SC Gov. Henry McMaster sent a list of 135 sites from around the state to the U.S. Treasury Department on Friday, March 23, to be eligible to receive investments as “Opportunity Zones,” under a portion of the Tax Cuts and Jobs Act sponsored by Republican U.S. Sen. Tim Scott.
The purpose of the initiative is to stimulate long-term investments in businesses and affordable housing in low-income communities. The program provides hefty tax incentives for investing unrealized capital gains into Opportunity Funds. The Opportunity Zones are designated by chief executives of each state and territory.
It is considered a formality for the Treasury Department to approve the recommendations. Businesses can then start investing in the zones, with the promise of erasing capital gains taxes in exchange for staying in these communities at least 10 years.
A Jan. 29 article in The New York Times notes that “more than $2 trillion in unrealized capital gains are sitting on individual and corporate balance sheets across America, according to the Economic Innovation Group, the result of profitable investments in stocks and mutual funds. Normally, proceeds from the sale of those assets would be taxed as a capital gain, at a maximum federal rate of 20% plus a 3.8% surtax. The new law offers investors an alternative: roll those unrealized gains into an Opportunity Fund, and defer federal taxes on the profit, at least temporarily.”
Of South Carolina’s 1,097 census tracts, 538 were designated by the Treasury as eligible for the Opportunity Zone status. The law required McMaster to narrow the list to a quarter of that number. Ninety-six of the 135 sites qualify as urban areas, according to McClatchy.
At least one Opportunity Zone is proposed for each of South Carolina’s 46 counties. The zones include:
· areas around Fairfield County’s V.C. Summer Nuclear plant, where 6,000 workers were left unemployed after construction was abandoned
· rural areas, such as a large part of Dillon County
· urban areas, such as downtown Myrtle Beach’s five-sided superblock at Ninth Avenue North and Kings Highway
· properties around the Volvo plant/I-26 corridor outside Charleston
In areas such as Hilton Head Island, where new businesses have created many jobs but there remains a lack of affordable housing for new workers, incentives could encourage developers to step in and fulfill that need.
“We are a state that has traditionally been so concerned about spending, there are few incentives provided by the state for lifting up the lower-income communities,” said Kendra Stewart, director of the College of Charleston’s Joseph P. Riley Center for Livable Communities. “We tend to focus all of our efforts on economic development and bringing in major corporations.”
This economic resurgence plan appearing on Page 130 of the GOP tax overhaul is aimed for areas where there are pronounced gaps in services. While some zones are in the state’s poorest sections, others are communities on the rise that are ready to see added boosts to development already underway.
The program is estimated to cost roughly $1.5 billion over 10 years, but a Scott spokeswoman said Scott is convinced the money will be repaid as successful businesses generate revenue.
Scott said the federal government’s roles should be to first designate the zones and then “get out of the way.”
“One of the reasons I wanted the legislation designed the way that I designed it is I felt the private sector does a better job of attracting the capital than does the government,” Scott said. “I’m a conservative. I want a conservative-centric solution for the issues that face this country living in poverty in our nation as a whole.”
Tech mogul Sean Parker, of Facebook and Napster, enlisted Scott and others to sponsor the legislation, with the support of a new Washington think tank, the Economic Innovation Group. “This becomes its own asset class, and it could be a very large asset class,” Parker said of the Opportunity Funds.
But for all the rules in place to designate the zones and for how the investment will be rewarded with potential windfalls, some are wary as to how investors will be drawn to put money in areas with the highest poverty rates and poorest job and business growth.
“People could use this program to invest in a building and remove it from the affordable housing stock,” said Brett Theodos of the Urban Institute, a Washington-based research group. “There is nothing that can obstruct or prevent that from happening. It actually has the potential to undermine community development objectives.”
While previous federal community investment programs have an uneven record, the New Markets Tax Credit is a current program that offers investment incentives for distressed areas in a more limited scope.
Scott’s plan received scant media attention during the rushed weeks of the push to approve the federal tax plan, but the senator said it was received enthusiastically by President Trump. Now comes the test if the program will restore areas of the country where economic recovery never took hold after the Great Recession.
“If it’s successful, we’ll look back 10 years from now and say this was one of the most important parts of the tax bill, and one we didn’t talk nearly enough about,” said Kevin Hassett, the chairman of Trump’s Council of Economic Advisers.
“I came out of one of these communities,” said Scott, who grew up poor in North Charleston, “so I believe that there’s untapped potential in every state in the nation.”
HOW OPPORTUNITY FUNDS WORK:
Investors can minimize their tax burden through preferential treatment on capital gains through investment of Opportunity Funds into Opportunity Zones:
· Investors can roll existing capital gains into Opportunity Funds with no up-front tax bill.
· A 5-year holding increases the rolled-over capital gains basis by 10%
· A 7-year holding increases the rolled-over capital gain investment basis 5% for a total of 15%
· Investors can defer their original tax bill until Dec. 31, 2026, at the latest, or until they sell their Opportunity Fund investments, if earlier.
· Investments held in the fund for at least 10 years are not taxed for capital gains.
Read PDF with more details about how Opportunity Funds work and examples of investment returns here.