Editorial: South Carolina should lead on Opportunity Zone development
Cities and counties across South Carolina are working to take advantage of the anti-poverty Invest in Opportunity Act that was part of the 2017 tax reform bill. Our state ranks 10th in the nation in the percentage of its population living below the federal poverty line, and stands to benefit greatly if the act succeeds.
Republican Gov. Henry McMaster and the Legislature should take further steps to ensure that South Carolina is a national leader in realizing the aims of the act, which directs private investment to projects in low-income areas by offering generous tax treatment to investors.
The Urban Institute recently published a study of the ways South Carolina can direct funds and manage Opportunity Zone development to enhance the opportunities provided by new Internal Revenue Service rules for investment in the zones. Some steps require action by state lawmakers, but there also is a large administrative role to be played by the South Carolina Commerce Department and the state Housing Finance and Development Authority. State Rep. Marvin Pendarvis, D-North Charleston, is introducing legislation to accomplish many of these objectives.
The tax breaks in the plan offer investors a way to tap into as much as $6.1 trillion in unrealized capital gains by sheltering them from full taxation if devoted to development in an Opportunity Zone, defined as a carefully selected census tract meeting low-income and other requirements. Even a fraction of that capital, measured in the billions, would supply much needed local capital for projects in such zones.
If successful, the plan, developed by Sens. Tim Scott, R-S.C., and Cory Booker, D-N.J., also will benefit people on both ends of the economic ladder. While qualified investors stand to make a decent return of 8 to 10 percent on long-term investments in the many Opportunity Zone funds that have sprung up around the country, properly directed investments will have a positive economic effect on many poor communities, raising wages and land values across the board.
Meeting the goal of getting the funds to the right places while improving local communities will depend greatly on how states implement the Opportunity Zones law. That is of top importance.
South Carolina has 135 Opportunity Zones, including 128 in low-income census tracts and seven in adjacent tracts where spillover benefits are expected. According to figures compiled by the Urban Institute, nearly 56 percent of the inhabitants of these zones are minorities. Household income is just over $32,000 a year, the poverty rate is nearly 30 percent and unemployment at the time of selection was 13 percent, compared to a statewide average below 4 percent. Only 15 percent of these residents have a college degree.
The state has already taken some positive actions. The Legislature amended the state capital gains law to bring it into conformity with the new IRS rules. The Commerce Department recently appointed a statewide coordinator for the program, and offers matching planning grants. Eleven counties and seven cities have taken advantage of these grants so far.
But the Urban Institute study and Rep. Pendarvis point out that the state can do more. Perhaps the most urgent need at the moment is for good reporting on the progress in implementing the act, which has no mandatory reporting requirement. The state should remedy this by enacting its own requirements.
Current reporting is haphazard and voluntary. Mark Elliott, managing director of the private sector South Carolina Opportunity Fund, says that he has to go to 30 or 40 different websites to gather information on Opportunity Zone planning and implementation. The state Commerce Department is reported to be working on a central reporting site. But the Legislature should enact a mandatory reporting requirement that highlights ways in which Opportunity Zone projects are achieving the anti-poverty and anti-gentrification objectives for the act as spelled out by the principles of the OZ Reporting Framework developed by the New York Federal Reserve Bank and the Beeck Center of Georgetown University.
South Carolina has a great opportunity to show the rest of the nation how to make this major anti-poverty program work. Doing so would greatly benefit the state’s economy and its residents.