In the midst of the most geographically divided economic recovery on record, it’s no surprise that communities desperate for economic growth often turn to expensive corporate tax incentives designed to produce a quick fix by luring or retaining local jobs and investment. Such incentives totaled a whopping $45 billion in 2015 alone.
Though it’s hard to blame local authorities for using every tool in their limited arsenals, the traditional economic development model has drawn widespread criticism in recent years.
Critics now have their strongest ammunition yet thanks to new research by Timothy Bartik of the W.E. Upjohn Institute for Employment Research, who recently released an exhaustive analysis of whether such incentives actually work in spurring economic development within states. Spoiler alert: they don’t.
Nevertheless, the volume of these incentives has tripled over the last 25 years, and struggling areas that can least afford failure are often the most likely to roll the dice with tax giveaways. When these bets fail, local communities are left with even fewer resources to devote to the work of growing a local economy that provides opportunity and upward mobility for its residents.
Federal programs aimed at reviving distressed communities have a dubious track record as well. They often sound great in theory, but fail the real world test of actually moving capital or improving job creation.
A 2015 white paper by Jared Bernstein of the Center on Budget and Policy Priorities and Kevin Hassett of the American Enterprise Institute found that, in spite of the solid economic rationale for geographically targeted programs to help communities facing downward spirals, they have been widely plagued by “misaligned incentives and a weak set of policies.”
To be clear, the United States isn’t lacking for capital. In fact, our research indicates that U.S. investors currently hold well over $2 trillion in unrealized capital gains in stocks and mutual funds alone thanks to a record-breaking expansion in the stock market. But both in practice and in policy, we’re doing a terrible job of connecting struggling regions with the private capital they need to rebuild and thrive.
New ideas are emerging to fill this void. One leading example is the broadly bipartisan “Investing in Opportunity Act (IIOA),” which is an innovative reimagining of how to incentivize private investment in underserved areas of the country.
Led by Senators Tim Scott (R-S.C.) and Cory Booker (D-N.J.) and Representatives Pat Tiberi (R-Ohio) and Ron Kind. IIOA encourages investors of all types to redeploy their capital gains into underserved, low-income areas called “Opportunity Zones.”
In other words, the proceeds from successful private investments would be used to power new economic revitalization efforts in places that have been left behind since the Great Recession.
IIOA aims to make investing in struggling areas as simple as choosing any other asset class. After all, American investors have long put their money in funds that bet on foreign emerging markets. Shouldn’t they be able to do the same for American communities on the rise?
The genius of IIOA is that it does several tricky things at once: balance national standards with state discretion, unlock a nationally-scalable source of private capital that can be channeled for maximum local impact and protect the taxpayer from unnecessary cost and risk.
Importantly, it does all of this without the use of costly tax credits. Instead, the bill’s incentives are directly tied to both the longevity and the success of an underlying investment.
The legislation also solves key practical barriers that keep investors from putting capital in underserved areas; namely, too much risk and too little information. Just like in the real world, IIOA encourages investors to pool resources with other investors — in this case, via a newly-established class of “Opportunity Funds” — thereby increasing the scale of capital while mitigating the risk to any individual investor.
The rationale is obvious — most investors don’t live in a struggling neighborhood, and even those motivated to put capital in such communities don’t know where to invest. Furthermore, truly changing the equilibrium of a struggling community requires lots of capital and a nimble funding vehicle (i.e., Opportunity Funds) to deploy the resources according to the unique needs and opportunities of each community.
To really help Americans in places that have been left behind, we need smart policies that get capital off the sidelines without forcing communities to mortgage the future. IIOA would put a powerful new economic development tool in the hands of mayors and governors working to recruit investment without hollowing out the local tax base.
That is why, even in today’s complicated political environment, a diverse array of policymakers, community leaders and civic-minded investors agree that it’s time to pass the Investing in Opportunity Act.
John Lettieri and Steve Glickman are co-founders of the Economic Innovation Group, a bi-partisan research, policy, and advocacy organization dedicated to advancing solutions that empower entrepreneurs and investors to forge a more dynamic economy throughout America.