After more than 50 years, the outdated government-dependency approach to fighting poverty has shown its limits, having raised the living standards of the poor but failed to expand self-sufficiency through work as President Lyndon B. Johnson’s War on Poverty envisioned. This unsatisfactory victory is why President Trump championed a new approach to fighting poverty through the 2017 Tax Cuts and Jobs Act’s Opportunity Zones provision, which is a major policy success that he will speak about on Friday in Charlotte, North Carolina. Instead of raising taxes and discouraging economic activity, Opportunity Zones provide targeted tax cuts to spur development and job creation in struggling communities.
Traditional anti-poverty programs provide cash grants or subsidize the demand for goods, such as healthcare, food, or housing. While these programs provide support to children, the elderly, and the disabled, they can also weaken the incentive to work for able-bodied, working age adults. Research by University of Chicago professor Casey Mulligan has shown that the largest traditional anti-poverty program, Medicaid, discourages people from working by an amount equivalent to their payroll taxes, with about 11 million workers being worse off if they work more because the program benefits they lose exceed their increased earnings. As such, they discourage people from becoming self-sufficient because earning income through work can lead to disqualification from benefits.
The Trump administration has proposed reforms to anti-poverty programs to promote work, but in their current forms, these programs also stifle progress by requiring higher taxes on employers and employees, which ultimately reduce opportunities for the people they seek to help. Instead, Opportunity Zones lower taxes on job creation, which is the most powerful source of poverty reduction ever invented. They do this by incentivizing private-sector investment in struggling communities that meet income eligibility requirements.
Selected at the census tract level by governors, there are more than 8,700 Opportunity Zones across the United States. Opportunity Zones exist in every state and are home to just over 10% of the population — including nearly 20% of people living in poverty. Because of Opportunity Zones, investors across the nation are bringing their dollars, knowledge, and skills to communities that have not seen this type of attention from job creators in decades.
This Trumpian approach to fighting poverty also improves upon revitalization programs such as federal assistance for economic development subsidies or Community Development Block Grants. These programs require cumbersome applications, bureaucratic approval, and too often failed to deliver results. Opportunity Zones, in contrast, allow anyone to invest and kick-start development in a given community. Within broad guidelines, investors and businesses can work together to revitalize struggling communities, investing in everything from a small coffee shop to a major housing development.
Opportunity Zones showcase the tax reform law’s embrace of the power of the decentralized market over centralized, bureaucratic rules and programs. This incentive for local business formation is expected to have a powerful and targeted effect on jobs and wages in areas that need it the most, similar to the effect the tax reform law’s national tax cut had on the labor market.
The emerging direct evidence on Opportunity Zones shows that they are spurring targeted investment, which is projected to reach a total of $100 billion in the coming years, an amount larger than the combined annual spending of three major anti-poverty programs: food stamps, child healthcare, and cash assistance. As of July 2019, the National Council of State Housing Agencies’s Opportunity Zone Fund Directory had 196 funds seeking a total of approximately $44 billion. Additionally, data from Real Capital Analytics show that year-over-year growth in development site acquisitions in Opportunity Zones surged by more than 25% late in 2018 after the Department of the Treasury designated the zones, greatly exceeding investment growth in the rest of the country.
These data highlight Opportunity Zones’s potential to build on the impressive employment and wage gains realized since the tax reform law took effect. Importantly, these gains have disproportionately benefited low-income earners and those previously on the labor market’s sidelines.
Today’s jobs boom is drawing in millions of those who were previously left behind. In the fourth quarter of 2019, a record-high 74% of the workers gaining employment came from out of the labor force rather than from unemployment. Furthermore, since the tax reform law was signed, low-wage earners have seen the fastest nominal wage growth (10.6%) of any income group. Low-income workers are earning higher incomes and leaving behind means-tested government programs, despite these programs’ incentives for economic inactivity.
In only two years, the broad tax cuts have already spurred overall economic growth and helped historically disadvantaged groups through a surge in the demand for workers. Now, early evidence shows that its anti-poverty Opportunity Zones provision is driving investment to the communities that need it the most. With the developer in chief in the Oval Office, these decentralized development policies can help communities such as Charlotte fight poverty by generating self-sufficiency rather than government dependence.
Just the way President Lyndon B. Johnson envisioned it.
Tomas Philipson is the acting chairman of the White House Council of Economic Advisers.
