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Tax break for the wealthy fuels investment in Vermont towns

  • Springfield Medical Care Systems, one of the Vermont town's largest employers, runs Springfield Health Center, in the mill building that formerly housed the Fellows Gear Shaper Company. (Valley News - James M. Patterson) Copyright Valley News. May not be reprinted or used online without permission. Send requests to Valley News File photograph — James M. Patterson

Published: 9/7/2019 10:19:20 PM
Modified: 9/7/2019 10:19:17 PM

SPRINGFIELD, Vt. — The town of Springfield became a center of machine tool manufacturing in the 20th century. But as the industry began to wane, this industrial town on the Connecticut River, once an economic powerhouse, fell on hard times and has struggled to reinvent itself.

Local boosters say a new federal program that gives wealthy people incentives to invest in low-income communities could be the key to reviving Springfield’s economy.

The so-called “Opportunity Zone” program has brought new investors to this storied factory town.

The tax break incentive has proved to be “an extremely attractive tool” for economic development, according to Bob Flint, the executive director of the Springfield Regional Development Corp.

“It’s stimulated really interesting projects,” Flint said.

Two multi-unit residential properties in Springfield have already been purchased through the Opportunity Zone program.

While there is growing interest in using the tax incentive to finance commercial and mixed-use projects, there is very little information about who is investing or how the money is being used. Flint declined to name the particular properties or individuals involved in the Springfield projects.

“I don’t think that’s public information,” he said.

And it isn’t. Under the federal law, there is no requirement to disclose basic information about the investments.

The Opportunity Zone program, a vehicle for huge capital gains tax breaks, was part of a sweeping 2017 Republican tax reform package that was billed as a way to drive economic development in low-income communities.

Critics on the right and the left question whether opportunity zone developments are a giveaway to wealthy individuals and corporations that will displace poor people, gentrify low-income areas, and further widen the gap between rich and poor.

The program allows wealthy individuals and companies to sell stocks or properties and plow that money, which would be otherwise subject to state and federal capital gains tax of as much as 32.55%, into “Opportunity Zones.” While the money is invested in the program, capital gains taxes can be delayed for years, reduced by 15% if a property is held for a seven-year period, or completely eliminated after 10 years.

Gov. Phil Scott’s administration has embraced Opportunity Zones and has made a concerted effort to promote the program in local communities. The Agency of Commerce and Community Development has held a series of workshops and summits, convening consultants, investors and local economic development officials to discuss projects. Another is scheduled in September.

Opportunity Zones (which are designated by each state’s governor) have been placed in most of the state’s major population centers — including Burlington, Rutland, St. Johnsbury, Newport, Barre, Springfield, Brattleboro and Bennington.

Supporters say the fact that there are few regulatory restrictions on the Opportunity Zone program will enable it succeed where previous federal economic development tax incentives have failed.

A chief champion of the initiative was New Jersey Sen. Cory Booker, now a Democratic presidential candidate.

“These cities are gold mines,” Booker said in 2018, according to ROI New Jersey. “They’re domestic emerging markets that are more exciting than anything you’ll see overseas.”

Critics worry the program is structured to benefit developers and property owners in areas already on the upswing, and that, in the worst case scenario, they’ll accelerate and subsidize gentrification.

Nationwide, as The New York Times reported, billions of dollars have been invested in high-end developments — many of which were already in the works before the tax program was started.

In Burlington, there was some optimism that the program could be used to support affordable housing projects.

The Champlain Housing Trust, a low-income housing nonprofit, for example, hoped the Opportunity Zone program could complement another federal incentive — the New Markets Tax Credit — to finance a renovation at the Old North End Community Center.

But the community center didn’t make it into the final 25 projects selected by the Scott administration.

Meanwhile, properties downtown, on the edges of the Old North End and a tract along the waterfront and Church Street — all with significantly fewer low-income residents — did make the cut.

Michael Monte, chief operations and financial officer of Champlain Housing Trust, said he’s generally doubtful that the program will benefit people on the lower end of the income spectrum.

“The opportunity is for people who have money to make more money,” Monte said.

The Opportunity Zone program includes no stipulations that assure investments will target or help poor residents who live in the zones, unlike the New Markets credits, according to Monte.

“If anything, it could hurt,” he said. “But, you know, the question is, is there an opportunity to use it for good? And I’m not too sure if the answer is no. I think the answer could be, perhaps.”

Gentrification and transparency

This is how Opportunity Zones work: Investors can use the program to reinvest capital gains into projects located in designated areas. Taxes on those capital gains can be deferred and reduced by up to 15%, if the investment is held for at least seven years. If the investment in the Opportunity Zone is held for 10 years, any money generated on the project is tax-free.

Brady Meixell, a research analyst at the Urban Institute, a Washington, D.C. think-tank, said there are few restrictions on which businesses are eligible for Opportunity Fund investments, so long as they are located in the designated zones. (So-called “sin businesses,” like golf courses, massage parlors and enterprises that sell alcohol as their main source of revenue do not qualify.)

“The more appreciation you get on your investment, the more capital gains you can avoid,” Meixell said. “So where the best returns will be on that is neighborhoods that are undergoing rapid change in property value — neighborhoods that are gentrifying.”

There are no requirements that the projects generate well-paying jobs for existing residents, make housing more affordable or increase homeownership.

“You could have an affordable housing, multifamily development, you could tear that down and put up luxury condos,” Meixell said.

The program could have an outsized effect on small, rural states like Vermont. Most states were only allowed to designate 25% of their census-eligible tracts, which are subdivisions drawn by the Census Bureau, for designation as Opportunity Zones. But because all states were allowed to designate a minimum of 25 total tracts, Vermont was able to designate a little more than 50% of its eligible tracts as Opportunity Zones.

There are few reporting requirements for the program. Information about which census tracts have been designated to be opportunity zones is public, as are the tracts the U.S. Treasury said were eligible for designation by the governor.

But that’s it. Unless projects or investors volunteer the information, there’s no way for the public to know which developments or businesses are receiving investment funds using the tax break.

Vermont boosters of Opportunity Zones often say that the state has been given credit for being far more transparent about how it picked its zones compared to most other states. Ted Brady, deputy secretary of the Vermont Agency of Commerce and Community Development, said he isn’t sure additional disclosure is necessary.

“We don’t know exactly where all of the investment’s happening. And of course, that would be helpful. But the last thing we want to do is make this program more burdensome,” he said.

The governor’s process for soliciting public feedback and selecting the zones “was recognized as a gold standard by an outside organization,” he added, referencing a laudatory blog post from Washington-based think tank the Brookings Institution.

The research group tipped its hat to Vermont — along with Colorado, Idaho, and California — for creating a dedicated website for Opportunity Zones, soliciting feedback from the public before selecting census tracts and publishing a map of chosen tracts. But that same article also called on the federal government to enact much stricter standards for public reporting on Opportunity Zones, including that states track how much money each zone and project receives, and from which investors.

A bill has been filed in the U.S. Senate by the original sponsors of the Opportunity Zone law to require that investments and the impact of those investments be tracked and publicly reported. But the current Congress is not widely expected to pass the disclosure measure, according to Forbes.

Limited potential for financial gain

A few developers in Vermont have made their participation in the Opportunity Zone program public. The Putnam Block project, a $56 million mixed-use redevelopment effort in downtown Bennington, has tapped into the program.

Skye Morse, the investment director at M&S Development, who has been consulting on the project, said the Putnam Block had received $3.75 million in Opportunity Zone investments.

The Opportunity Zone funds came from local “community-minded individuals” — not outside investors, Morse said. That’s not surprising, he said, given that projects with the greatest tax benefit have the highest profit margins.

“The investors who are really going to benefit are those who invest in projects that return a very large capital gain, right? Because then they don’t pay tax on that,” he said.

Morse said he believes the Putnam project, which broke ground in August, will be successful but won’t result in a particularly big payday.

“The point of the project is not to return large financial gain to our investors — quite the opposite,” he said.

Eric Hangen, a community development consultant based in Rutland County, said he’s not generally worried about Opportunity Zones accelerating gentrification and displacement of low-income people in Vermont, which, nationally, is the criticism most often leveled at the program.

In most rural areas — like Rutland or Bennington — there’s plenty of housing. The problem is a declining population and employment base. “So most investment is going to be a good thing,” he said.

But he noted he couldn’t speak for the Burlington area, which suffers from a housing crunch and has the state’s highest rents.

Hangen also said he worried about communities like Rutland competing for Opportunity Zone investors in urban areas with much more sophisticated economic development teams trying to broker beneficial deals for local residents.

“There are good people on the ground trying to do that work, but resources are so much more limited in a rural area,” he said.

Five of Vermont’s 25 designated Opportunity Zones are in Chittenden County. Two are in Burlington — including one spanning the waterfront and Church Street – one is in South Burlington, and two are in Winooski (the entire Onion City is in an Opportunity Zone).

Heather Carrington, Winooski’s community and economic development officer, said the city was “excited” about the program.

“The way that we really think it could benefit is an infusion of long-term investment into a low-income community,” she said.

Carrington said she didn’t know of any existing Opportunity Zone projects in the city, but said she’d had “exploratory confidential conversations” with “familiar committed local partners and residents.”

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