With an expected $75 billion in property damage across several states, Hurricane Ian is certainly one of the most damaging natural disasters in the history of the United States. The typical “thoughts and prayers” will not be enough to help those impacted by this storm.
Nothing can replace the lives lost. Insurance will help property owners somewhat in devastated areas, but more needs to be done to help residents of Florida, Georgia, South Carolina, North Carolina, Tennessee and Virginia. Despite their flaws, “opportunity zones” could be an excellent tool to deliver much-needed economic investment and tax breaks to rebuild.
Current tax policy
Historically, opportunity zones have been used to encourage investment in economically distressed areas while providing income tax benefits to investors.
The Tax Cuts and Jobs Act of 2017 created thousands of opportunity zones in low-income communities in all 50 states, Washington D.C. and five U.S. territories. Currently, investors in opportunity zones are eligible to defer capital gains through December 31, 2026. Depending on how long an investment is held, the investor can qualify for a basis adjustment that would exempt the investor from paying tax on the capital gains.
While the existence of opportunity zones is a good start, the current structure of the law will not be adequate for the need at hand.
One of the currently pending bills, S.4065 Opportunity Zones Transparency, Extension and Improvement Act, introduced by Sen. Cory Booker (D-NJ) on April 7, 2022, will revise reporting requirements for sponsors and end the disqualification of opportunity zones when median family income exceeds 130% of the national median family income. This bill has limited bipartisan support with six co-sponsors: three Republicans and three Democrats.
Flashback to Katrina, Wilma and Rita
Passing disaster-relief legislation to create opportunity zones is not a new concept for Congress. After Hurricanes Katrina, Wilma and Rita, Congress passed the Gulf Opportunity Zone Act of 2005. It created the Gulf Opportunity Zone or GO Zone. While similar opportunity zones have been in place since the 1990s, this legislation appears to be the first use of the concept to incentivize large-scale development for natural disaster recovery.
The Gulf Opportunity Zone Act of 2005 gave states the option to issue two new types of bonds:
- Gulf Opportunity Zone Bonds. Their proceeds paid for Qualified Projects and they were treated as exempt facility bonds, which meant holders could receive tax-exempt income.
- Gulf Tax Credit Bonds. These bonds were designed to provide tax credits that could be applied to regular income tax and the Alternative Minimum Tax (AMT).
These alternatives are examples of how we can use legislation to provide opportunities for those looking to help the victims of Ian.
Some suggestions for Congress
Not surprisingly, the current opportunity-zone tax-break program is largely ineffective at helping the local communities they serve. The major problems are the tax breaks are costly and the oversight to ensure compliance is inadequate. The lax-compliance requirements enable investors to take advantage of the program in ways that were not intended.
For example, according to the American Progress Group, investors can claim a tax break if as little as 63% of the capital in a fund is invested in a designated opportunity zone [ . ]
With the Congressional Budget Office recently estimating that extending current opportunity-zone tax breaks will cost $103 billion, it’s time we make some commonsense reforms. Here are a couple of my thoughts.
Create mutual fund-like products
The first one, which would directly impact your clients, is to allow investments to be made into mutual fund-like products. Although current law permits funds to be created for this purchase, the large purchase minimums skew the investment and the tax benefits to a relatively small number of wealthy investors.
Treating these products like mutual funds, with lower investment minimums, would allow us to unlock the power and generosity of those who want to help the impacted. The Florida Disaster Fund received more than $20 million in donations within 48 hours of its activation to help communities impacted by Hurricane Ian.
Tie tax benefits to measurable initiatives
A second reform that would impact your clients is to create quality measures tied to the tax benefits, such as creation of local jobs. Those inclined to donate might find these criteria appealing because they would serve as a check and balance. Tax-break recipients would need to show their project’s direct impact to a local community instead of simply pointing to the completion of a physical building.
Enacting just these two measures would broaden the potential investment in these hard-hit communities and take steps to help ensure that the funds are being targeted towards projects that will make a longer-term impact.
What can you do today?
The public can take a number of steps to try to jumpstart more disaster-recovery opportunities. Key among these is contacting one’s senators and congresspeople. Letting you elected officials know that there are other ways to provide assistance is a great start.
This is an opportunity to make our voices heard in Congress and to give your clients a way to help, too. Let’s do the right thing and help our neighbors.
John M. Gehri, CFP, ChFC is a licensed investment advisor representative with Harvest Financial Advisors in the Cincinnati/West Chester, Ohio area. He may be reached at [email protected]. This article is for informational purposes only. Any commentary and third-party sources are believed to be reliable but Harvest Financial Advisors cannot guarantee their accuracy.