Introduction

With the passage of the Tax Cuts and Jobs Act in 2017, Opportunity Zones (OZs) became the most consequential place-based policy initiative in a generation. Designed with decentralization, flexibility, and scalability in mind, OZs were the first federal development program to use capital gains tax incentives as the mechanism to drive behavior.[1] This structure was one important departure among many from the more traditional tax credit model, which together help explain how OZs unlocked $48 billion worth of direct equity capital for investing in targeted low-income communities by the end of 2020 alone.[2]

The novelty of the OZ mechanism has ushered in a new generation of research as scholars race to grade the policy. Historically, researchers have found little lasting economic impact from legacy “zone” programs such as Enterprise Zones, prompting many to ask whether OZs would be any different.[3] In the rush to declare success or failure, however, even prominent scholars have succumbed to various analytical pitfalls searching for effects of the policy in the wrong places at the wrong times. The structure of the incentive, pace of regulatory rollout, and nature of community development all caution for patience in allowing the impacts of the policy to register. In the meantime, the studies that most clearly incorporate the structure of the incentive and its most common use-cases into their design show strongly positive initial results that suggest that the OZ model has truly broken new ground. The following brief will critically evaluate the emerging body of academic work on the economic impacts of OZs to level-set on what can credibly be determined at this point in time and, we hope, constructively inform scholars’ research agendas going forward.

Taking Stock of the Emerging Literature

Scholars have endeavored to evaluate the performance of OZs across a number of different factors since the policy was enacted. They have explored the relationship between OZ status and home prices,[4] commercial property sale prices and transaction volumes,[5] building permits activity,[6] establishment openings,[7] job openings,[8] employment rates, incomes, and poverty rates.[9] Effect estimates on the immediate and short-run impacts of OZs have ranged from positive[10] to null.[11] Appendix Table 1 compares and contrasts a number of different studies in depth.

Not all of these studies are created equal, however. Some have consequential shortcomings in their designs or methods. For example, most inquiries only examine a short window immediately following the policy’s passage—an implausible time horizon for observing meaningful impacts. The analysis window in four of the nine most widely-referenced papers does not extend beyond 2019, meaning their study periods ended just as OZ regulations were finalized (see Figure 1).[12] Results from this pre-regulatory period cannot tell us anything about the direct short-term impact of OZ investment on targeted communities, not to mention anything of the long-term impact of a fully-implemented policy. As it happens, the two studies observing the strongest positive impacts (Arefeva, et al., 2023 and Wheeler, 2022) incorporate at least two full years of post-regulatory observations.Type your paragraph here.


Timelines Are Critical to Evaluating OZs

All new policies take time to ramp up, but the structure of the OZ incentive makes timing especially crucial to internalize into study designs. Specifically, scholars must take into account key regulatory milestones, grasp how the regulatory timeline shaped the evolution of the market, and align with the on-the-ground realities of investment and development. 

Regulatory timeline. OZs were enacted in December 2017 as part of the Tax Cuts and Jobs Act, but states first had to identify and propose their OZ selections to the U.S. Treasury, and then those individual census tracts had to be certified by the Secretary. This process was not completed until June 2018. Following designation, regulations essential to investing in OZs were promulgated in three waves, starting in October 2018, then in April 2019, and finally in December 2019—the latter two packages being the largest and most substantive. Thus, 2020 marked the first year a fully-operational OZ investment ecosystem was up and running.
Market development timeline. The regulatory timeline naturally shaped the economic and financial evolution of the market. The amount of equity capital raised by OZ funds grew rapidly as the regulations were finalized and has continued climbing since. The best available estimates report that OZ funds held a cumulative $48 billion in assets by the end of 2020, up from $4 billion in 2018 and $30 billion in 2019.[13] Private data sources suggest that holdings at least doubled again over the subsequent two years, charting a steep climb towards—and likely past—$100 billion in direct OZ equity by 2022.[14] It is important to remember that these figures describe the supply side of the OZ market, however, and that they will lead actual capital deployment significantly. In terms of communities, the best available information reports that 48 percent of OZs had already registered investment activity through the incentive by the end of 2020 (translating to approximately 3,800 individual communities, or census tracts), up from 26 percent in 2019.[15] In other words, the number of tracts registering investment was climbing steeply alongside investment dollars in the policy’s early years. 
Investment timeline. The third critical consideration around timing has to do with the practical mechanics of investing and development. Investors have six months from realizing a capital gain to move the earnings into an OZ fund, and funds then have another six months to begin deploying that money into investments in communities. To date, OZ investments have primarily—although by no means exclusively—taken the form of real estate (often multi-family residential or mixed-use) and by nature (as codified in statute and regulation) must be new builds or substantial rehabilitations. The average multifamily construction project in the United States lasts 17.5 months from authorization to completion; even longer (19.2 months) for the larger buildings often associated with OZ investment.[16] Even before breaking ground, developers and investors have to conduct significant due diligence and project planning. Thus, two years can pass between when a place registers an OZ investment and when that investment becomes an economically active property. Researchers should anticipate these lags in their study designs. 

What to Look For, and When

Ultimately, these timeline considerations mean that inquiries need to be grounded in clear theories of cause and effect, or what to expect and when. Timeframes are especially crucial given the upstream nature of an investment incentive, which only indirectly influences many economic indicators researchers care about—and does so at a considerable lag. Enterprise Zones provided direct employment tax credits, for example, the economic impacts of which can register immediately (the credit is only awarded when a person is in a job). OZs are fundamentally different.