AN OPPORTUNITY ZONE FALLS IN A FOREST.

AuthorLernar, Anika Singh
PositionA Taxing War on Poverty: Opportunity Zones and the Promise of Investment and Economic Development

Introduction 1183 I. What Causes Gentrification? 1186 II. What do Opportunity Zones Cause? 1190 III. Lessons 1195 Conclusion: Opportunity Reconsidered 1199 INTRODUCTION

A recent press account summarizing research on the question of who benefits from economic development tax subsidies began:

At its best, the federal New Markets Tax Credit program has subsidized projects like a community-owned grocery store in West Oakland. Or a new permanent home for an immigrant rights organization in Queens, New York. Or the re-purposing of a 180-acre former steel production site on the far South Side of Chicago into spaces for retail, green manufacturing and food production, and the largest indoor recreational space in the region. At its worst, the same program has subsidized high-priced condominiums or even convention centers that spark or accelerate gentrification. (1) Unpacked, the paragraph contends that economic development subsidies, when well-spent, fund amenities that do not lead to gentrification. The paragraph, however, makes a number of assumptions about what sorts of subsidized transactions might yield gentrification: Community-owned retail does not lead to gentrification and high-priced condominiums do. Consider, however, the preferences of potential gentrifiers, well-paid, college-educated people living in or near low-income neighborhoods. Many readers of the quoted article, in fact, are probably potential gentrifiers. And, as they read this list of subsidized deals, it seems likely that many of them thought to themselves, "I would love to live in a neighborhood with a community-owned grocery store." A community-owned grocery store--where presumably there had previously been no grocery store--would make many potential gentrifiers more likely to move to that former food desert. Similarly, an indoor recreational space sounds like an attractive amenity for families of all income bands.

But neighborhoods with convention centers are not generally considered particularly attractive. And the empirical research is quite clear that even "high-priced condominiums" do not raise nearby rents and they sometimes help to stabilize or decrease them. (2) That is not surprising: Developers like to build their "high-priced condominiums" where rents are already rising; they do not typically look to roll the dice in low-rent neighborhoods with no preexisting upward rent trajectory. (3)

In other words, the lede understood the conventionally accepted truth--high-end condominiums are a sign of gentrification--but misunderstood the causation. And perhaps it also misunderstood whether the tax credits that subsidized these transactions actually caused the transaction to occur, a question we need to take especially seriously in the context of Opportunity Zones, the cousin of the New Markets Tax Credit that was the subject of this symposium.

Whether Opportunity Zones cause or facilitate gentrification is a difficult question in part because it is far from clear that Opportunity Zones have a "but for" causal impact at all. Do Opportunity Zones drive investment decisions, or are they frosting on the top of an already-tasty cake? Some tax credit programs--for example, the more lucrative version of the Low-Income Housing Tax Credit--provide sufficiently deep subsidies to render an unprofitable transaction profitable." (4) A rental housing complex with capped, below-market rents is not a profitable transaction. Add in 9% Low-Income Housing Tax Credits and, lo and behold, it is.

Other credits provide a shallower subsidy that nonetheless can be leveraged to draw private investment that might not otherwise have occurred. Consider, for example, the New Markets Tax Credit. It is shallower than the 9% Low-Income Housing Tax Credit, but the Internal Revenue Service has endorsed a leveraged loan model that makes it possible for a tax credit-motivated investor to pursue deals, the profitability of which turn on the tax credits. (5) Opportunity Zones, however, are a shallow subsidy. The subsidy is insufficiently large to make unprofitable deals profitable, though it will make some profitable deals marginally more attractive to investors. (6)

Whether Opportunity Zones cause gentrification, then, is two inquiries, at least, baked into one. What, if anything, are the effects of Opportunity Zones? And do those effects cause gentrification? In other words, do Opportunity Zones cause the things that cause gentrification? This Essay unpacks these two questions in the reverse order. Part I explores the policies and conditions that lead to gentrification. Part II then examines the impact of the Opportunity Zone program. Part III and the Conclusion argue that place-based economic development subsidies, like Opportunity Zones, are attractive to policymakers but unlikely to result in poverty alleviation. Advocates and scholars committed to addressing the problems facing low-income places will have to look elsewhere for solutions.

  1. WHAT CAUSES GENTRIFICATION?

    The vast majority of low-income census tracts in the United States are not at risk of gentrifying. (7) Instead, in an era of escalating wealth inequality, segregation, and regional economic disparities, most low-income places are only likely to see ever-increasing rates of poverty. (8) Nevertheless, considering this question--what causes gentrification --can be helpful to probing broader questions about place-based subsidies and the impacts of those subsidies on low-income people.

    Researchers studying gentrification have endeavored to identify what kinds of investments trigger displacement and have distinguished between "amenity effects" of development and "supply effects." (9) Adding housing supply has "supply effects." (1)" By absorbing a portion of demand, adding supply can decrease the rate at which rents rise." If the effect is large enough or demand is relatively weak, it can even stabilize or decrease rents. (12) Developing housing, therefore, can mitigate escalating housing prices, a key component of gentrification.

    Developments that add amenities are different. New amenities can make a neighborhood attractive to people who might not have otherwise considered living there. Joking about gentrification, people will often point to amenities like wine bars, beer gardens, and organic groceries as signs of gentrification. These amenities might be indicators that gentrification is taking place. (13) It is unclear, however, that they drive gentrification. Other amenities are likely more important to an individual's decision on where to live. Indeed, the more basic amenities to which low-income people are entitled are the same amenities that might attract middle- and high-income people to low-income neighborhoods.

    Returning to the earlier example, grocery stores are a fundamental need that all people share. Low-income neighborhoods are often food deserts. (14) They lack adequate access to reasonably priced groceries. For that reason, community development corporations, nonprofit organizations, funders, and others seek to advance policy and transactions that can bring grocery stores to low-income neighborhoods. (15) These grocery stores, then, also make a neighborhood more livable for wealthier households that would not have otherwise considered living in a neighborhood without a grocery store. Making a place more livable--nicer parks; more retail, full-service grocery stores; safer streets; transportation infrastructure; proximity to jobs--makes it more attractive to middle-class and wealthy people whose ability to pay for housing will outpace that of existing residents. Even when programs like New Markets Tax Credits are designed to provide those amenities, they are not designed to ensure that those amenities are enjoyed by low-income people. The solution, of course, is not to avoid building a grocery store but instead to build sufficient housing and sufficient affordable housing to ensure that the grocery store benefits low-income residents.

    Gentrification, then, is not solely a function of what is built. It is, in addition and perhaps even more importantly, a function of who gets to enjoy whatever is built. Where a disinvested community is successfully revitalized, "[i]ncumbent residents stay and reap the benefits of neighborhood improvements, whereas in gentrification they can be displaced as the social and economic environment of neighborhoods shift, and the public sector does not take action to protect long-term residents." (16) As a result of such displacement, investments intended to benefit a neighborhood's low-income residents may instead benefit wealthier people who are newly attracted to that community once those investments are made.

    Even if the tax benefits of Opportunity Zones were limited to uses perceived to increase quality of life or create jobs in job-poor areas, there would be nothing in the program that would require that those uses or jobs be made available to low-income people. In the case of jobs tied to tax credit and other subsidy programs, studies have found these jobs are not created so much as they are redistributed around a region. (17) Moreover, jobs are not necessarily made available to residents of adjacent low-income neighborhoods but instead hire applicants from around the commuting region, including higher-income areas. (18)

    In fact, even when subsidies or public dollars are used to build public goods, there may be no good mechanisms to ensure that those goods are enjoyed by people who might need them most. As a result, some scholars and observers have worried that improvements to public transit, for example, can drive gentrification and displacement. (19) Car ownership is expensive and universal car usage wreaks havoc on quality of life and the environment. (20) Public transit infrastructure is a key policy intervention to ensure economic vitality, access to opportunity, and quality of life. But there are few transit-rich neighborhoods in the United States...

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