California Partisanship Stalls Opportunity Zone Investment

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California Governor Gavin Newsom has signed dozens of new bills over the past several weeks, but the state has yet to take up the important task of bringing California into conformity on opportunity zones.

State legislators failed last month to pass legislation that would have allowed investors to defer state capital gains tax if they invested into designated qualified opportunity zones in the state.

The Qualified Opportunity Zone (QOZ) program was part of the 2017 Tax Act aimed to direct investment dollars into economically distressed neighborhoods by offering a substantial tax benefit for investors who roll over capital gains into a designated opportunity zone investment. 

California is one of a handful of non-conforming states where investors would still be subject to state capital gains tax for their investment rollover.

Governor Newsom supports a bill that would provide the same state capital gains tax deferment as the U.S. Treasury Department plan, but many legislators complain that it is just another tax break for wealthy investors.

While Newsom’s plan would amend part of the state’s tax code to resemble the federal tax exemption closely, it adds a caveat that investors only receive a tax benefit if they create a clean energy business or invest in affordable housing. The bill would also allocate $100 million annually from the state’s budget to the Franchise Tax Board to be spent in opportunity zones to support those projects.

The Struggle of the California Investor

Other states that moved quickly to embrace the QOZ program are seeing billions pour into opportunity zone developments. California is one of only four states that has not conformed to the capital gains tax deferral as outlined in the Tax Act program, and the lack of investment is starting to show. Industry experts believe that California’s refusal to align with the federal program is hurting the state and forcing investors to spend their capital in a more tax-friendly environment.

California already has one of the highest income tax brackets in the nation at 13.3%. Add on top the high cost of living, and investors are giving pause before committing to long-term developments in the state.

In California, investors are only getting a return of 87 cents on the dollar, versus 100 percent in other states. The disadvantage translates into fewer QOZ deals being done and less improvement for distressed communities across the state.

Governor Newsom has been talking up the program in hopes that it will spur investment into green energy projects and housing for the poor, yet legislators are slow to recognize the upside. California Democrats stand in stark contrast to the rest of the nation, which quickly adopted and promoted the program’s benefit in their states.

Other states, most with widely accepted bipartisan support, enacted even stronger incentives to bring investment money into economically distressed neighborhoods quickly. However, in California, the legislature, in conjunction with union groups and housing advocates, surprisingly opposed Newsoe’s plan.

Some in California still hope a deal will get done. State Treasurer Fiona Ma just appointed more than a dozen housing and economic development experts to form the new Housing, Economic Development, Jobs and Opportunity Zone Ad Hoc Committee.

Ma has been a big proponent of the opportunity zone program, speaking with lawmakers across the state and touting its benefits. The committee will be responsible for bringing forth creative strategies to increase housing production and economic development in the state, with an emphasis on opportunity zones.

The Urgent Need for an Opportunity Zone Consensus

California is in the midst of a homeless crisis of epic proportion, and Newsom has promised to build more than three million new homes to address the housing crisis. The state also has green mandates to combat climate change, which requires a commitment to costly new energy constructs, all while millionaires continue to flee to greener pastures.

All these factors only add to the urgency for California’s legislature to sit down, come to a compromise, and put together an opportunity zone solution that aligns with the federal program and ushers in a favorable environment for investment.

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