Nine percent of Michiganders live in Opportunity Zones (OZ), a program designed to incentivize investments in low-income communities or areas directly adjacent to one or more low-income communities.

OZs, introduced as a provision in the 2017 Tax Cuts and Jobs Act, encourage private investment in low-income communities by providing a tax break to investors that earn a higher income and it seeks to reduce socioeconomic disparities.

The U.S. Department of the Treasury used 2011-2015 data from the American Community Survey to identify eligible communities. These communities include census tracts where the poverty rate is at least 20% or the median family income is less than 80% of the state media or area median.

The Michigan League for Public Policy (MLPP) has released a new report on OZs in Michigan and offered policy recommendations to improve the program’s administration.

According to the MLPP, 890,000 Michigan residents live in 288 OZs across the state in nearly every county.

Of Michigan’s 2,813 census tracts, 41% met the definition of low-income communities and were therefore eligible for consideration to become an OZ. Once these eligible tracts were established, the list was presented to then Governor Rick Snyder in 2018 to choose the final set of OZs.

The MLPP highlighted what early evidence revealed about OZs including:

• The program may exacerbate racial inequities: According to the MLPP, the OZ program attempts to “address racial inequities by attracting wealthy outside investors rather than investing in the people and businesses already living there.”
• Investor wants and community needs: OZ funds can be invested in real estate developments as well as directly into new or existing businesses, but research suggests the majority of OZ funding is typically directed towards commercial real estate investments. According to Smart Growth America, the design of the program prevents it from attracting investments to people of color-owned small businesses or legacy businesses owned by community members.
• States are subsidizing investments that would have occurred anyway: A review of 30 studies found that at least 75% of firms benefiting from economic development tax breaks would have made similar investments or location decisions even without the incentive.
• Many OZs were already experiencing high levels of socioeconomic change: In 2017 when OZ legislation passed, eligibility for the program was based on outdated 2011-2015 American Community Survey data. Michigan was also still recovering from the Great Recession and many eligible census tracts were undergoing high levels of socioeconomic change during this time.

Several CMF members have worked to establish equitable best practices for OZ funds. As CMF reported, in 2019 the Kresge Foundation made a $22 million guarantee commitment and partnered with two impact fund managers to ensure equity and responsible community development guided OZ investments.

According to Kresge, one of those funds has closed with more than $80 million of capital commitments from investors and more than $30 million of commitments from foundation and government partners (including Kresge’s $15 million guarantee).

Since OZs are a part of a federal program that gives the state limited ability to change or improve its administration. However, the MLPP is sharing two policy actions Michigan can take.

Policy Recommendations from the League:

1. Decouple From Federal OZ Provisions: Michigan’s overall state and local tax system result in households that earn lower incomes paying a higher share of their incomes in taxes. According to the MLPP, the loss of income tax revenue from high-income households and businesses investing in OZs will shrink the tax base, forcing the state to rely more heavily on regressive consumption taxes that hit low-income households the hardest.
2. Introduce State Report Requirements: The state should adopt annual reporting requirements to increase transparency and accountability, identify best practices and reduce the risk of fraud. The state should keep a public record of projects that can be disaggregated by census tract, OZ fund, the dollar amount of investment and date of investment. According to the MLPP, having state-level data will allow researchers to identify misuses of the program, costs to the state and impacts on communities.

Want more?

Read MLPP’s full report.

Learn more about the Kresge Foundation’s support of equitable Opportunity Zone investments.