A timely paper from Michelle Layser, University of Illinois College of Law, considers whether the design of place-based investment tax incentives actually hinders the ability to reduce poverty among residents in the communities where incentivized investments occur. This topic is especially important as Opportunity Zones and their related investment funds ramp up.  

Layser examines a set of state and federal place-based investment tax incentives, including Enterprise Zones, New Markets Tax Credits (NMTC), Low-Income Housing Tax Credits (LIHTC), and Opportunity Zones (OZ). In the analysis she distinguishes between programs that are community oriented versus spatially oriented. Community oriented programs contain features to benefit local residents, while those that are spatially oriented focus only on improving a specific space.  

Most place-based incentives are “spatially oriented” rather than “community oriented.” Since spatially oriented investment is not required to help local residents, the benefits stemming from the new investment are likely to accrue to new residents and “place entrepreneurs.” This is because the new investment brings new people who want to take advantage of new opportunities (by some definitions, gentrification), including “place entrepreneurs” whose business models are typically not based on meeting the needs existing residents. Further, the monetization of tax breaks in programs like NMTC transfers some of the program benefits to intermediaries who facilitate the transactions. Layser points out that these transactions do not necessarily involve bad actors, just that the benefits don’t flow to poor residents. Instead, by their very design spatially oriented investment tax incentives create multiple external benefits while failing to either directly help or safeguard poor residents.

Place-based investment tax incentives have traditionally enjoyed significant bipartisan support, yet the empirical evidence is often disappointing to anti-poverty advocates. This Article has argued that what many anti-poverty advocates regard as a flaw of place-based investment tax incentives—a lack of safeguards to protect poor communities—is a feature of most current place-based investment tax incentives. (p. 81)

Her recommendation is to reinvent place-based investment tax incentives to require greater community orientation by:

  • Conferring power to community stakeholders through citizen participation and empowerment to identify the programs, policies, and investments that would affect their quality of life and improve their experiences within their neighborhoods
  • Linking place to community by encouraging firms to engage more directly with communities  through, for example, hiring members of the community or improving neighborhood conditions for the benefit of the community
  • Incorporating a system for monitoring outcomes, including specifying objectives, establishing metrics, and creating an assessment schedule

In other words, community input and needs should become a more prominent part of the incentive program. This approach is consistent with Smart Incentives principles. If, indeed, the idea behind place-based incentives is that struggling individuals should be better off as a result, then it is necessary to build their needs into the process, specify the mechanisms for addressing those needs, and monitor and report on results. 

These recommendations are also aligned with the OZ Reporting Framework from the US Impact Investing Alliance and Beeck Center for Social Impact + Innovation at Georgetown University, as well as recently introduced bipartisan legislation supporting OZ reporting requirements. These recommendations are also in line with other frameworks to support community-benefiting development such as the Social Bottom Line Framework and Triple Bottom Line Tool developed by our partner Dr. Janet Hammer at The Collaboratory. For more information see https://ozframework.org/about-indexand http://www.gocollaboratory.com/.

A number of cities and funders are aiming to put these principles into practice and ensure that Opportunity Fund investments benefit local residents. Examples can be found from Berkeley, CA to Newark NJ, as well as other cities and funds. The City of Berkeley recently passed a resolution to create a municipal Qualified Opportunity Fund that would invest in projects that provide significant affordable housing, create good jobs and grow business opportunities for underrepresented groups, and include a community engagement process. The Economic Development staff is currently researching the resolution’s suggested policies to minimize adverse effects on Berkeley residents from the expected development. These policies include: 

  1. Leverage tax incentives to ensure jobs created in Qualified Opportunity Zones (QOZ) go to local residents, pay a liveable wage, and offer worker protections and benefits that protect families.
  2. Ensure historically disadvantaged businesses have access to contracting opportunities in Qualified Opportunity Zones.
  3. Require 50% of housing built in Qualified Opportunity Zones to be affordable to those making less than median area income to support local inhabitants already living in Qualified Opportunity Zones.
  4. Ensure that populations in Qualified Opportunity Zones have access to critical services such as healthcare, transportation, healthy food, and quality education services.
  5. Take steps to include historically underrepresented groups in every aspect of the QOZ process including investment, construction, operation, and purchase.

Beyond Opportunity Zones, Dr. Hammer has been exploring strategies to increase both the amount and efficacy of investment in place-based development. Her concept includes innovations in fundraising and multi-stakeholder collaboration to identify and prioritize investments. Several trends suggest this may be a more viable option than in the past, including enabling legislation that reduces barriers to investment; financial technologies that make it easier to identify options for investment; and a greater demand for investments that generate social and environmental benefits. Look for a blog post on this concept in the near future.

To learn more about this approach, please contact us here at Smart Incentives or reach out directly to Dr. Hammer (janet(at)gocollaboratory.com).

For more information on this research, please see: 

Layser, Michelle D., The Pro-Gentrification Origins of Place-Based Investment Tax Incentives and a Path Toward Community Oriented Reform (March 4, 2019). Wisconsin Law Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3347401

Please see our other articles on Opportunity Zones: