The Opportunity Zone (OZ) tax incentive, created in the 2017 Tax Cuts and Jobs Act to lure private investment into designated lower-income communities, will expire at the end of 2026. Between 2018 and 2024, more than $100 billion in investment has gone to Opportunity Zones, and many in Congress want to extend and expand the program. 

However, evidence shows the incentive has done relatively little to improve communities most in need. If the goal of the program is to drive private capital toward truly disinvested communities to better the lives of residents with low incomes, significant changes should be considered. Rather than merely opening the spigot further with added incentives in the hope that these funds will spill into the communities that need them most, the investments need retooling.

To inform this discussion, we revisit the extensive body of evidence about the program’s achievements to date. 

How substantial are investments into Opportunity Zones?

In a word, massive. Analysis by researchers at the US Department of the Treasury’s Office of Tax Analysis found a total of $89 billion in OZ investments into Opportunity Funds from 2019 to 2022, and the program has averaged more than $20 billion in investments annually—well north of $100 billion during the program’s lifetime. With this level of investment, the OZ program is larger than other federal economic development tools, such as the New Markets Tax Credit investment, which are capped by Congress. High investment volumes also mean high costs, so the program has been much more costly to federal taxpayers than was initially anticipated. 

Although the Internal Revenue Service describes the OZ program’s purpose as “to spur economic growth and job creation in low income communities while providing tax benefits to investors”—a recognized gap in the federal toolbox—the size of the program indicates it has become something else. Indeed, less than 2 percent (PDF) of equity in Opportunity Funds was invested in operating businesses, according to tracking by Novogradac, an accounting firm. It seems Opportunity Zones have become largely a market-rate rental housing and other real estate program—not a resource to create jobs or develop economies. Our qualitative findings also found that investments were largely going into real estate for reasons that reflect programmatic structure and investor preferences.

Where are Opportunity Zone investments going?

The Treasury’s Office of Tax Analysis found that 66 percent of census tracts designated as Opportunity Zones (8 percent of all US census tracts) received OZ investment through 2022—an impressive penetration rate for a federal place-based program. Yet, there is a notable bias in where investment is going—toward places that already have more investments.

When ranking census tracts by how much all-in commercial or multifamily housing investment they get, all zones except the very top see very low OZ investment levels, while roughly 75 percent of OZ investment goes into zones with the top 20 percent of commercial investment. Further, more OZ investment went to zones in counties with higher incomes and educational attainment—areas with higher potential for appreciation (which drives greater tax benefits under the program). 

These trends show up geographically as well, with faster-growing states attracting greater investment, and low- or no-growth states attracting little. According to the Joint Committee on Taxation, the states that received the most OZ investment per capita were Wyoming, Utah, Arizona, and Nevada.

Rural areas pose a special challenge for the program. Of all Opportunity Zone investment, 93 percent went toward metropolitan areas. This trend again reflects investor preferences, indicating that the program does less incentivizing than anticipated in guiding investment to places investors would otherwise have overlooked.

How has OZ investment affected neighborhoods?

Given the program’s prominence and scale, there now have been more than a dozen regression-controlled assessments of Opportunity Zones. Collectively, impact studies of OZ designations show mixed, limited, or no effects on designated neighborhoods, depending on the outcome in question.

Across economic indicators, various research studies and papers have found that OZ designation:

• was not linked to increased job postings;
• did not lead to a greater degree of new business formation, business loans, commercial diversity, or consumer spending;
• did not lead to more venture capital investment;
• had no effect on small business lending; and
• had no statistically significant effects on employment, earnings, or poverty rates for existing zone residents but did increase overall employment between 2017 and 2019 by 2 to 4 percentage points.

Analysis of real estate trends within zones are more mixed. One study showed that designation had no significant effect for commercial investment, and another study found commercial property and vacant land prices increased. One study found no statistically significant effect on the number of residential real estate transactions, but a different study found there were more real estate units created as a result of OZ investment. Our work to replicate these results shows that the findings are sensitive to the modeling approach and specifications. Another paper found that single-family home prices did not significantly increase in price within zones. A different study found zone designation had no effect on home lending.

How can the OZ program be so big and its impact be so limited?

With more than $100 billion in investment, Opportunity Zones have proven to be a powerful vehicle for capitalizing projects. But not all this investment is additive, or brought off the sidelines by the Opportunity Zone incentive. Said differently, a significant share of OZ projects would have happened anyway.

When we interviewed project developers and investors, most reported that Opportunity Zones neither filled a financing gap nor increased the social impact of their projects. Though some projects were assuredly induced by the OZ incentive, many others would have occurred even had the incentive not been provided. As one project sponsor told us, Opportunity Zones were the “icing on the cake” and that their project would have gone forward either way. 

These findings have borne out in quantitative studies as well. A recently published analysis suggests much of the investment taking advantage of Opportunity Zones would have happened regardless of the tax incentive.

How should Opportunity Zones be reformed? 

If the program remains active as a housing incentive or seeks to be more active as an economic development tool, we should get more benefit from it. Currently, the program is expensive for the federal taxpayer and does little to incentivize investment that would not have already happened or into the communities or projects with greater need. 

The OZ program, if extended, should steer more activity toward truly needy communities, toward projects that generate additive economic growth, and toward housing units with greater affordability. Absent changes that rebalance the program towards these goals, federal funding can be better allocated elsewhere.