Legislation aims to boost investment in economically distressed areas
WASHINGTON – The country's most economically distressed areas would become more attractive for private investment under legislation introduced Wednesday by a bipartisan group in Congress and backed by the first president of Facebook.
The Investing in Opportunity Act would let investors put off paying capital gains taxes and instead use that money to improve conditions in places with chronically high poverty and unemployment, low family incomes and rampant abandoned housing.
The legislation represents a new twist on a familiar approach in Washington: using the tax code to affect behavior. It's designed to encourage socially conscious investors to join forces to help communities where few investors ever tread.
“Our goal is to make sure we see the private sector engage with their resources in a way they have not in the past,” said Sen. Tim Scott, R-S.C.
He and Sen. Cory Booker, D-N.J., are the lead Senate sponsors. The effort is being led in the House by Rep. Pat Tiberi, R-Ohio, and Rep. Ron Kind, D-Wis.
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And Sean Parker, co-founder of Napster and the first president of Facebook, is putting his philanthropic and entrepreneurial stamp of approval on the legislation as a way for investors to make a difference — and a profit — in communities bypassed by the economic recovery.
If it becomes law, it would provide "a vital new pathway for investors and entrepreneurs to kickstart economic growth in distressed areas across America," Parker said in an emailed statement.
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Parker is founder and chairman of the Washington-based Economic Innovation Group, which published a Distressed Communities Index that pinpoints the areas most in need of private capital.
The group’s February analysis found 50.4 million Americans living in economically distressed ZIP codes, mostly in the South, Southwest and Rust Belt. While the rest of the country was recovering from the Great Recession in 2010-13, the average distressed ZIP code lost 6.7% of its jobs and 8.3% of its businesses, the report states.
Advocates say the legislation is a well-timed effort to tackle pockets of persistent poverty in every state. The bipartisan team behind the bill makes it more likely to gain traction on Capitol Hill, where such cooperation is rare and increasingly necessary.
On the Senate side, the legislation is a byproduct of an unusual political alliance between Scott and Booker, the chamber's only AfricanAmericans. On the House side, Kind and Tiberi are members of the tax-writing House Ways and Means Committee formerly chaired by House Speaker Paul Ryan of Wisconsin, who has made anti-poverty efforts a centerpiece of his economic policies.
Tiberi said the idea is novel because it involves no public-sector financing and no tax credits.
“There are some who say there is up to $2 trillion in unrealized capital gains on the sidelines… and this would get them to put it to work and incentivize them to do that,” Tiberi said.
In exchange for temporarily avoiding the capital gains tax, investors could roll the profits on investment sales into “opportunity funds.” The funds' professional managers would then invest the money in qualified “opportunity zones,” where it could help finance small businesses, new construction, development of blighted properties or local infrastructure projects.
Supporters of the bill believe they can attract investors who will want to use their profits for something other than buying a jet or donating to charity. The opportunity funds would pool investments large and small, and help identify where the money is needed most.
Scott said the capital gains tax deferrals would cost an estimated $20 million a year. Supporters of the legislation also estimate that, based on interest in previous tax credit programs, it could lead to $15 billion to $17 billion in new investments in opportunity zones around the country.
Kind said the opportunity zones would be rural, urban or suburban, depending on conditions in each state.
"We've got a huge build-up of capital gains and if they are never realized, they're never taxed and therefore they are sitting there," Kind said. "This is a way to bring that back into play ... and have a huge impact on job creation."
Scott offered McCormick County, S.C. as an example of an area that would benefit. Sixty-six percent of the county's population lives in an economically stressed ZIP code.
“They have not seen economic development in a very long time and would see more under this model,” he said.
The legislation would limit the size of the opportunity zones and would let governors decide which areas are most in need.
"If everything was an opportunity zone, nothing would be an opportunity zone,” Scott said. “We need to make sure we target the most severely impacted areas.”
Contact Mary Troyan at mtroyan@usatoday.com