A bright idea for spurring investment in economically distressed areas, approved as part of the federal tax reform bill, has the potential to pump much-needed capital into some of the poorest communities in South Carolina and across the nation.
With a little economic alchemy, Sen. Tim Scott, R-S.C., hopes to transform the problems of the rich into opportunities for the poor.
Under his Investing in Opportunity Act, individuals and businesses can defer or reduce capital gains taxes by reinvesting their profits in Opportunity Funds. In turn, they are required to invest 90 percent of their capital in high-poverty zones designated by governors.
In South Carolina, where the poverty rate is slightly higher than the national average, about 30 percent of residents live in areas that would qualify as an “opportunity zone,” defined as a census tract where the poverty rate is at least 20 percent and the median income is 80 percent or less than the county median income.
“We could see major private-sector dollars being invested in distressed communities — no new bureaucracy, no new government programs — simply an incentive package to provide access to opportunities for kids who grew up in single-parent households like myself,” Sen. Scott said during a recent tour to publicize the effort.
The funds could bankroll projects ranging from affordable housing to business startups to solar farms.
Capital gains taxes can cost investors 20 percent or more of their profits. But by re-investing in so-called O-Funds, they could reduce those taxes significantly over time. Some details about how O-Funds will be managed are still being worked out by the Treasury Department, but investors seeking a tax shelter with the potential to create jobs and housing shouldn’t wait to get in line.
A five-year reinvestment would reduce the basis for capital gains taxes by 10 percent; after seven years, 15 percent. Those taxes can be deferred through 2026. O-Fund investments held for at least 10 years would be exempted for any further capital gains taxes.
The Investing in Opportunity Act is the first federal program aimed at helping poor communities in a decade, The New York Times reports.
On Friday Gov. Henry McMaster announced his choice of 135 opportunity zones across South Carolina. Those include seven census tracts in Charleston County, including part of North Charleston where Sen. Scott grew up. A large swath includes the Volvo plant in Ridgeville.
“By incentivizing private investment and economic prosperity in low-income communities across the country, Sen. Scott’s proposal may result in the most transformative free-market solution in generations,” the governor said.
The Joint Committee on Taxation estimated Sen. Scott’s program would reduce federal tax revenue by a relatively modest $1.6 billion over 10 years.
Some critics of the idea are concerned that it could simply accelerate the gentrification of economically depressed areas by driving up housing costs and pushing longtime residents out. In South Carolina, state lawmakers need to ensure the careful regulation of O-Funds by the Department of Commerce to make sure they go toward affordable housing and the creation of jobs and businesses.
Credit goes to Sen. Scott and Sen. Cory Booker, a New Jersey Democrat, for getting the program included in the tax bill. The idea itself comes via a Washington think tank and tech mogul Sean Parker, who sought a way to put otherwise stagnant capital to work for the greater good.
Making it work will be up to investors and entrepreneurs with a zeal for improving long-neglected communities.
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