President Trump wants to turn thousands of low-income areas across America into engines of economic development.
City Council Member Luis Chavez wants to boost the momentum that is already transforming the economic landscape of Southeast Fresno.
Together, these two unlikely political allies (one a Republican, the other a Democrat) just might shake things up in Fresno – in a good way, of course.
What we’re talking about is the use of government tax policy to spur (or, as the bureaucrats like to say, “incentivize”) private sector investment in specific areas. The goal for the tax breaks is to advance a specific public policy. Generally, that policy is putting people to work. Ideally, those jobs pay a decent wage and generate (rather than consume) taxes.
Trump is pitching something called “Opportunity Zones.” Chavez is pitching a jobs plan for the Ventura/Kings Canyon corridor.
Nothing in politics or business is a sure thing. At the same time, Trump and Chavez are doing what good politicians are supposed to do – lead.
Let’s begin with Trump.
Opportunity Zones were part of Trump’s huge tax bill that was passed last December. A key piece of the Opportunity Zone concept is capital gains – the profit from the sale of an investment such as real estate or stocks. You pay taxes on capital gains after the sale; that’s when the profit on your investment is realized. You don’t pay taxes on your profit before the sale, when your profit remains unrealized.
Michael Hendrix, a financial expert writing about Opportunity Zones in “City Journal,” estimates that American investors are sitting on a Mt. Everest-size pile of potential capital gains. Hendrix says a portion (perhaps a substantial portion) of that potential profit lies fallow in the investments because the investors aren’t incentivized to do something more dynamic with it.
“But now these investors can put that money – as much as $2.3 trillion – to use in so-called Opportunity Funds,” Hendrix writes. “In exchange, their capital gains taxes are deferred, reduced, or eliminated altogether.”
Opportunity Zones and Opportunity Funds go hand-in-hand. The first step is designating economically distressed areas in dire need of job producing cash investment as Opportunity Zones. The next step is adding investing incentives to the tax code. The final step is creating a vehicle (Opportunity Funds) for channeling the money into the distressed areas.
“Investing in struggling places is taking on new urgency,” Hendrix writes. “Harvard economist and Manhattan Institute fellow Edward Glaeser, together with his co-authors, recently (identified) a widening and persistent gap in the economic fortunes of America’s regions. A man between the ages of 25 and 54 in Flint, Michigan, for instance, is more than ten times likelier to be out of work than a similarly-aged man in Alexandria, Virginia. Their conclusion? ‘It may be time to target pro-employment policies towards our most distressed areas.’”
Now we turn to California Gov. Jerry Brown.
Opportunity Zones are to be determined by census tracts, based on economic criteria such as levels of poverty. However, every economically distressed census tract that meets the criteria is not destined to become an Opportunity Zone. If I understand the rules correctly, only one in every four qualifying census tracts will ultimately become an Opportunity Zone.
The governor of each state is charged with recommending to the Trump Administration which census tracts should be Opportunity Zones. The governors’ deadline was March 21.
“California has a total of 3,516 qualified census tracts,” Brown wrote to U.S. Treasury Secretary Steven Mnuchin on March 21. “After careful analysis to identify low-income census tracts with strong potential for economic development, combined with extensive public comment, I have developed the list of 879 census tracts for designation as qualified opportunity zones. Nominated tracts represent 57 of California’s 58 counties.”
By my count, 47 of those 879 census tracts are in Fresno County. A bunch of them are in the City of Fresno or the Fresno metropolitan area. The California Department of Finance website (http://dof.ca.gov/Forecasting/Demographics/opportunity_zones/index.html) has an excellent interactive map showing the nominated census tracts.
Fresno’s nominated tracts are largely in Central Fresno, West Fresno and Southeast Fresno. I found it interesting that one of the tracts is the approximately one square-mile area that includes the long-planned Francher Creek housing-retail-commercial project along Clovis Avenue, between Belmont and Kings Canyon. The tracts include the “reverse triangle” south of town where so much industrial development (the Amazon and Ulta Beauty distribution centers, for example) is already underway.
Concludes Hendrix: “States and municipalities need to start planning now for the implementation of Opportunity Zones.”
Which brings us to District 5’s Chavez.
I had a good chat with Chavez by phone on Wednesday. It turns out that he was eyeing the local potential for Opportunity Zones almost before the ink was dry on Trump’s tax bill. Of course, Chavez couldn’t know two months ago which census tracts the Governor would nominate. But Chavez sensed that the Ventura/Kings Canyon corridor, which runs through the heart of District 5, was a strong candidate.
Sure enough, the Ventura/Kings Canyon corridor from First Street to Peach Avenue is on the Governor’s list.
So, Chavez, working with Mayor Lee Brand, is crafting a bill that would incentivize private sector job growth along the corridor. Chavez said he hopes to introduce the bill in April.
Chavez let me take a look at the resolution that will accompany the bill. The resolution notes that “commercial and mixed-use development creates jobs, increases property and sales taxes, attracts more business, and creates and enhances vibrant neighborhoods….” The resolution also states that “the City has recently begun Bus Rapid Transit service along the Ventura/Kings Canyon corridor in Southeast Fresno, and the City wishes to incentivize job creation along the corridor….”
There are lots of particulars to Chavez’s bill. In essence, the bill gives businesses – startups, relocations from outside Fresno or the expansion of established firms – a break on most development fees. The business must create at least five new fulltime jobs. The breaks apply to the Ventura/Kings Canyon Corridor east of First Street. The breaks wouldn’t apply to businesses simply moving from another part of Fresno to the corridor. (Chavez said the bill, depending as it does on the will of the council, could end up applying to other parts of town, as well.)
Taking a page from the old Fresno Redevelopment Agency playbook, the bill aims to backfill the lost development fees from the increased taxes generated by higher property values.
Take the Opportunity Zones, combine them with his bill, mix in a variety of other development-friendly initiatives such as cap and trade, and the result, Chavez said, is “the perfect storm for economic development.”
I don’t know if the President these days is fond of metaphors dealing with the word “storm.” But Council Member Chavez’s fundamental point is well taken.