As we approach the two-year anniversary of Opportunity Zones becoming law, there is growing momentum to resolve unfinished business from its passage in 2017.
Anyone familiar with Opportunity Zones knows that the reporting requirements originally included in the Investing in Opportunity Act, which served as the basis for the Opportunity Zones provision in the Tax Cuts and Jobs Act, were stripped out of the final package due to the Senate’s parliamentary rules. This was a procedural issue, not a substantive one. Indeed, there has always been bipartisan agreement on the need for a reporting framework for Opportunity Zones. And that need is growing more urgent by the day. Soon, the U.S. Department of the Treasury will issue its final regulations governing Opportunity Zones investment, setting the stage for a long-awaited ramp-up in market activity and local implementation efforts across the country in 2020. While the Internal Revenue Service (IRS) has included modest reporting standards in their ongoing regulatory implementation process, it’s clear that a robust measurement framework can’t be achieved without further action by Congress.
To this end, Senator Tim Scott (R-SC) introduced the Improving and Reinstating the Monitoring, Prevention, Accountability, Certification, and Transparency Provisions of Opportunity Zones (IMPACT) Act last week. Joining Senator Scott were several cosponsors, most notably Senate Finance Chairman Chuck Grassley (R-IA), as well as Senators Rubio (R-FL), Capito (R-WV), Young (R-IN), Ernst (R-IA), Cassidy (R-LA), Gardner (R-CO), Lankford (R-OK), and Sinema (D-AZ). A number of recent legislative proposals, including the Opportunity Zone Accountability and Transparency Act and the Opportunity Zone Reporting and Reform Act, have sought to reinstate and expand the original reporting requirements. The IMPACT Act, however, would significantly enhance efforts to evaluate the Opportunity Zones policy and guard against abuse, while striking the best balance between the need for granular measurement data and the imperative to protect confidential taxpayer information. To date, the bill has been endorsed by the National League of Cities, National Association of Counties, and Opportunity Funds Association.
The legislation has four core components:
- Reporting Requirements for Opportunity Funds and Their Investors: The bill would codify a range of reporting requirements for Opportunity Funds and their investors. Funds would be required to report such information as the timing, type, location, and value of their investments. The legislation would require the collection of the North American Industry Classification (NAIC) Code for Qualified Opportunity Zones (QOZ) businesses, the approximate number of residential units, and the average number of employees, among other data points. Investor data would help IRS to better administer and enforce the program over time.
- Public Transparency Regarding Nationwide Investment Activity: The bill mandates Treasury to compile and publicly release “as soon as practical,” and annually thereafter, a report on national OZ activity that includes the number of funds, total assets, distribution of investments by NAIC code, percentage of designated census tracts that have received investment and the aggregated amount of investment for each tract, amount of business vs. property investments, and the aggregate amount of residential units and firm size by employee count that have received investment.
- Comparative Measurement of Community Outcomes Over Time: The legislation would require Treasury to track socioeconomic indicators of Opportunity Zones communities over time, including new business starts, employment and poverty rates, and distribution of employees across industries. Treasury would be required to compare trends in OZ communities with those of other eligible low-income tracts that were not designated, as well as the post-designation performance of OZ tracts against their performance during the five years prior to designation. Treasury would be required to issue its findings in the 6th and 11th years after the date of enactment.
- Penalties for Noncompliance and Abuse: The legislation establishes stiff penalties for non-compliant QOFs that are commensurate with the size of the fund as well as penalties for investors who fail to comply, with allowances made for reasonable cause in both instances. It also heightens the penalty for “intentional disregard” to $25,000.
Without standard reporting data, we are left with educated estimates for the amount and types of capital being deployed across designated communities. A new report this week by Novogradac found that Qualified Opportunity Funds listed on its directory have raised nearly $4.5 billion, an increase of 40 percent since the firm’s last report in October. Since this number is derived from a voluntary rolling survey, the total amount of funds raised by QOFs nationwide is likely much larger. In other words, even without the benefit of clear and final regulations, market activity for this new initiative may already be comparable to legacy programs like the New Markets Tax Credit.
Data collection, transparency, and strong guardrails are essential for the long-term success of the Opportunity Zones initiative. For these reasons, the bipartisan IMPACT Act deserves strong support. But Congress shouldn’t stop there. More can be done to enhance Opportunity Zones as a tool for transformative community benefit, while also strengthening the structural integrity of the policy. We’ve previously written about the need to address the small share of OZ designations that clearly don’t align with the places policymakers had in mind. Congress should also consider common sense additions to the list of restricted investments that were included in the original statute. And given how the lengthy wait for final regulations has kept many investors on the sidelines to date, Congress should do more to encourage broad market participation and a greater flow of capital to high-need areas, starting with extending the deadline for receiving the full steps-up in basis that expires at the end of 2019. These and other modest changes will help ensure Opportunity Zones lives up to its potential. But to have maximum impact, such changes must be made soon—while the marketplace is still in its early stages.
The full bill text of the IMPACT Act can be found here.
For more information: Click here for a detailed fact sheet on designated Opportunity Zones communities, here for an interactive map highlighting a number of early investments, funds, and community initiatives, and here for a comment letter to Treasury on the need for strong reporting and measurement.