A new tax incentive program could bring private investors to struggling rural areas

A new tax incentive available to private investors may give some rural, low-income communities the boost they need to succeed.

The New Markets Tax Credit Program was signed into law as part of the federal Tax Cuts and Jobs Act, which Congress passed on December 20, 2017. The program is a potential new resource for rural Arizona, where new business developments are often few and far between.

It starts with an opportunity zone: an economically-distressed community in which certain investments may be eligible for preferential tax treatment under the New Markets Tax Credit Program, according to the New Markets Support Company (NMSC), a financial solutions organization that has invested more than $1 billion in distressed communities in the past 14 years. The tax incentive is intended to direct available and unrealized capital gains to those communities at a time when economic recovery is primarily focused on metropolitan areas.

“Five metro areas produced as many new businesses in the past five years as the entire rest of the country, so it’s really just a few places that are seeing the benefits of this economic recovery as many are left behind,” said Kevin Boes, president and CEO of NMSC, which is a part of the Local Initiatives Support Corporation (LISC). Boes presented the tax incentive to rural community and business leaders at the Rural Development Forum hosted by Local First Arizona in Wickenburg in August.

U.S. investors currently hold an estimated $2.3 trillion in unrealized capital gains on stocks and mutual funds alone, representing a significant potential resource for economic development, according to the Economic Innovation Group (EIG), a primary supporter of the tax incentive bill. LISC voiced support of the bill a little over a year ago, recognizing how it could benefit low-income rural areas.

About 40 percent of the country’s census tracts are considered low-income, and 25 percent of those can be designated as opportunity zones, meaning 10 percent of the country is now eligible for investment through the tax credit program. The designated opportunity zones were finalized in April 2018.

“If you make a 10-year investment in an opportunity zone, through an opportunity fund, once you hit the 10-year mark, any capital gains on that new investment are completely tax-free,” Boes said. “The idea here is to bring in a new set of capital from high-net worth individuals, from family offices, from corporations that have capital gains to the work that we’re doing.”

An opportunity fund is an investment vehicle organized as a corporation or partnership for the purpose of investing in an opportunity zone property. Any low-income census tract is eligible for designation as an opportunity zone. Arizona has 168 designated zones, including 13 rural zones.

“We were the ones the governor asked to help make the recommendation,” said Keith Watkins, senior vice president of economic and rural development for the Arizona Commerce Authority. “There were 665 eligible census tracts in Arizona. So the job was to narrow those down to the 168, because we were only allowed to submit 25 percent.”

Watkins said his team went out to all the counties and tribes in rural areas that had eligible census tracts, even going to the individual cities in the Phoenix and Tucson metropolitan areas.

“We absolutely maximized the 25 percent, and we went to great lengths to ensure that every county had at least one zone, if not more,” Watkins said.

Investment possibilities include commercial real estate, single- and multi-family housing developments, equipment leasing, startup businesses and existing businesses that are relocating into opportunity zones. Funds can be used to invest in multiple opportunity zones, but at least 90 percent of an opportunity fund must be used in the designated zones, and they must be equity investments.

“Arizona is unique in how much of the state’s geography is covered by opportunity zones, just given the size of some of these rural tracts that were chosen,” Boes said. “So if you look at the broad map of the country, Arizona does stand out in that way.”

The long-term goal of the New Market Tax Credits program and the NMSC is to bring new, sustainable capital into rural and impoverished areas in need of revitalization and development, Boes said.

“As Maurice Jones, our CEO, says: ‘If ten years from now, if we look at the world and community development and it’s still banks and foundations that are the primary financial supporters of our work, then we’ve missed a big opportunity,’” Boes said, quoting the president of LISC.

“Hopefully we will have a new set of investors that will not only be investing in the community development work we do through opportunity funds but also get them interested in our broader work and investing outside of opportunity funds as well,” he said.