When the Opportunity Zone program was authorized by Congress in 2017, there was high hope that it would give a significant boost to the employment rates of those living in the poorest areas of our cities. Unfortunately, a new research paper adds to the growing findings of the program’s shortcomings and disappointing outcomes, just as the next race to establish new OZ designations is set to begin.
Summarized in the March issue of the NBER Digest, the working paper, Understanding the Employment Effects of Opportunity Zones, by Matthew Freedman, Noah Arman Kouchekinia, and David Neumark, presents research showing essentially zero redistributive effects for residents in OZ tracts. It adds to the growing body of empirical research that has found the long-term, net large-scale benefits to be lacking for tax breaks provided by locating in OZs (Other research is summarized early in the working paper).
Additionally, the authors found that job creation within the OZs grew, but at an apparent employment cost to neighboring lower-income communities. OZ designation increased jobs within zones by just 1.3%, the researchers found. Moreover, 84% of those gains were accompanied by declining jobs in adjacent low-income communities.
Employment prospects for OZ residents increased slightly (.9%) with OZ designation, though the research found the increase was entirely attributable to jobs outside OZs. The authors conclude that the OZ program primarily reallocated jobs geographically rather than creating net new employment, and that new jobs within OZs largely went to more affluent people living outside of the zones.
Policymakers interested in encouraging regional growth might do well to question the outcomes of OZ programs, given the $8.2 billion in tax breaks the program has cost in 2020-2024. That forgone tax revenue might more positively benefit the communities, the businesses, and the populations targeted by the OZ program if it were invested in regional innovation, R&D, and workforce development.
The upcoming expansion of the OZ program attempts to address earlier complaints that the benefits of the OZ designation appear highly limited to urban areas. The new research confirms the OZ impact on urban areas was statistically significant, and rural areas, in contrast, revealed no evidence of positive economic impact. While the research does not identify the factors that lead to these differences, the authors acknowledge there are inherent factors in urban environments allow OZ programs to influence outcomes. The next round of zones is more focused on rural areas, but legitimate questions arise about the prospective results, given the lack of rural investment in the first round and the complex realities of rural development.
The analysis may have wide-ranging implications for local economic developers, as the paper references prior work suggesting that agglomeration can create a positive environment for innovation. That is a similar conclusion one might draw from other empirical research, such as the latest AURP annual survey of the economic impact of member university-affiliated innovation districts and research parks.
Prior analysis, together with the new NBER research findings on urban growth, suggests that innovation districts within OZs might benefit from concentration, visibility, collaboration, and other factors linked to density. However, the evidence the Freedman, et al. paper presents, OZs are unlikely to lift the incomes of nearby low-income residents and, therefore, should not be justified on their potential to address income distribution problems.
An important factor when interpreting the research findings is the nomination process by states. While the national policy establishes broad eligibility, the ultimate designation is determined by state-level preferences. It is possible that the research results are driven by state and local priorities intended to boost interest in higher-end market in low-income areas. Further, the nomination and selection criteria, and the extent to which they were influenced by property owners and development interests with existing ties to properties within eligible zones are not explored.
The next round of OZ nominations creates an opportunity for this analysis to inform the nomination process with the aim of improving TBED-related outcomes. Incorporating the limitations identified, particularly the emphasis on relocation over creation, may lead to opportunities for nominations to target the potential positive agglomeration and spillover effects that could support innovation districts. Using OZs as a tool to drive longer-standing density and zoning concentrations may be laudable goals for local economic development and TBED interests working with governors to identify priority tracts. Layering OZ designation with existing branding or place-based strategies could help align and amplify otherwise marginal impacts.
Do the OZ outcomes in your community match the national data, or are there local outcomes that point to meaningful impacts? How are state and local policymakers preparing for the next round of OZ designations? To discuss these issues with TBED leaders from across the country, please join SSTI’s TBED Community of Practice.
This page was prepared by SSTI using Federal funds under award ED22HDQ3070129 from the Economic Development Administration, U.S. Department of Commerce. The statements, findings, conclusions, and recommendations are those of the author(s) and do not necessarily reflect the views of the Economic Development Administration or the U.S. Department of Commerce.