Maryland Shouldn’t Double Down on Ineffective Federal Tax Breaks for ‘Opportunity Zones’

This week Maryland lawmakers are considering a proposal from Gov. Hogan to give additional state tax breaks to companies participating in the federal Opportunity Zones program. Doubling down on the ineffective tax break approach would be an unwise use of Maryland’s resources, and the General Assembly’s best choice is to reject any new business subsidies. Failing that, any subsidies should be paired with robust protections to ensure they benefit struggling communities.

Congress created the Opportunity Zones tax break as part of its 2017 tax overhaul. The program’s stated goal is to increase private investment in struggling communities, but its approach mirrors the rest of the law: lopsided tax breaks to wealthy investors with relatively few strings attached. The program allows investors to delay or reduce their capital gains tax responsibilities when they invest in areas (Opportunity Zones) designated by state governments. Qualifying neighborhoods must satisfy certain requirements—they must have a high poverty rate, low median income or high unemployment rate, or be adjacent to a neighborhood with one of these characteristics—but the law includes few other protections to ensure that the residents of these neighborhoods benefit.

A recent report from the Center on Budget and Policy Priorities highlighted several concerns about the program:

• The program’s central feature is a package of capital gains tax breaks, which overwhelmingly benefit a small group of individuals who are already doing well. More than two-thirds of capital gains income nationwide goes to the wealthiest 1 percent of households.
• Participants can get the biggest tax break by targeting investments to areas where they can expect to gain the greatest profits. This means that the program largely strengthens the incentive to invest in areas that already had strong growth prospects rather than guiding investments toward the communities with the greatest needs.
• The program does not include any protections to ensure that companies receiving tax benefits hire current residents of the struggling communities where they are located, or that they offer decent wages or benefits.

A large volume of research by policy experts and academic economists has found that economic development subsidies are frequently ineffective. Evaluations of similar programs in Maryland  have repeatedly found little to no evidence of success. It is likely that the Opportunity Zones program will have similar results.

Maryland has already designatedwhich neighborhoods federal Opportunity Zone tax breaks will be available in. On its own, this was a relatively harmless action. However, piling state tax breaks on top of the federal ones—at the expense of essential services like education and health care—would be an unwise choice. The evidence is clear that more tax breaks would bring few benefits, and they would do real harm by reducing the resources available for proven investment in the basics.

If policymakers do choose to hand more tax breaks to wealthy investors, they should at least include protections to ensure these subsidies bring some value to the communities they are intended to benefit. Here are some steps they should take:

• Require a share of subsidized investments to go to businesses owned by people of color, women, and current Opportunity Zone residents
• Require companies receiving benefits to hire locally for positions at a range of wage levels
• Require companies receiving tax breaks to pay family-sustaining wages, offer good benefits, and train workers in marketable skills
• Protect the state’s investment by requiring companies to reach agreements with local labor unions to prevent strikes and lockouts
• Require companies to negotiate with local communities to ensure that investments meet residents’ needs
• Ensure public accountability by requiring companies to report on local hiring and job quality outcomes