Duluth's poorest neighborhoods could look more attractive to outside investment if an initiative tucked inside recently passed federal tax reform plays out as intended.
The new program allows investors to defer taxes on capital gains if they invest those profits in areas identified as Opportunity Zones, the poorest Census tracts in a state as selected by their governors.
"We see the positive potential with these Opportunity Zones to attract funding via the president's new tax reform act and hope it will incentivize good-paying jobs and good, quality, affordable housing within our communities," said Keith Hamre, Duluth's director of planning and construction services.
The U.S. Treasury still has to approve the areas that Minnesota cities, counties and tribes recommended to Gov. Mark Dayton, who sent his list of 128 areas to the feds on Friday.
In Duluth, downtown, the Central Hillside, Lincoln Park and parts of West Duluth made the cut. Also nominated were tracts in Hibbing and Virginia and several rural parts of the Northland. Parts of Superior and Ashland were nominated for inclusion by Wisconsin Gov. Scott Walker.
The promise of Opportunity Zones is twofold - it unlocks an estimated $6 trillion in wealth that is stashed away in funds and on the stock market, and it encourages development in often overlooked communities.
"If only a fraction of that $6 trillion flows into Opportunity Zones, this new provision will quickly become the largest federal community development initiative in memory," says the Economic Innovation Group.
The Brookings Institution calls Opportunity Zones "welcomed good news for communities that have not been experiencing much hope over the past decade," but warns the program needs continued accountability to work.
"Ensuring basic levels of transparency, inclusiveness, and clarity of outcomes will position the program to turn that hope into real progress," senior fellow Anthony F. Pipa wrote. "Otherwise it risks reinforcing political and economic divides, exacerbating the lack of trust between citizens and their government."
The Minnesota Department of Employment and Economic Development hailed the potential of the program to "bridge public-private partnerships." Minnesota Housing Commissioner Mary Tingerthal said the zones could attract much-needed investments in workforce housing.
Investors will be able to defer taxes on past gains to 2026 when they set up Opportunity Funds with those gains and target investment in designated Opportunity Zones. For investors who hold onto their investment for ten years or more, any appreciation in the investment will be tax-free when it is sold.
Opportunity Funds will have to be set up by the end of 2019 to qualify, although the government has not issued guidance for them yet, putting an early strain on the program's potential.
"This short time frame may encourage Opportunity Fund managers to search out areas and partners that already have the capacity to build complex financial deals or have projects that are close to starting," writes economist Rob Grunewald at the Minneapolis Federal Reserve Bank.