State actions in 2019: Opportunity Zones

In 2019, the administrations and legislatures in many states grappled with if and how to adjust state economic development initiatives to leverage the federal Opportunity Zone (OZ) program. The actions of 12 states that implemented new activities are described below.

Notably, many of these state efforts require applications and reports on OZ projects — unlike the federal OZ incentive. Some created a new requirement specific to OZs and some states placed the OZ benefits within existing initiatives that already require such information sharing. Investor use of state OZ benefits, therefore, may be one means by which the costs and benefits of the federal program will be able to be evaluated.

Readers should be aware that full appreciation of the state-level benefits for OZ investment go beyond the distinct initiatives described below. Of the 44 states that have an income or capital gains tax, all but five conform with the federal OZ benefits — meaning that investors will receive state capital gains deferrals, reductions and waivers.

Alabama

The state created a multi-tiered incentive structure providing increasing support as projects make a greater commitment to accountability. All OZ projects approved by the state can provide investors with conforming state tax treatment on OZ investment returns. Projects are then eligible to work with 10 approved state funds to receive public investments. Projects with this public funding that are also willing to provide more detailed impact reports can then benefit from a $50 million pool of tax credits available to investors with OZ investments that underperform expectations (note that this is relative to the project agreement and could benefit investors that experience a positive return).

Arkansas

Arkansas does not typically conform with the federal income tax code but passed a bill to conform specifically with the federal OZ tax rules.

Connecticut

A new law requires the state’s Department of Economic and Community Development to market 10 properties in OZs, give preferential treatment across many existing state programs to applications for projects in OZs, provide an additional 5 percent incentive for historic rehabilitation projects, and conduct a study to determine if and how further OZ incentives should be structured.

Hawaii

Hawaii updated the state’s revenue code to conform to the federal OZ benefits for investments in OZs designated by the state (which appear to be all 25 zones authorized in Hawaii).

Louisiana

The state’s restoration tax abatement, which provides up to a 10-year abatement of property taxes on improvements of existing structures, can now be applied to projects within OZs.

Maine

The Finance Authority of Maine (FAME), the state’s quasi-public financing arm, agreed to provide up to $10 million in loan guarantees against up to $50 million of OZ investments made by Arctaris Impact. As covered last year, Arctaris has received support from Kresge Foundation to make OZ investments that incorporate community involvement and project reporting requirements.

Maryland

Portions of Gov. Larry Hogan’s proposed OZ initiative passed into law this year. While a technology infrastructure fund was not included in the final legislation, OZ investors in the state are able to benefit from enhancements across a wide array of existing incentives, including for biotechnology and cybersecurity investments, hiring, and housing development. Most of these programs provide an additional benefit for any OZ investment, at the cost of some additional reporting, but several contain an even stronger benefit for projects that will engage community stakeholders as project advisers.

Michigan

Gov. Gretchen Whitmer issued an executive order directing the state’s procurement to give preferential treatment to bids from “geographically-disadvantaged” businesses (comprising those located in a HUB Zone or OZ) and set a target purchase rate of 3 percent from these businesses.

New Jersey

New Jersey created an approach very different from other states to incentivize OZ development, opening a prize competition to municipal entities working to develop their capacity to support OZ projects and investments. The five communities selected in round one received $100,000 each for such support activities.

New Mexico

Last August, the Governor’s Office of Economic Development announced that OZ projects are now able to access a set-aside $1 million from the state’s existing local economic development act grants. Typically, projects awarded under the program must create new jobs, raise wages and have “significant” community impact and support.

Ohio

Ohio created a new OZ investment tax credit, which provides a 10 percent credit of an investment made in an Ohio OZ fund in the last year. An Ohio OZ fund is defined as being entirely invested in qualified OZ property located in Ohio. The state will award up to $50 million in credits per biennium in total and up to $1 million per investor. The credit can be passed through, transferred, and carried forward for five years.

Rhode Island

While one of the core elements of the federal OZ incentive is that the greatest benefit is for investors keeping their money in the project for at least 10 years, Rhode Island’s new OZ tax benefit seeks to reward a shorter timeline. Investors in Rhode Island projects can receive a full exemption of the state tax after just seven years.