Zones chosen for tax breaks

Federal program aims to spark development in struggling neighborhoods

Maryland officials have selected dozens of struggling neighborhoods around the state for new federal tax breaks designed to spur investment.

Under last year’s federal tax overhaul, investors can put money into housing and business projects in designated “Opportunity Zones” and pay less tax on any capital gains that result. The program is a small piece of the huge new tax law, but federal and state officials think it could have a big impact in low-income communities.

State officials have identified 149 areas statewide to be eligible. Much of East and West Baltimore has been nominated. So has Park Heights and huge swaths of south Baltimore including parts of Port Covington, where Under Armour founder Kevin Plank has proposed building a mixed-use project from scratch.

In addition, the zones would be established around Fort Meade In Anne Arundel County, Aberdeen Proving Ground in Harford County and the Indian Head naval facility in Southern Maryland. The state also has targeted an area of Montgomery County where it hopes to lure Amazon’s second headquarters, as well as parts of Cecil County where officials are encouraging distribution centers to open up.

Remote parts of the state also would stand to benefit, with large parts of Garrett and Somerset counties identified as zones.

The U.S. Treasury Department must review and approve the state list, which is expected, before it becomes effective.

Michael White, chief of staff at the Maryland Department of Housing and Community Development, said officials chose areas where other programs are already available to investors in the hope of making them especially attractive. White said officials consulted with local politicians, developers and others. Some of the new zones overlap with existing state Enterprise Zones where businesses can get tax benefits for creating jobs.

“We were really trying to look at areas that would get real investment,” he said.

The Opportunity Zones program offers investors a few ways to save on federal taxes by investing in a qualified fund. Investors may defer paying taxes on the money they invest in the fund and receive increasing discounts on any capital gains taxes due on that money. If they leave their investment in the so-called Opportunity Fund for 10 years, any new gains are free of capital gains taxes.

An example provided by the Economic Innovation Group, a think tank that supports the idea, indicates investors could make significant gains. Someone who put $100 of unrealized capital gains into an Opportunity Zone this year and left it there for 10 years would see it grow to $176 after taxes compared to $132 if they invested in stocks, assuming the same 7 percent rate of return. Nationally, the program is estimated to cost the government $1.6 billion over its 10-year life span.

While supporters of the idea say it will draw capital into areas that are struggling, some analysts have cautioned that it will fuel gentrification and lead to money flowing into neighborhoods that already have started to take off as investors seek to maximize their gains.

Ja'Ron Smith, an urban affairs and revitalization adviser to President Donald Trump, said that the law was designed to give state leaders control over which areas to designate so that the benefits flow to where they’re most needed. Smith said the administration’s hope is that the zones will lead to the creation of new jobs and businesses in areas that have been overlooked for decades.

“We’re talking about areas throughout the country that have never got resources,” he said.

But JP Krahel, an accounting professor at Loyola University Maryland, said despite the tax advantages the program might not be enough to make some areas appealing to investors because “the only way to get tax benefits is to earn money in the first place.”

And while the policy is designed to help struggling communities, Krahel said the people who live in them generally won’t be the ones to get the most benefit.

“The only people it helps directly are the people who have the means to make big investments,” he said. “It’s essentially trickle down."

Odette Ramos, the director of advocacy group the Community Development Network, said she thinks there will be opportunities for local investors to make use of the program. Ramos called it a “humongous opportunity.”

“There are some savvy multifamily affordable housing for-profit entities who will be able to benefit,” she said. “There’s a whole angel investor community in Baltimore and they would benefit.”

Officials still are figuring out how to make best use of the zones, and advocates and politicians say they plan to monitor how they are being used by investors.

Baltimore City Councilman John Bullock plans to introduce a resolution Monday seeking a public hearing with officials from the Baltimore Development Corporation and city Department of Finance on how the zones will work.

“Development can be very positive but we want it to be in places that have been neglected for quite some time,” Bullock said.

Bullock’s West Baltimore district includes four of the proposed zones. In recent years, the area has started to see some new development and Bullock said the tax benefits could be a “shot in the arm.”

“We are seeing some initial investments, but we need so much more and this would definitely be a welcome piece,” he said.