Zones” Pull Declining
Out of Poverty?
Stanford researchers investigate
whether a new program will help low-income
residents or merely profit investors.
BY EDMUND L. ANDREWS
“Given the uncapped size of the program
and the wide scope of investments, this
incentive has the potential to be more
successful than other more restrictive place-based policies,” says Tian, who’s scheduled to
graduate from Stanford GSB in 2019.
If the new zones do attract capital, one question
is whether that money actually helps lift local
residents out of poverty by improving their areas.
One risk, highlighted in previous academic
research, is that the local area improvements
could gentrify an area and drive out low-income residents. Indeed, a recent paper by the
Brookings Institution suggests that some of
the designated zones were already in the process
of gentrifying. That means that investors may
not even need any special incentives, but also
that people in poverty could be squeezed out by
new upscale housing.
Another risk is that investors put money
into businesses that do little or nothing for low-income residents. One zone, for example, is just
3 miles from Palo Alto and well within Silicon
Valley. If Google decided to build a ne w office
annex there, it might only employ tech workers
from outside the area and do little for existing
residents who struggle to pay rent.
For Lester, that makes Opportunity Zones
a fascinating real-life experiment that could
provide valuable insights on poverty-reduction
strategies for years to come.
“The extent to which these projects actually
help low-income residents will in some ways be
a function of how local governments participate
in directing the investment,” Lester says. “It will
be up to the local governments to step up and
say, ‘ This is where you can have a real impact.’”
In the meantime, Evans and Tian are
working to connect the dots between investment
opportunities in distressed areas and people
with capital to deploy.
To that end, the three are trying to build
public awareness about the program, both by
developing research on particular aspects and by
building interactive maps of Opportunity Zones
and additional tools for investors, policymakers,
and other interested parties.
“People may find investment opportunities
in their own backyards,” says Evans, also in
the Stanford GSB class of 2019. “This can give
an investor a chance to take some investment
profits from Apple or Google and reinvest them
in local area businesses.” Δ
The $1.6 trillion tax cut that became law last
December contained a sleeper provision
that’s beginning to generate excitement
across party lines, a rarity in today’s politics.
The obscure provision, which had
bipartisan support, allows investors to reap
big tax savings by reinvesting cash from
previous capital gains into low-income
It’s not the first time that Congress has
created tax incentives to attract investors to
neighborhoods with high poverty, but Rebecca
Lester at Stanford GSB says this program could
lure much more money than earlier efforts.
“One of the really distinctive features of
this program is that it is so broad,” says Lester,
an assistant professor of accounting who
specializes in the impact of accounting and
tax policies on investment and employment.
“There’s no cap on the number of investors
and few restrictions on what kinds of equity
investments are eligible.”
The big question, Lester says, is whether
the program actually helps low-income
residents or simply enhances the profits
To that end, Lester and t wo graduate
students — Hanna Tian and Cody Evans —
have begun analyzing how the incentives
work and mapping the demographic and
economic characteristics of tracts now being
designated as Opportunity Zones.
Under the law, states designated up to 25%
of their low-income neighborhoods for the
The Treasury Department will approve
nearly 9,000 zones nationwide. California
alone has nearly 800, and New York state has
more than 500.
The basic idea is to attract investors who
have big unrealized capital gains from stocks,
real estate, or other investments.
Normally, investors have to pay a capital
gains tax of up to 23.8% when they cash out.
Under the new law, however, those
investors can defer paying capital gains
taxes for years if they reinvest their profits
in an Opportunity Zone. If they hold that
investment for seven years, they get a 15%
reduction on the original capital gains tax.
If they hold it for 10 years, moreover, they
won’t have to pay any tax at all on the profits
generated from the Opportunity Zone. For
a successful investment, that would add up
to a major tax saving.
Lester and her students say the incentives
have several striking features.
The first is that Congress did not limit
the size of the program or how much money
people can invest using this incentive. That
makes this quite different from an earlier
program, the New Markets Tax Credit, which
had a limited budget. In 2014, the Treasury
Department approved only around 30% of
applications for Ne w Markets projects.
The second big feature is that investors
can put their money into virtually any kind
of equity investment they like, from startup
companies and existing local businesses
to new homes or factories. The main
requirement is that the investment be inside
one of the designated zones.
A third potential advantage is the
minimal amount of red tape. In previous
programs, projects had to go through
lengthy processes of certification and
approval. With Opportunity Zones, it’s
widely expected that the Internal Revenue
Service will let investors simply declare
their in-zone investments on a form they
file with their annual tax returns.
Rebecca Lester is an assistant professor
of accounting at Stanford GSB.
Photograph by Preston Gannaway