor-went -to-nba-owner-dan-gilbert. 41 Senator Cory Booker, “Following Allegations of Misconduct, Booker, Cleaver, Kind Urge T reasury Inspector General for “Complete Review” of T reasury’s Implementation of Opportunity Zones,” press release, October 31, 2019, at https://www.booker.senate.gov/?p=press_release&id=1005 . See also Representative Bill Pascrell, “ Pascrell Assails Mnuchin T reasury Corruption,” press release, October 29, 2019, at https://pascrell.house.gov/news/documentsingle.aspx?DocumentID=4051 . 42 See Letter from Sen. Booker et al. (October 31, 2019). 43 Justine Coleman, “T reasury Watchdog to Investigate T rump Opportunity Zone Program ,” The Hill, January 15, 2020, at https://thehill.com/policy/finance/478521-treasury-watchdog-to-investigate-trump-opportunity-zone-program. 44 House Ways and Means Committee Chairman Richard Neal, “Neal, Wyden, Lewis, Booker Request GAO Study on Opportunity Zone Program,” press release, November 6, 2019, at https://waysandmeans.house.gov/media-center/press-releases/neal-wyden-lewis-booker-request -gao-study-opportunity-zone-program. Congressional Research Service 11 Tax Incentives for Opportunity Zones: In Brief project types and controls to limit revenue losses. GAO also found that insufficient data were being collected to evaluate OZ performance. GAO found that addressing the latter concern may require congressional action. Related to this issue, the Urban Institute previously published in the Federal Register on May 1, 2019 (hereinafter referred to as the "May 2019 NPRM").¹⁶ The May 2019 NPRM provides details about the requirements under Section 1400Z-2 that could be imposed on OZ-related transactions. These proposed requirements could also shape some of the development effects of OZs. Public comments are due by July 1, 2019, and a public hearing is scheduled for July 9, 2019.¹⁷

What Economic Effects Can Be Expected?

The Urban Institute analyzed the census tracts designated by the CEOs of the states and the District of Columbia, "scoring"“scoring” each against measures of the investment flows they are receiving and the socioeconomic changes they have already experienced.³⁹45 Tracts that were selected by the state'’s respective CEO and designated as QOZs were compared with eligible, nondesignated tracts not selected by the CEO. CEOs in Montana, DC, Alaska, and Georgia selected areas with the lowest levels of preexisting investment.⁴⁰ 46 Conversely, CEOs in HawaiiHawai , Vermont, Nebraska, and West Virginia selected areas with the highest levels of preexisting investment. Additionally

Designated tracksAdditional y the researchers found Designated [OZ] tracks [sic] do have lower incomes, higher poverty rates, and higher unemployment rates than eligible nondesignated tracts (and the US overall average, which is as expected given eligibility criteria). Housing conditions trend in similar ways, with lower home values, rents, and homeownership rates. The designated tracts are also notably less white and more Hispanic and black than eligible nondesignated tracts. Age less white and more Hispanic and black than eligible no ndesignated tracts. Age compositions are comparable. Education levels are somewhat lower among designated tracts than eligible nondesignated tracts.... In terms of this program, there appears to be no targeting on the basis of urbanization.47 Some Members of Congress have also introduced bil s that are intended to limit the benefits of OZ tax incentives. For example, H.R. 5042 would modify the eligibility criteria for qualified OZs and replace existing OZs that do not conform to those criteria with new designations. H.R. 5042 also retroactively prohibits (effective as if enacted as part of P.L. 115-97) qualified OZ investments in self-storage property, stadiums, and residential rental property unless 50% or more of the residential units of such property are both rent-restricted and occupied by individuals whose income is 50% or less of area median income. Data and Reporting Requirements on Beneficial Investors and Projects Testimony before some committees has reinforced suggestions that Congress lacks adequate information for oversight of OZ tax benefits and that further data-reporting requirements are needed.48 QOFs are not required by statute to provide periodic public reports on the locations of their investments or economic impacts of those investments on low -income communities. The ability of the IRS and Treasury to disclose such information is currently limited by general provisions protecting taxpayer confidentiality absent the taxpayer’s consent.49 However, Treasury or Joint Committee on Taxation (JCT) economists could conduct an in-house study measuring the effects of the tax provision without publicly disclosing confidential taxpayer data, and Congress could amend taxpayer confidentiality rules to permit disclosure. 45 Brett T heodos, Brady Meixell, and Carl Hedman, Did States Maximize Their Opportunity Zone Selections? Urban Institute, May 21, 2018, at https://www.urban.org/research/publication/did-states-maximize-their-opportunity-zone-selections. State-by-state comparisons are available in a spreadsheet on the linked page. 46 Ibid., at 4. 47 Ibid., at 8. 48 For example, see U.S. Congress, House Committee on Small Business, Subcommittee on Economic Growth, T ax, and Capital Access, Can Opportunity Zones Address Concerns in the Sm all Business Econom y? 116th Cong., October 17, 2019, at https://smallbusiness.house.gov/calendar/eventsingle.aspx?Ev entID=2901. All of the witnesses in that hearing recommended additional data collection. 49 See IRC Section 6103. Congressional Research Service 12 Tax Incentives for Opportunity Zones: In Brief Under its existing authority, the IRS has sought public input on ways to modify the Form 8996, which is filed annual y by taxpayers that have self-elected QOF status, to increase the amount of data collected on OZ investments.50 Starting with the 2019 tax year (2020 tax filing season), the IRS now asks for more data on the value and location of qualified OZ property owned or leased by the QOF, as wel as any qualified OZ stock or partnership interests.51 Currently, data and metrics on investment in OZs are provided by nongovernmental, private industry sources. For example, Novogradac, an accounting and consulting firm that focuses on economic development tax incentives, reported that a total of 580 QOFs nationwide had raised $12.05 bil ion in equity as of September 1, 2020.52 The names, contact information, and investment focus area of QOFs that elected to provide such information are also listed on Novogradac’s website, as wel as other third-party sites.53 Some of these third-party data sources also indicate the minimum investment required for an investor to participate in a particular QOF. Several bil s introduced in the 116th Congress are intended to promote oversight and transparency of OZs. For example, S. 1344/H.R. 2593 would require the Department of the Treasury to collect data and report to Congress on investments held by QOFs. These bil s would also require the Treasury to make certain information regarding these investments publicly available. Additional y, S. 2787 would require QOFs to file an annual report disclosing specific information on its investments and investors, and require that QOFs publicly disclose such information. More QOF disclosure on tax forms could aid the IRS in ensuring the proper administration of OZ tax incentives. Although IRS would likely be limited to disclosing such taxpayer-provided data to the public without the taxpayer’s consent, it could release some aggregated amounts of OZ investments organized at state or local levels or the tax benefits claimed by income level in order to provide the public with a better idea of how the direct benefits of OZ tax incentives are distributed. If substantial disclosure, public or private, were required by investors or QOFs, though, then that could be a disincentive for some participation in OZ-related investments. More detailed forms could also increase compliance costs for QOFs. 50 Department of the Treasury, “Request for Information on Data Collection and T racking for Qualified Opportunity Zones,” 84 Federal Register 18648-18649, May 2, 2019. Regulatory docket available at https://www.regulations.gov/document?D=T REAS-DO-2019-0004-0001. 51 For the most recent official version see, IRS, “Form 8996 – Qualified Opportunity Fund,” at https://www.irs.gov/pub/irs-pdf/f8996.pdf. 52 Novogradac, “Opportunity Funds Listing” (accessed December 7, 2020), at https://www.novoco.com/resource-centers/opportunity-zone-resource-center/opportunity-funds-listing. 53 For example, see OpportunityDb, “Opportunity Zone Fund Directory,” at https://opportunitydb.com/funds/. Congressional Research Service 13 link to page 18 Tax Incentives for Opportunity Zones: In Brief Appendix A. Illustration of CDFI OZ Mapping Tool Figure A-1 provides an il ustrative screenshot of the Fund’s online mapping tool. This image displays census tracts that have been designated as a qualified OZ in the Southeast, primarily Alabama, Georgia, and South Carolina. Designated OZs are shown in blue. A complete list of qualified OZs has been published as an IRS Internal Revenue Bulletin and is available on the Fund’s “Opportunity Zone” website.54 54 See CDFI Fund, “List of Designated Qualified Opportunity Zones,” at https://www.cdfifund.gov/Pages/Opportunity-Zones.aspx. Qualified OZs are also published in IRS Notice 2018 -48, Designated Qualified Opportunity Zones Under Internal Revenue Code § 1400Z-2, at https://www.irs.gov/pub/irs-drop/n-18-48.pdf; and IRS Notice 2019-42, Amplification of Notice 2018-48 to Include Additional Puerto Rico Designated Qualified Opportunity Zones, at https://www.irs.gov/pub/irs-drop/n-19-42.pdf. Congressional Research Service 14 Figure A-1. CDFI Fund Mapping Tool Showing Designated Opportunity Zones (OZs) in the Southeast Source: CRS screenshot of CDFI Fund, CIMS mapping tool, accessed November 11, 2018, at https://www.cims.cdfifund.gov/preparation/?config=config_nmtc.xml. Notes: Designated OZs are shown in blue. Congressional district borders have been enabled in the above screenshot CRS-15 link to page 19 Tax Incentives for Opportunity Zones Appendix B. Number of Census Tracts Eligible in Each State for Qualified OZ Designation Table 2 displays the maximum number of census tracts in each state or territory that were eligible for OZ designation under each of the two nomination criteria. These data, from February 27, 2018, were posted on the Fund’s website before the qualified OZ recommendations issued by state or territory CEOs were certified. Table 2. Maximum Number of Census Tracts Eligible for Opportunity Zone Designation, by State or Territory, 2018 A B C Maximum Number of Maximum Number of Tracts That Can Be Eligible Non-LIC Nominated (the Contiguous Tracts Total Number of Low- Greater of 25% of All That Can Be Income Community LICs or 25 If State Has Nominated (5% of State/Territory (LIC) Tracts in State Fewer Than 100 LICs) Column B) Alabama 629 158 8 Alaska 55 25 2 American Samoa 16 25 See Notes Arizona 671 168 9 Arkansas 340 85 5 California 3,516 879 44 Colorado 501 126 7 Connecticut 286 72 4 Delaware 80 25 2 District of Columbia 97 25 2 Florida 1,706 427 22 Georgia 1,039 260 13 Guam 31 25 2 Hawai 99 25 2 Idaho 109 28 2 Il inois 1,305 327 17 Indiana 621 156 8 Iowa 247 62 4 Kansas 295 74 4 Kentucky 573 144 8 Louisiana 597 150 8 Maine 128 32 2 Maryland 593 149 8 Massachusetts 550 138 7 Congressional Research Service 16 Tax Incentives for Opportunity Zones A B C Maximum Number of Maximum Number of Tracts That Can Be Eligible Non-LIC Nominated (the Contiguous Tracts Total Number of Low- Greater of 25% of All That Can Be Income Community LICs or 25 If State Has Nominated (5% of State/Territory (LIC) Tracts in State Fewer Than 100 LICs) Column B) Michigan 1,152 288 15 Minnesota 509 128 7 Mississippi 399 100 5 Missouri 641 161 9 Montana 90 25 2 Nebraska 176 44 3 Nevada 243 61 4 New Hampshire 105 27 2 New Jersey 676 169 9 New Mexico 249 63 4 New York 2,055 514 26 North Carolina 1,007 252 13 North Dakota 50 25 2 Northern Mariana Islands 20 25 See Notes Ohio 1,280 320 16 Oklahoma 465 117 6 Oregon 342 86 5 Pennsylvania 1,197 300 15 Puerto Rico 835 See Notes See Notes Rhode Island 78 25 2 South Carolina 538 135 7 South Dakota 69 25 2 Tennessee 702 176 9 Texas 2,510 628 32 Utah 181 46 3 Vermont 48 25 2 Virgin Islands 13 25 See Notes Virginia 847 212 11 Washington 555 139 7 West Virginia 220 55 3 Wisconsin 479 120 6 Wyoming 33 25 2 Congressional Research Service 17 Tax Incentives for Opportunity Zones Source: CDFI Fund, “Opportunity Zones Information Resources,” February 27, 2018, at https://www.cdfifund.gov/Pages/Opportunity-Zones.aspx. Notes: These data are not available on the CDFI Fund website, above, and were accessed before publication of earlier versions of this CRS report. Puerto Rico: The Bipartisan Budget Act of 2018 (P.L. 115-123) deemed each census tract in Puerto Rico that is a low-income community to be certified and designated as a qualified OZ. As of the time these data were posted, the maximum number of tracts that can be nominated by Puerto Rico as wel as the maximum number of Eligible Non-LIC Contiguous Tracts that could have been included in that nomination was being determined by the Fund. USVI: The U.S. Virgin Islands could nominate Eligible Non-LIC Contiguous Tracts, provided that the nominated non-LIC tracts do not exceed 5% of al nominated tracts (both low-income communities and nominated contiguous tracts). Thus the USVI could nominate no more than one of its Eligible Non-LIC Contiguous Tracts. Northern Mariana Islands and American Samoa: Neither the Northern Mariana Islands nor American Samoa had any Eligible Non-LIC Contiguous Tracts. Author Information Sean Lowry Donald J. Marples Analyst in Public Finance Specialist in Public Finance Disclaimer This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff to congressional committees and Members of Congress. It operates solely at the behest of and under the direction of Congress. Information in a CRS Report should n ot be relied upon for purposes other than public understanding of information that has been provided by CRS to Members of Congress in connection with CRS’s institutional role. CRS Reports, as a work of the United States Government, are not subject to copyright protection in the United States. Any CRS Report may be reproduced and distributed in its entirety without permission from CRS. However, as a CRS Report may include copyrighted images or material from a third party, you may need to obtain the permission of the copyright holder if you wish to copy or otherwise use copyrighted material. Congressional Research Service R45152 · VERSION 12 · UPDATED 18 targeting on the basis of urbanization.⁴¹