ARTICLE
Where State and Federal Tax Law Can Help Economic Development In today’s conflicting world of policy and politics between California and Washington DC, finding common ground on state/federal issues is challenging. In almost every instance in the past two plus years, California’s policies track in the opposite direction with the Trump Administration’s policy directives. Yet, California continues to chart a path of economic opportunity while the policy gears in Washington DC are mostly stuck in political attacks from both sides of the aisle. I know first-hand having worked in Washington DC during different times — a short two year stint as an intern in the US Senate (1976-77) and in Congressional offices from (1982-1987) and (1988 to 2000) — the policy debates have always been marred in political ideology. Yet, during the 1970s, 80s and 90s there was a large delegation of moderate thinking legislators — both Democrats and Republicans — where both parties would come together (dropping their political guard) to seek common good for the American people. It did not matter if there was a Democrat or Republican in the White House, the art of legislative compromise won the day in the end. I am afraid that those times seem to be a thing of the past. Yes, we can banter that one side is right while the other side in completely at fault, but the truth of the matter is that all sides have dug in their heels to protect their political turf until the next election cycle. There is no victory for America when the incumbent fighters utilize politics over policy. I am no Pollyanna when it comes to the inner workings of Congress, the State legislature or even our local city council. Yet, often out of the worst of times comes a glimmer of hope that produces an opportunity that can make a difference. Here is a glaring example: Early this year, Governor Gavin Newsom noted that a Trump administration program that provides tax breaks meant to spur investment in low-income areas could boost California’s economy. Newsom said, “The Opportunity Zones program could help address two of the state’s major challenges: promoting energy investment to meet its climate change goals and providing funding for housing amid a shortage that has exacerbated income inequality.” The program, which was part of the 2017 Tax Cuts and Jobs Act, reduces capital gains taxes for real estate and business investors in designated low-income areas. The U.S. Investing in Opportunities Act, passed two years ago as part of the new federal tax bill, created tax incentives for investment in designated census tracts called Opportunity Zones. The statute, introduced with bipartisan sponsors led by Senators Cory Booker (D-NJ) and Tim Scott (R-SC), was designed to spur growth in low-income communities by encouraging reinvestment of capital gains into certified Opportunity Funds. Opportunity Zones (OZs) are probably best understood not as a new grant program but as a new investment tool — similar to the home mortgage interest deduction that creates tax preferences, which then drive individual and market behavior. I wrote about the OZs earlier this year after attending a conference in Monterey. The Act creates a tax incentive for investors to re-invest their capital gains into dedicated Qualified Opportunity Funds (“QOF”). Let’s dig a little deeper to understand how this might benefit our communities. With minor exceptions, the federal statute is not prescriptive in terms of the types of qualified investments, from affordable housing to clean energy to infrastructure to small business to workforce. This provides flexibility, as well as the need to craft local and state strategies that will focus these investments to ensure they deliver living wage jobs, increase affordable housing, prevent unwanted gentrification and build resilient communities. This work is just beginning and there is time for communities to consider the benefits of the OZ tool, as the U.S. Treasury Department is just now rolling out the full set of investment rules. Investors are expected to begin forming Opportunity Funds in the later part of 2018 and the State is creating its Opportunity Zone strategy after the Treasury issues final rules. In short, a state’s competitive edge for OZ implementation will come for those states which (1) have a clear public investment vision; (2) support their local communities to act and think differently about how they develop project portfolios; and (3) engage potential investors and steer co-investment into the state’s most compelling pipeline of investable and “de-risked” projects. California's OZ strategy information is here: Click here! So where are these Opportunity Zones for our county? A quick search on the California Opportunity Zone website reveals that Santa Cruz County has four census tracts that ‘fit’ the definition noted in the sheet above. Click here! The census tracts are along Ocean Street from the Water to the Boardwalk area and in Live Oak area and East Cliff Drive. The link below takes you to a mapping system where you can ‘plug’ in the GEOID number and up pops the specific of that census tract. Click here! The question to be addressed is: how do we maximize this opportunity by getting the potential investors to put their capital gains into qualified funds that align with the local government and community leaders on a strategy to implement a plan for these qualified OZs? Here is a link to the frequently asked questions and the get ready OZ guide. Click here! Clearly, the Opportunity Zone investment strategy is not “free money.” The 10 point guide provides the basis for starting the strategy over a long 10 year timeline. Like all investments, gathering the right information, surrounding yourselves (our community) with experts in this investment field and organizing a public/private partnership is the key to a successful plan. Do OZs really work? Take a look at the first of its kind in the City of Placentia/County of Orange TOD Packing House & Old Town Enhanced Infrastructure Financing District (“District” or “EIFD”) was formed on July 30, 2019 as the first City/County cooperative EIFD to be formed in California. The EIFD area also encompasses two (2) Opportunity Zone (OZ) census tracts, which enables the City/County to use the EIFD as a collateral inducement for private sector investment driven by the federal tax benefits that OZ’s can provide. The District encompasses ~300 acres, representing approximately 7% of the City. The District includes the City’s “Old Town” Placentia Revitalization Plan area and Transit-oriented Development (TOD) Packing House District, and other proximate areas. The nucleus is a forthcoming Metrolink station for the 91 Line; the first Metrolink station in Orange County in nearly 10 years. The District represents a partnership between Placentia and the County of Orange, and will be funded by property tax increment from both taxing entities. The Southern California Association of Governments (“SCAG”) provided funding for the technical analysis for the Infrastructure Financing Plan through its Tax Increment Financing Pilot Project Program. The Santa Cruz County Chamber is eager to work with our Santa Cruz County communities and local government leaders to see if these new investment options can work for our region. Stay tuned.
Where State and Federal Tax Law Can Help Economic Development In today’s conflicting world of policy and politics between California and Washington DC, finding common ground on state/federal issues is challenging. In almost every instance in the past two plus years, California’s policies track in the opposite direction with the Trump Administration’s policy directives. Yet, California continues to chart a path of economic opportunity while the policy gears in Washington DC are mostly stuck in political attacks from both sides of the aisle. I know first-hand having worked in Washington DC during different times — a short two year stint as an intern in the US Senate (1976-77) and in Congressional offices from (1982-1987) and (1988 to 2000) — the policy debates have always been marred in political ideology. Yet, during the 1970s, 80s and 90s there was a large delegation of moderate thinking legislators — both Democrats and Republicans — where both parties would come together (dropping their political guard) to seek common good for the American people. It did not matter if there was a Democrat or Republican in the White House, the art of legislative compromise won the day in the end. I am afraid that those times seem to be a thing of the past. Yes, we can banter that one side is right while the other side in completely at fault, but the truth of the matter is that all sides have dug in their heels to protect their political turf until the next election cycle. There is no victory for America when the incumbent fighters utilize politics over policy. I am no Pollyanna when it comes to the inner workings of Congress, the State legislature or even our local city council. Yet, often out of the worst of times comes a glimmer of hope that produces an opportunity that can make a difference. Here is a glaring example:
Early this year, Governor Gavin Newsom noted that a Trump administration program that provides tax breaks meant to spur investment in low-income areas could boost California’s economy. Newsom said, “The Opportunity Zones program could help address two of the state’s major challenges: promoting energy investment to meet its climate change goals and providing funding for housing amid a shortage that has exacerbated income inequality.” The program, which was part of the 2017 Tax Cuts and Jobs Act, reduces capital gains taxes for real estate and business investors in designated low-income areas. The U.S. Investing in Opportunities Act, passed two years ago as part of the new federal tax bill, created tax incentives for investment in designated census tracts called Opportunity Zones. The statute, introduced with bipartisan sponsors led by Senators Cory Booker (D-NJ) and Tim Scott (R-SC), was designed to spur growth in low-income communities by encouraging reinvestment of capital gains into certified Opportunity Funds. Opportunity Zones (OZs) are probably best understood not as a new grant program but as a new investment tool — similar to the home mortgage interest deduction that creates tax preferences, which then drive individual and market behavior. I wrote about the OZs earlier this year after attending a conference in Monterey. The Act creates a tax incentive for investors to re-invest their capital gains into dedicated Qualified Opportunity Funds (“QOF”). Let’s dig a little deeper to understand how this might benefit our communities. With minor exceptions, the federal statute is not prescriptive in terms of the types of qualified investments, from affordable housing to clean energy to infrastructure to small business to workforce. This provides flexibility, as well as the need to craft local and state strategies that will focus these investments to ensure they deliver living wage jobs, increase affordable housing, prevent unwanted gentrification and build resilient communities. This work is just beginning and there is time for communities to consider the benefits of the OZ tool, as the U.S. Treasury Department is just now rolling out the full set of investment rules. Investors are expected to begin forming Opportunity Funds in the later part of 2018 and the State is creating its Opportunity Zone strategy after the Treasury issues final rules. In short, a state’s competitive edge for OZ implementation will come for those states which (1) have a clear public investment vision; (2) support their local communities to act and think differently about how they develop project portfolios; and (3) engage potential investors and steer co-investment into the state’s most compelling pipeline of investable and “de-risked” projects. California's OZ strategy information is here: Click here! So where are these Opportunity Zones for our county? A quick search on the California Opportunity Zone website reveals that Santa Cruz County has four census tracts that ‘fit’ the definition noted in the sheet above. Click here!
The census tracts are along Ocean Street from the Water to the Boardwalk area and in Live Oak area and East Cliff Drive. The link below takes you to a mapping system where you can ‘plug’ in the GEOID number and up pops the specific of that census tract. Click here!
The question to be addressed is: how do we maximize this opportunity by getting the potential investors to put their capital gains into qualified funds that align with the local government and community leaders on a strategy to implement a plan for these qualified OZs? Here is a link to the frequently asked questions and the get ready OZ guide. Click here!
Clearly, the Opportunity Zone investment strategy is not “free money.” The 10 point guide provides the basis for starting the strategy over a long 10 year timeline. Like all investments, gathering the right information, surrounding yourselves (our community) with experts in this investment field and organizing a public/private partnership is the key to a successful plan.
Do OZs really work?
Take a look at the first of its kind in the City of Placentia/County of Orange TOD Packing House & Old Town Enhanced Infrastructure Financing District (“District” or “EIFD”) was formed on July 30, 2019 as the first City/County cooperative EIFD to be formed in California.
The EIFD area also encompasses two (2) Opportunity Zone (OZ) census tracts, which enables the City/County to use the EIFD as a collateral inducement for private sector investment driven by the federal tax benefits that OZ’s can provide.
The District encompasses ~300 acres, representing approximately 7% of the City. The District includes the City’s “Old Town” Placentia Revitalization Plan area and Transit-oriented Development (TOD) Packing House District, and other proximate areas. The nucleus is a forthcoming Metrolink station for the 91 Line; the first Metrolink station in Orange County in nearly 10 years.
The District represents a partnership between Placentia and the County of Orange, and will be funded by property tax increment from both taxing entities. The Southern California Association of Governments (“SCAG”) provided funding for the technical analysis for the Infrastructure Financing Plan through its Tax Increment Financing Pilot Project Program.
The Santa Cruz County Chamber is eager to work with our Santa Cruz County communities and local government leaders to see if these new investment options can work for our region. Stay tuned.