Tax Bill Could Prompt Development in California Neighborhoods

More than 800 of California's poorest neighborhoods could see new development thanks to tax breaks included in last year's federal tax bill.

A little-noted provision of the federal tax overhaul passed in December allows investors to avoid paying taxes on all or part of their capital gains from investments in areas designated as "opportunity zones." The goal is to spur development in areas that have traditionally been overlooked, though some critics worry it could turn into windfall for developers in gentrifying neighborhoods.

Gov. Jerry Brown can recommend up to a quarter of California's high-poverty census tracts as places where developers are eligible for the breaks if they invest in housing, business parks, retail stores or other developments. On Friday he recommended mostly urban neighborhoods, particularly around Los Angeles County and the Inland Empire, but also included portions of 54 of the state's 58 counties. (A state Department of Finance map of the eligible and recommended zones is available here.)

The program could help extend the economic boom that has rained prosperity on some areas of California, Panorea Avdis, director of the Governor's Office of Business and Economic Development, told reporters in a conference call.

"We know that it hasn't been realized consistently between Northern and Southern California and even between the coastal and inland areas of the state," Avdis said.

Some experts, though, are skeptical.

Evidence for the success of programs similar to the opportunity zones is inconclusive, and if executed poorly, it could end up displacing residents of poor areas or benefiting developers more than the people living in the neighborhood, said Adam Looney, a senior fellow at the Brookings Institution. He worries the benefits of the program will concentrate in gentrifying areas and cost the federal government billions of dollars in lost revenue, particularly if Congress makes it permanent.

"You'll have a lot of happy developers and happy local stakeholders, and that will make the program look successful even if it was costly, and even if the development would've occurred anyway," Looney said.

Brown's preliminary list includes areas that are not commonly considered struggling or are already undergoing rapid revitalization, Looney said. He pointed to one tract that includes a portion of Stanford University and adjacent student housing, and others in Inglewood close to the planned stadium for the Los Angeles Rams, where he said developers are likely to congregate regardless of tax incentives.

Investors won't have to pay taxes on their earnings as long as they hold onto the investment for at least 10 years. They can avoid a portion of the capital gains tax if they sell after five years. An estimated 3 million people live in the affected neighborhoods, but it's unclear how many investments would likely result from the tax breaks, said H.D. Palmer, a spokesman for the state Department of Finance.

Brown focused his 798 initial recommendations on areas with especially high poverty and at least 30 businesses, hoping that the development spurred by tax breaks will include job-creating firms on top of badly needed housing.

A third of them are in Los Angeles County, 97 in the Inland Empire counties of Riverside and San Bernardino, 31 in Orange County and 43 in San Diego County. In Northern California, six counties surrounding the more prosperous San Francisco Bay would get 67 opportunity zones and Sacramento County would get 38.

Brown is seeking feedback by March 15 on areas to add or remove from the list and must finalize his recommendations by March 21. The U.S. Treasury Department has the final say on which census tracts are eligible for opportunity zone tax breaks.

States have used a variety of methods for choosing which areas to make eligible for tax breaks. Connecticut Gov. Daniel Malloy, for example, is encouraging local governments to apply for his consideration.