'Opportunity Zones' in R.I. raise questions of equity

PROVIDENCE, R.I. — A tour of the low-income areas Rhode Island selected to take advantage of the "Opportunity Zone" incentives in last year's federal tax cut bill would take you past mills along the Pawtuxet River in West Warwick, past vacant industrial sites in South Providence and empty storefronts in downtown Pawtucket.

But it could also take you to the beach in Narragansett, the University of Rhode Island quad, quaint shops on Hope Street in Bristol, a new student apartment tower at the base of Providence's College Hill and the Rhode Island State House.

The Opportunity Zone program included in last year's Tax Cut & Jobs Act was billed as a way to share some of the windfall that investors will see from the law with underprivileged communities.

Now that the zones have been drawn on maps across the country, some of the selections are raising questions about whether they will really help distressed communities or accelerate growth and inequality in areas already undergoing gentrification.

New York's decision to make an Opportunity Zone out of the already crane-filled neighborhood that Amazon chose for one of its new giant office campuses — for which the company is already expected to receive up to $3 billion in city and state subsidies — raised eyebrows.

How did Rhode Island choose its Opportunity Zones?

Fighting areas with poverty was one intention of the zones, but not necessarily the driving force.

The map of Rhode Island Opportunity Zones is a fair guide to the locations where the state has been looking to steer development for years.

It includes:

— All of downtown Providence;

— Newport's North End, including the Pell Bridge exit-ramp area near Naval Station Newport;

— The Providence River waterfronts in Providence and East Providence;

— The Woonasquatucket River Valley in Providence;

— Downtown Pawtucket and the area surrounding the planned commuter rail station;

— The area near the Westerly Education Center;

— The Highland Corporate Park in Woonsocket;

Rhode Island Commerce Secretary Stefan Pryor this week said the selection process involved local leaders and used numerous criteria, starting with growth potential and including the desire to spread the zones throughout different corners of the state.

"We reached out through the League of Cities and Towns and directly to cities and towns," Pryor said. "We also took into account the potential for investment to occur; the potential to attract business expansion, startup creation and business development; the synergy with local efforts and our efforts; and does the local municipality have the plans in place and infrastructure in place to yield results."

The Opportunity Zone program allows investors with unrealized capital gains to avoid paying federal taxes on that income if they plow it into funds that invest in Opportunity Zones and keep it there for at least 10 years. Rhode Island was one of 12 states that lobbied the IRS to make sure the investments could be in a wide variety of businesses located in the zones, not just real estate.

(A federal comment period on the proposed rules for the program runs through late December, and they are expected to be finalized early in the new year.)

Since the cost of the incentives is borne by the federal government, states are eager to cash in, and Pryor noted that locating an Opportunity Zone in a depressed area wouldn't help that area if nobody invests there.

There are a few areas left out of Opportunity Zones that may surprise people, including the area around McCoy Stadium in Pawtucket, large portions of South Providence and the city's West End, and Central Falls.

The federal tax law requires Opportunity Zone census tracts to have at least 20 percent of their residents living at the federal poverty line, or for the median family income there to be no more than 80 percent of the statewide median. (The statewide poverty rate is 11.6 percent and the median income is $76,655.)

Pryor said the state added its own rule that all the zones would have a higher poverty rate than the state average.

How do places like Narragansett, Bristol, Warren and Kingston Village in South Kingstown, all areas with expensive real estate, qualify as low-income?

The students at URI who live there full-time don't typically have high earnings, and many owners of expensive waterfront houses don't live there permanently, so their incomes don't count under the tax law. 

The Narragansett Opportunity Zone includes not only Ocean Road estates and Sand Hill Cove, but the Port of Galilee, where the state's commercial fishing industry is centered. The census tracts chosen for Opportunity Zones in Narragansett, Westerly, Bristol and Warren were the only ones in those municipalities that qualified under the law.

Matthew Turner, a professor of economics at Brown University, said the Opportunity Zone program looks like a bad way for the federal government to fight poverty, but from the state's perspective, choosing areas more likely to draw investors makes sense.

"From the point of view for Rhode Island it is a win, because it allows us to collect money that would have gone to the federal government, but it will go mostly to land owners," Turner said. "As a tool to help disadvantaged people it is not efficient. They chose to pick census tracts that were likely candidates for investment anyhow, so this will give them a little bump to make them more attractive."

Mohammad Raissi, a visiting instructor in the Providence College School of Business, called Opportunity Zones a "very effective" tool for channeling investment earnings into new investments. He said the state was right to target areas where businesses are already looking to go.  

Will big-money investors bite?

"We have received preliminary inquiries," Pryor said. "It's at an early point in time, as the federal government is still finalizing the rules and regulations. ... So that leads to a lack of certainty until they are finalized ... as to how it will operate."

— panderson@providencejournal.com

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On Twitter: @PatrickAnderso_