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Statement of The Hon. Andy Kim on Can Opportunity Zones Address Concerns in the Small Business Economy?

Washington, October 17, 2019

America’s small businesses are a catalyst for creating employment opportunities and driving growth in the U.S. economy. The estimated 30 million small firms in the U.S. represent over 99 percent of all employers, and support nearly 56 million jobs.

Small businesses are vital to the well-being of many large and small communities, in rural, suburban, and urban areas. That is why we need to be enacting policies that allow small firms to thrive.  One way for Congress to support small businesses is through well-conceived and targeted tax policy. In my short time in Congress, I’ve heard that small firms need a simple tax code, one that levels that playing field, and creates opportunities to build Main Street, not Wall Street.

The tax policies that are enacted in Washington D.C. have a direct impact on the people in my district back in Southern New Jersey and along the Jersey Shore. Take for example one of the signature pieces of legislation of this administration: the new tax law.

That legislation, the Tax Cuts and Jobs Act passed in 2017 was an imperfect one—one example being the cap imposed on State and Local Tax Deductions and the lack of parity between small business and corporations.  Because of this change to the SALT deduction, millions across my home State have gone from receiving refunds to paying more in federal taxes. And while corporations can still take the full deduction for their state and local taxes, small businesses that report income on their individual returns cannot. These are issues that need to be addressed right away.

But we are not here today to discuss all the aspects of the new tax law, but one provision that has a laudable goal---to spur investment, economic activity, and ultimately job growth in undercapitalized communities.  Over the last several decades and particularly after the financial crisis, thriving towns across the country with vibrant Main Streets have seen their local economies decimated. As part of the new tax law, Opportunity Zones were created with the intent to give preferential tax treatment for investors in economically distressed communities with the hopes that these investments will lead to increased economic activity throughout the area.

At first glance, these new tax incentives appear to do what many other policy proposals and programs have attempted or failed to do: bring much-needed capital, economic development, and jobs to those communities that need it the most.

Unfortunately, like many tax incentives, there is opportunity for abuse and few guardrails around the program, which could result in lost opportunity and thwarted Congressional intentions. The overall structure of the tax incentives centered around Opportunity Zones leaves many questions unanswered.

The centerpiece of the tax incentive is continued deferral of capital gains on previous investments and complete elimination of capital gains tax on gains within Opportunity Zones that are held for more than 10 years. While this sounds like a reasonable trade off, it begs the question of what sort of investments will be made, by whom, and what will be prioritized to ensure economic growth, prosperity, and job growth in the near and long term?

And while investments can be made in virtually any business or asset, reports indicate that most of the money is flowing toward real estate as opposed to small businesses already operating within the Opportunity Zone. When an investor buys a property, makes some improvements, and sells it to someone else for a higher price while deferring capital gains; investors, fund managers, and real estate developers benefit but there doesn’t seem to be much benefit to the broader community.

Further, with no minimum or maximum investment requirement, few restrictions on who may make investments or set up an Opportunity Fund, and no public reporting requirements, we must determine how best to measure the success of this new tax provision to determine if its meeting the intended goals.

And, like any new program or tax benefit, we must ask whether our agencies have the proper tools and resources in place to combat waste, fraud, and abuse.  This last point is of particularly importance, as recent news reports highlight the growing concern that Opportunity Zones are new tax incentives that only benefit those with capital that are looking to further defer and delay paying taxes on capital gains.

That is why today’s hearing within our committee’s jurisdiction is so important.  We need to shed light on how this new program works and doesn’t work, and what additional regulatory clarity is needed to ensure that low- and moderate-income communities, where many small businesses operate, are getting the critical investments that the new tax law promised.

It is my hope that this hearing will shed light on the possible benefits that Opportunity Zones have for small businesses, while looking critically at what are outstanding challenges and real concerns that must be addressed. I firmly believe Congress can work together---just like this Committee does day in and day out---to find responsible tax incentives and policies that truly help small firms and strengthens our economy for the long term.

 

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