[House Hearing, 116 Congress]
[From the U.S. Government Publishing Office]
CAN OPPORTUNITY ZONES ADDRESS CONCERNS IN THE SMALL BUSINESS ECONOMY?
=======================================================================
HEARING
before the
SUBCOMMITTEE ON ECONOMIC GROWTH, TAX, AND CAPITAL ACCESS
OF THE
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTEENTH CONGRESS
FIRST SESSION
__________
HEARING HELD
OCTOBER 17, 2019
__________
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Small Business Committee Document Number 116-051
Available via the GPO Website: www.govinfo.gov
______
U.S. GOVERNMENT PUBLISHING OFFICE
38-014 WASHINGTON : 2020
HOUSE COMMITTEE ON SMALL BUSINESS
NYDIA VELAZQUEZ, New York, Chairwoman
ABBY FINKENAUER, Iowa
JARED GOLDEN, Maine
ANDY KIM, New Jersey
JASON CROW, Colorado
SHARICE DAVIDS, Kansas
JUDY CHU, California
MARC VEASEY, Texas
DWIGHT EVANS, Pennsylvania
BRAD SCHNEIDER, Illinois
ADRIANO ESPAILLAT, New York
ANTONIO DELGADO, New York
CHRISSY HOULAHAN, Pennsylvania
ANGIE CRAIG, Minnesota
STEVE CHABOT, Ohio, Ranking Member
AUMUA AMATA COLEMAN RADEWAGEN, American Samoa, Vice Ranking Member
TROY BALDERSON, Ohio
KEVIN HERN, Oklahoma
JIM HAGEDORN, Minnesota
PETE STAUBER, Minnesota
TIM BURCHETT, Tennessee
ROSS SPANO, Florida
JOHN JOYCE, Pennsylvania
DAN BISHOP, North Carolina
Adam Minehardt, Majority Staff Director
Melissa Jung, Majority Deputy Staff Director and Chief Counsel
Kevin Fitzpatrick, Staff Director
C O N T E N T S
OPENING STATEMENTS
Page
Hon. Andy Kim.................................................... 1
Hon. Kevin Hern.................................................. 3
WITNESSES
Mr. Brett Theodos, Senior Fellow, Urban Institute, Washington, DC 5
Mr. Aaron Seybert, Managing Director of Social Investments, The
Kresge Foundation, Troy, MI.................................... 7
Ms. Jennifer A. Vasiloff, Chief External Affairs Officer,
Opportunity Finance Network, Washington, DC.................... 9
Mr. John Lettieri, President and Chief Executive Officer,
Economic Innovation Group, Washington, DC...................... 10
APPENDIX
Prepared Statements:
Mr. Brett Theodos, Senior Fellow, Urban Institute,
Washington, DC............................................. 24
Mr. Aaron Seybert, Managing Director of Social Investments,
The Kresge Foundation, Troy, MI............................ 32
Ms. Jennifer A. Vasiloff, Chief External Affairs Officer,
Opportunity Finance Network, Washington, DC................ 39
Mr. John Lettieri, President and Chief Executive Officer,
Economic Innovation Group, Washington, DC.................. 50
Questions for the Record:
None.
Answers for the Record:
None.
Additional Material for the Record:
SBIA Letter.................................................. 60
CAN OPPORTUNITY ZONES ADDRESS CONCERNS IN THE SMALL BUSINESS ECONOMY?
----------
THURSDAY, OCTOBER 17, 2019
House of Representatives,
Committee on Small Business,
Subcommittee on Economic Growth,
Tax, and Capital Access,
Washington, DC.
The Subcommittee met, pursuant to call, at 10:02 a.m., in
Room 2360, Rayburn House Office Building. Hon. Andy Kim
[chairman of the Committee] presiding.
Present: Representatives Kim, Davids, Delgado, Hern, and
Stauber.
Also Present: Representatives Chabot, and Houlahan.
Chairman KIM. Good morning everyone. The Subcommittee will
come to order.
I want to thank everyone for joining us this morning. I
especially want to thank the witnesses for being here today.
Thank you so much.
America's small businesses are a catalyst for creating
business opportunities and driving growth in the U.S. economy.
The estimate 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, and
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 so far, I have heard that small
firms need a simple Tax Code, one that levels the playing field
and creates opportunities to build Main Street, not Wall
Street.
The tax policies that are enacted in Washington have a
direct impact on the people in my district back in New Jersey
and 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 businesses 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
spurn 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 hope 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 to
failed to do, bring much needed capital, economic development,
and jobs to those communities that need it most.
Unfortunately, like many tax incentives, there are
opportunities 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 leave 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 tradeoff, 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 assets, reports indicate that most of the money is flowing
towards real estate versus small businesses already operating
within the Opportunity Zone. When an investor buys a property,
makes some improvement and sells it to someone else for a
higher price while deferring capital gains, investors, fund
managers, and real estate developers benefit but there does not
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 it is 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
particular importance as recent news report 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 does not 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
business while looking critically at our 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
strengthen our economy for the long term.
With that, I want to again thank each and every one of the
witnesses for joining us, and I look forward to your testimony.
I would now like to yield to the Ranking Member, Mr. Hern,
for his opening statement.
Mr. HERN. Thank you, Mr. Chairman.
Mr. Chairman, if I may, I would ask for just a moment of
silence for our colleague, Elijah Cummings and his family.
If I could please, just a moment of silence, please.
Thank you so much.
It is good to be with you today. I look forward to hearing
your testimonies.
As a small business owner myself for the past 34 years,
including 17 years on a bank board and 13 years on the
McDonald's National Leadership Council serving over 3,500
McDonald's franchisees, 8 years of that. I was the ombudsman 5
years as the National Chairman of the Systems Economic Team, 5
years on the Corporate Tax Policy Team, 8 years on the
Insurance Policy Team, there is no better advocate for small
business in the United States House of Representatives than
myself. And so I want to look at every policy that is coming
through here to make sure it actually benefits those who are
asking for help.
But generating two out of three jobs in business and across
America, this economy depends very heavily on small business,
not only small business as we know it but also the incubators
for the large businesses of the future. From traditional brick-
and-mortar storefronts to highly specialized manufacturers,
small businesses and entrepreneurs and startups are
transferring how business is getting done these days. We must
continue to work in a bipartisan manner to ensure that all
small businesses operate within an environment that is free of
overly burdensome regulations and an environment that allows
them to create jobs and expand. That is why it is important
that we are going to be discussing another bipartisan idea that
has been implemented and making progress across the country:
Opportunity Zones.
As a way to jumpstart economically distressed areas of the
Nation, the Tax Cuts and Jobs Act included a provision to
authorize the Opportunity Zones program. This program provides
stepped up tax enhancement for individuals that reinvest their
capital gains in targeted economic areas. Opportunity zones
represent a unique working relationship between the Federal
Government, state and local municipalities, and the private
sector. Although similar to programs of the past, Opportunity
Zones have been created with flexibility to ensure utilization.
Within my state of Oklahoma, there have been 117
Opportunity Zones designated. Moreover, approximately 380,000
Oklahomans live in these designated boundaries, and in my
congressional district alone, Oklahoma's 1st Congressional
District, we have 23 designated zones.
In order to direct investments properly, qualified
opportunity funds must be created. Although recent headlines
have suggested this program will only benefit certain business
sectors, this hearing will allow members of the Subcommittee to
explore how small businesses can better interact with these
designated zones.
We know that small businesses are the Nation's job
creators, and thus, when jobs are created in communities,
neighborhoods are transformed. The two rounds of guidance from
the Deparmtent of Treasury and the IRS have continued to
clarify the roles of businesses within this program.
The first round of regulations was published in October of
2018 and the second round came out in April of 2019. With the
program in its infancy, we need more information on how
investments are being shaped and on how dollars are falling to
projects. This information will be critical as we assess its
effectiveness.
I look forward to hearing from our witnesses on how this
program has been implemented and the steps that have been take
to spur economic development. I know this hearing will provide
even more clarity for small businesses across the Nation.
And with that, Mr. Chairman, I yield back.
Chairman KIM. Thank you, Mr. Hern. The gentleman yields
back.
And every time we have one of these hearings I am always
reminded about how grateful we are and lucky to have your
expertise as a small business owner and someone who can really
help make sure that we focus in on where the rubber hits the
road and make sure we can get things done, which is very much
the intention of this Subcommittee. The Ranking Member and I
both want to make sure that we can move forward just thinking
about what is best for the small businesses and we come into
this hearing with an open mind, just really trying to get at
the best understandings of what we have seen so far, trying to
glean best practices, and trying to understand where we might
be able to go from there to the benefit of small businesses,
whether in Oklahoma, New Jersey, or elsewhere around this
country.
And if Committee members have an opening statements
prepared, we would ask that they be submitted for the record.
I would like to just take a quick minute to explain the
timing rules. So each witness will get 5 minutes to testify and
the members get 5 minutes for questioning. You have a little
gizmo in front of you which is our lighting system. The green
light will tell you when you begin. The yellow light comes on
when you have 1 minute remaining. And the red light comes on
when you are out of time, and we ask that you do your best to
stay within the timeframe to the best of your ability.
I just want to quickly introduce our witnesses before we
proceed. I would like to introduce Mr. Brett Theodos. He
directs the Community Economic Development Hub at the Urban
Institute where he is a senior fellow in the Metropolitan
Housing and Communities Policy Center. His work focuses on
economic and community development, neighborhood change,
affordable homeownership, consumer finance, and program
evaluation and learning. Thank you for coming.
Our second witness is Mr. Aaron Seybert, the managing
director of the Social Investment Practice at The Kresge
Foundation. Prior to joining the foundation in 2016, Mr.
Seybert served as executive director at JPMorgan Chase Bank
where he was involved with community development banking
focused on new market tax credits and historic tax credit
investing. Welcome, Mr. Seybert.
Our third witness today is Ms. Jennifer Vasiloff. She
joined the Opportunity Finance Network (OFN) in 2017 as chief
external affairs officer, a role capitalizing on her 16 years
of experience in promoting and strengthening the CDFI field.
Ms. Vasiloff leads the organization's efforts to raise the
profile of CDFIs, particularly at the national level. Welcome,
Ms. Vasiloff.
I would now like to yield to our Ranking Member, Mr. Hern,
to introduce our final witness.
Mr. HERN. Thank you, Mr. Chairman.
Our witness is John Lettieri. Mr. Lettieri is president and
CEO and cofounder of the Economic Innovation Group, also known
as EIG. EIG is a leader on economic policy matters and an
innovator of policy solutions that power America forward. Mr.
Lettieri has previously served as a staffer in the United
States Senate and is a vice president of Public Policy and
Government Affairs for the Organization of International
Investment with a focus on economic development. Mr. Lettieri
has also testified in the past on Capitol Hill on the topics of
Opportunity Zones. Mr. Lettieri, we appreciate you taking time
away from your company to talk with us today. Thank you.
Chairman KIM. Great. Thank you so very much. And again, we
are grateful to have all four of you here today.
Why do we not just jump right in? Mr. Theodos, you are
recognized for 5 minutes.
STATEMENTS OF BRETT THEODOS, SENIOR FELLOW, URBAN INSTITUTE;
AARON SEYBERT, MANAGING DIRECTOR OF SOCIAL INVESTMENTS, THE
KRESGE FOUNDATION; JENNIFER A. VASILOFF, CHIEF EXTERNAL AFFAIRS
OFFICER, OPPORTUNITY FINANCE NETWORK; JOHN LETTIERI, PRESIDENT
AND CHIEF EXECUTIVE OFFICER, ECONOMIC INNOVATION GROUP
STATEMENT OF BRETT THEODOS
Mr. THEODOS. Chairman Kim, Ranking Member Hern, and members
of the Committee, thank you for inviting me to speak with you
today.
I study private and mission and public financing to
understand who communities are accessing capital, which are
being left behind, and how to help. These I offer on my own,
not to be attributed to the Urban Institute, its trustees, or
funders.
It is a legitimate work of the Federal Government to help
communities inadequately connected with capital markets achieve
economic growth. We have many examples of Federal programs and
incentives working to achieve those ends. However, we also have
1031 exchanges and the mortgage interest deduction and EB5
visas that are poorly targeted to need.
Community development policy in the United States, 2 or
more generations ago consistently relied on Federal spending
and control, but we have gradually and consistently moved
towards a model where the Federal Government exerts less and
less control over Federal resources. I submit that Opportunity
Zones mark the near complete transition to privatized Federal
community economic development policy.
A heavy reliance on the private sector to accomplish the
public agenda introduces a set of pitfalls. While some zones
should never have been chosen or eligible, many do show real
need for investment and OZs will undoubtedly attract
substantial capital into zones in aggregate.
OZs have four compelling features as I see them. They tap
into a new investor pool, they can be used as a tool for
mission-driven projects, they encourage a longer term
investment horizon, and they incentivize equity capital which
receives less Federal attention.
However, as currently structured, OZs have several
shortcomings. Their place-based targeting is overly broad with
too many upper income communities included. For example, zones
in Manhattan and Brooklyn and Berkeley where the median home is
worth more than a million dollars.
Real estate will be the largest use case and there are
already better targeted Federal supports for real estate. There
are not sufficient project type or use requirements in contrast
with other Federal tools. So, for example, no requirements that
new apartments be rented at affordable prices. There is no
requirement for community input or engagement under this new
incentive. Many OZ investors report they would have done the
deal in the exact same form absent the incentive, meaning the
Federal Government is subsidizing projects that do not actually
need the help. And finally, there is a lack of reporting
requirements.
Congress should consider the following reforms:
First, tighten the number of eligible zones by removing all
contiguous tracks, as well as those that as they gain
investment stop qualifying as low income communities.
Second, Congress should more narrowly restrict qualifying
investments. For instance, only real estate transactions where
the operating business is the owner occupant or where housing
is sold or rented at below market prices.
Third, any investment into a CDFI, a community development
financial institution, any investment into a vehicle that they
control should be given preferential treatment.
Fourth, Congress should add a ``but for'' or a substitution
test to restrict the incentive to projects that could only
proceed with the additional help.
Fifth, Congress should consider restructuring the tax
benefits by extending the temporary deferral, by converting the
step-up and basis to a sliding scale that depends on the level
of economic distress in the zone, and by eliminating the
permanent exclusion.
Finally, Congress should require transaction level
reporting for all OZ investments on who, what, where, when, and
how much. So who the investors and the investees are, what the
investment was for, when the investment was made, where the
investment went, and how much was invested.
It is important to note that Treasury could improve this
incentive even now, but if Treasury fails to take these steps,
Congress should act. Treasury could make this more like a
program, not merely an incentive by giving responsibility to a
sub-agency with dedicated staffing to oversee data collection
monitoring. Treasury should conduct a rigorous certification
process for opportunity funds to be eligible to act as an
investment vehicle, providing a mission test for opportunity
funds, not self-certification. And finally, the draft IRS tax
form is inadequate to track the program but Treasury already
has the authority it needs through the certification process.
Thank you for your time. I look forward to questions.
Chairman KIM. Thank you so much.
Mr. Seybert, over to you for 5 minutes.
STATEMENT OF AARON SEYBERT
Mr. SEYBERT. Thank you, Chairman Kim, and Ranking Member
Hern, and members of the Committee.
The Kresge Foundation is a $3.7 billion privately endowed
foundation headquartered in Metro Detroit working nationally.
We are focused on creating opportunities for low-income people
in America's cities. We raise no outside capital. We provide no
for-profit services. We have no stake in Opportunity Zones
whatsoever other than the $22 million of balance sheet
protection we have provided to two Opportunity Zone funds that
are mission aligned with our organization. Our sole focus in
the sector is ensuring that Opportunity Zones benefit low-
income people.
In addressing the concerns of the Committee, I would like
to suggest that we focus on maybe a different question than has
been presented because I think certainly Opportunity Zones can
address the concerns of the small business economy. The
question really should be will the new marketplace that has
been created do that, and what incentives exist for the market
to address those concerns?
As Brett mentioned, unlike virtually every other Federal
incentive designed to address inequality, this is not a
program. This is a private marketplace that is entirely
unregulated or virtually unregulated where private investors
deploy capital gains, grow those gains hopefully in return,
invest those gains in Opportunity Zones in hopes of growing
those gains long term and avoiding capital gains in the future.
How those gains are invested and who benefits from those
investments remains largely undefined.
Given that understanding, I think that we should examine
the existing capital challenges that face small businesses in
this country every day. Particularly for minority-owned firms,
many small businesses struggle to access capital because they
are undercapitalized to begin with. The lack of equity in small
businesses makes it difficult to access traditional debt
products needed to grow and expand. Here, Opportunity Zones
could really provide a great benefit.
The incentive requires investors to make equity investments
in underlying businesses. In a traditional venture capital
model where venture investor returns are really enhanced by
this incentive, that rationale make a lot of sense in how the
tool is effective in promoting that sort of investment. What is
unclear though is whether or not the incentive is there to
invest in small businesses that do not offer the same growth
curve like a tech company provides. Many small businesses do
not appreciate capital in that fashion. They are oftentimes
illiquid and it is unclear as to how an investor would exit
their investments in a small business if not for a venture-like
or private equity-like model.
That brings me to my second point which is really around
scale. If you examine the 75, 85-ish so sort of privately
declared opportunity funds who have decided to identify
themselves as such, the majority of those require a minimum
investment of $250,000 of investment, and many are
significantly more than that. When you compare that to the data
around small businesses, which again, definitionally, it is
important how you define small businesses, but in the data that
we look at, most businesses are seeking growth equity less than
$250,000, certainly, and many under $100,000. I think that
mismatch creates a problem for many small businesses where the
market is trying to deliver a product of scale and many small
businesses need something that scales down to the business
needs on the ground.
Third, we want to understand the risk-return calculus for
investors. It has been noted, real estate is the predominant
asset class right now in the opportunity's own sector because
we believe that real estate generally provides a lower risk, an
enhanced risk calculus for investors. And so while small
businesses certainly can absorb capital from opportunities on
investors, the question is why would an Opportunity Zone
investor, but for the venture capital model, decide to take the
risk of a small business when real estate, generally speaking,
is acknowledged as being a lower risk moderate return
investment class. And so it is unclear as to why investors
would choose to take that additional risk.
Knowing the structural issues that sort of face small
businesses and the way that Opportunity Zones overlay, it is
really impossible to know whether not Opportunity Zones today
are going to address the concerns of the small business
community. Because of the way the legislation was structured,
there is no disclosure accountability built into this
marketplace. The public is likely to never know who raised the
capital, where it was invested, and who benefitted from that
investment. It is like the transparency should be concerning to
all of us because as we learned in 2008-2009, markets without
transparency are not only inefficient but they can also be
dangerous.
So we truly believe that Opportunity Zones offer a huge
potential to the communities that we are concerned about, but
until we have that transparency in the marketplace that is
needed, we are going to be very concerned about the impacts on
our constituencies and the people that we serve every day.
Thank you for your time, and I am happy to answer
questions.
Chairman KIM. Great. Thank you for your comments there.
Over to Ms. Vasiloff. You are recognized for 5 minutes.
STATEMENT OF JENNIFER A. VASILOFF
Ms. VASILOFF. Opportunity Finance Network (OFN) is a
national network of community development financial
institutions (CDFIs). CDFIs are mission-driven community
development banks, credit unions, loan funds, and venture
capital funds investing in opportunities that benefit low-
income, low-wealth, and other under-resourced communities
across America.
Currently, there are more than 1,000 CDFIs certified by the
Department of the Treasury's CDFI Fund. Nationwide, the CDFI
industry manages over $185 billion in assets. With cumulative
net charge-off rates of less than 1 percent, CDFIs lend
prudently and productively in markets often overlooked by
conventional financial institutions.
CDFIs are the ``boots on the ground'' experts that have
been operating in Opportunity Zones and other disinvested
communities for decades. As soon as the Opportunity Zone
provision became law, CDFIs across the Nation began reaching
out to investors, community residents, and other partners
excited about the potential of this new community development
tool. Many CDFIs devoted significant resources to exploring how
to attract Opportunity Zone investors to the projects with
high-mission impact that CDFIs specialize in.
Regrettably, we have found that the Opportunity Zone tax
incentive is not a good match for the kind of neighborhood
revitalization deals of interest to CDFIs, particularly those
targeting small businesses. Our member CDFIs tell us that
investors expect double-digit returns, prefer real estate to
small business investments, and largely shun the more
challenging areas that need an infusion of capital the most. As
a result, relatively few CDFIs are moving forward with
establishing their own Opportunity Funds. Among those that are,
an even smaller number are planning to concentrate on
investments into small businesses.
The structure of the Opportunity Zone incentive is better
suited to investing in a new business choosing to locate in an
Opportunity Zone, rather than a business already operating in
the community.
As important as launching a startup venture might be, the
health and growth of existing businesses is also critically
important, particularly businesses that employ community
residents.
Two CDFIs that are trying to use the Opportunity Zone
incentive for small business investment are Community
Reinvestment Fund headquartered in Minnesota and targeting the
Midwest for their opportunity fund, and AltCap, a CDFI serving
the Kansas City market. These experienced small business CDFIs
are launching Opportunity Funds with a goal of investing in
operating businesses. OFN strongly supports their efforts and
looks forward to highlighting their work. However, both
organizations have encountered obstacles and face competition
from Opportunity Funds that are not as mission driven or
focused on the small business community.
Separate from the limited role the CDFI industry is likely
to play, OFN is concerned that community residents, Congress,
and other stakeholders will have limited information on how the
Opportunity Zone tax incentive has operated due to the anemic
data collection currently required by the Internal Revenue
Service and U.S. Treasury. OFN has advocated for comprehensive
data collection that will show where an Opportunity Zone
investment is being made, the results of the investment, and
the impact on the targeted community. The modest level of data
collection currently planned by Treasury should be
significantly expanded to get the full picture of the impact of
Opportunity Zone investments.
In the absence of an adequate Federal data collection
protocol, OFN contributed to and strongly supports the
Opportunity Zone framework, a voluntary set of guidelines
created in partnership with the U.S. Impact Investing Alliance,
the Beck Center at Georgetown University, and the Federal
Reserve Bank of New York. The framework identifies best
practices, a reporting framework, and a shared goal of
measuring outcomes. My colleagues, the Kresge Foundation, Urban
Institute, and Economic Innovation Group are all contributors
to the framework.
OFN also supports the bicameral, bipartisan legislation
that has been introduced to establish reporting requirements
for Opportunity Fund investment.
In summary, the Opportunity Zone incentive is a poor fit
for CDFIs, a missed opportunity to take advantage of the
experience, mission commitment, and expertise of this
nationwide network of community development finance
professionals. Unfortunately, new investments in small
businesses incentivized by the Opportunity Zone tax benefit are
likely to be disappointing also.
OFN encourages members of this Committee to support
stronger accountability measures in the Opportunity Zone
program and to consider other approaches to foster small
business development in underinvested communities, including
those leveraging the Nation's network of community development
financial institutions. Thank you.
Chairman KIM. Thank you.
Why do we not go on to our final witness here? Mr.
Lettieri, you are recognized for 5 minutes.
STATEMENT OF JOHN LETTIERI
Mr. LETTIERI. Thank you, Mr. Chairman and Ranking Member
for inviting me to testify.
EIG was the leading proponent of the concept behind
Opportunity Zones, and I believe it can provide a new lifeline
to struggling communities if implemented properly.
While there have been a number of Federal incentive
programs aimed at boosting economic activity in underserved
areas, Opportunity Zones is a sharp departure from past
precedent in its scope, flexibility and its structure. Perhaps
for this reason it has generated enormous interest from a wide
variety of stakeholders.
While the incentive was designed to meet a wide variety of
needs, its central purposes was to support new businesses and
existing small and medium-size firms in need of growth capital.
The topic of this hearing is specifically whether
Opportunity Zones can help address concerns of the small
business economy, and here I think it is important to
distinguish between small businesses and new businesses because
policymakers generally devote too much attention to the former
and not nearly enough to the latter. It is specifically new
businesses that grow and add employees to which most net new
job creation can be attributed each year. It should therefore
be of concern that new business formation was abysmal in the
wake of the Great Recession, both in terms of the start-up rate
and the number of new firms created, as well as the geographic
distribution of those firms.
The latest figures on business startups show no real
rebound, making entrepreneurship one of the few indicators that
have failed to meaningfully improve.
Capital access is especially critical for early-stage
businesses and it is noticeably weak in Opportunity Zone
communities. This policy could therefore help fill an important
equity financing gap and allow entrepreneurs stay in their
communities to build economic opportunity and wealth for local
residents.
However, we should be clear that while vitally important
for growth-oriented companies, equity capital is not always the
right source of financing for local businesses. No one policy
can fit all needs.
I want to talk about early market activity as we see it
around the country. And though it is still early in the life of
this marketplace, the Opportunity Zone's incentive is already
being used to support a wide range of investments across the
country as Congress intended. However, most of the early
investment has indeed gone to various types of real estate
developments and that is for a few simple reasons. One of the
main factors is that improving the built environment is often a
crucial first step in bringing people and businesses back into
a community. But a more pernicious factor is the fact that the
regulations governing business investment through Opportunity
Zones have been slow and unclear.
Investments in clean energy, broadband infrastructure,
vertical farming, manufacturing industry, industrial
facilities, these are all signs of the long-term potential of
this incentive even if the scale of capital flow into such
investments so far has been limited. Many early investments are
going into basic neighborhood amenities, such as grocery
stores, medical clinics, and new housing of all different
types. Small cities are using Opportunity Zones to build or
expand local innovation districts or revitalize blighted
downtown corridors. Several early investments are using real
estate development to support a stronger startup ecosystem
through incubators and co-working spaces.
Examples like these will likely proliferate as rules and
best practices for Opportunity Zones become more widely
understood among communities, investors, and local businesses.
However, without additional regulatory clarity, and much
stronger local implementation efforts, this policy will not
reach its full potential. Indeed, regulatory concerns are
keeping many investors who would wish to deploy capital into
operating businesses on the sidelines.
Unresolved technical issues include how to satisfy the
requirement that investments in existing business add
substantial new value. Timing requirements governing the
investment activities of an opportunity fund. How to unwind an
opportunity fund and return capital to investors after the 10-
year holding period. The ability to recycle capital from one
investment to another without interrupting the intended tax
benefit. These are fundamental issues that still remain
unresolved nearly 2 years into the law's life. So it is no
wonder then that the investment scope and scale is limited,
particularly for businesses which are less predictable and more
complicated than real estate investment.
Each of these issues will significantly impact the extent
to which this policy lives up to its potential to boost
investment in local businesses and create new economic
opportunity for residents.
In conclusion, in spite of those challenges, I believe
Opportunity Zones is a promising new initiative but it will
require substantial new work, additional work to achieve its
intended purpose. Let's be clear-eyed about those challenges.
Rulemaking is not yet complete. Community stakeholders lack
resources and are still finding their footing. The
philanthropic sector, which could be playing a much more
meaningful role, has been slow to engage. And investors
generally remain hesitant to invest and make long-term
commitments in areas where they previously might not have
considered investing.
That this is hard work should come as no surprise. As a
country, we have largely neglected the underlying challenges of
disinvestment and declined that this policy was intended to
address. There will be no overnight success stories, but with
the right tools and a much greater commitment of resources I
believe Opportunity Zones can be an important first step in a
new movement of place-based policymaking.
Thank you. I look forward to taking your questions.
Chairman KIM. Thank you. And we appreciate everything that
you shared with us. And we will jump into questions.
I will start by just recognizing myself for a few minutes
here and then we will quickly move on to some of my colleagues.
We are here today as we said to talk through some of the
imperfections in this system, try to shed light on how we can
move forward. Certainly, it is something that is of high
interest in my own district. We have six zones in my district,
18,000 residents within those zones.
There is a saying in management that you cannot manage what
you cannot measure and one concern that I have had about the
Opportunity Zones is the lack of established reporting
requirements that do not necessary provide us with a great
measure of success. And we walk a fine line here because we
also want to make sure that while ensuring accountability, it
is not so much that it suffocates the program or the effort
that we are trying to get in. That is something that Ranking
Member Hern and I have both really committed to is really just
trying to make sure that we are not overly burdening especially
small business and others. But we also are just trying to think
through this.
So I think for me, what I would like to ask you is, as we
are trying to think through, we will get to the point about
what kind of information you think we would need to know, but I
would like to just start are the more fundamental level. How
would you measure success of this new tax incentive? How would
you go about doing that? Is this something that we should look
at in terms of job creation of economic growth within these
communities or is there some other measure? I am kind of first
interested in seeing what would you look at to be able to then
come back and tell us down the road that this has been
successful?
So if you do not mind, maybe we will just start with you,
sir, and we will move on down.
Mr. THEODOS. So I think in terms of intermediate outcomes
and longer term outcomes. And my key intermediate outcome is
where is the OZ capital going? And if the OZ capital goes to
the 10 percent off best off zones, if 90 percent of the capital
goes to the 10 percent best off zones, then we are in a
situation where we can already articulate that this incentive
is not working well. If what we see is a broad diffusion of
capital across all of the zones and even the most disinvested
zones are benefitting from this incentive, then we are set up
in a position to believe that this might be helping in a
broader and more meaningful way. We do not have the insights at
all to be able to answer those questions. So those are my
intermediate.
Longer term outcomes are also fairly clear and
straightforward. It is about job growth. It is about firm
creation. It is about wealth creation for residents in
communities that have historically lacked access to wealth.
Chairman KIM. I do not know if everyone wants to comment on
this but just go down the row if anybody else wants to say
anything on this.
Mr. SEYBERT. I mostly agree with Brett, although we come
from the position of what is in the interest of low-income
people. And so ultimately for us, when we think about economic
inequality, it is really about the economic mobility of low-
income people, right, which is really about real wage growth in
low-income households. As noted, the lack of transparency makes
efforts nearly impossible, and it is lacking data. It is almost
entirely a long-term analysis.
I think what I would urge the Committee to reject is the
false equivalency between the lack of access to capital
contributing to the anemic growth in businesses which is
absolutely true. And therefore, more capital must then cure
that anemic growth. I do not think that we can say that. If
that were true, if more capital meant more growth, then folks
in all of your districts would be screaming for more subprime
lending in their communities. Right? We moved billions of
dollars of subprime lending through low-income communities
across this country and it did not help; it hurt. Right? So it
is not about the volume of capital that moves through. It is
about the kind of capital that moves into these communities and
who it is designed to benefit.
I do not have a short-term answer about how we measure
that. I just know what has worked in the past and we have some
examples of more program-like Federal programs, like the Low-
Income Housing Tax Credit, the New Markets Credit, Federal
Mortgage Insurance, other things that have been designed to
help low-income people that over a long period of time have
shown some success in encouraging economic mobility. This tool
may become the thing that really drives economic growth from a
household perspective, from a low-income people perspective,
but it is far too difficult to tell, and without the data that
has been urged to be collected by the folks testifying today, I
do not know that we will ever get that answer.
Chairman KIM. Okay. Just in the short time we have, if any
last comments from the two of you and then we can get back to
this after we talk to some of the other colleagues.
Ms. VASILOFF. Just very briefly to sort of double down on
the need for really any data collection. It is hard to define
success or measure success when so little information is being
asked of participants in this program. And as Aaron mentioned,
there are other examples, like the New Markets Tax Credit where
participants in that program are required to provide a lot of
information on a transaction level basis. Systems are in place.
CDFIs abide by them as well as other participants in that
particular program. I think something comparable could be put
in place for Opportunity Zones.
Chairman KIM. Okay.
Yes?
Mr. LETTIERI. If I could just briefly, I want to mostly
agree with what everyone said and strongly disagree with a
couple things.
One, I think we all agree on the need for reporting
requirements. That is something that EIG has led the charge on
legislatively and in our comment letters to Treasury. So there
is no disagreement I think on this panel about that.
However, I think we are better off looking at this as a
policy experiment in light of the large-scale failure of many
other programs with a similar intention and somewhat similar
structures to each other to achieve the intended results of
stimulating widespread and large-scale economic growth in those
low income areas. We do not really know at scale what works
particularly with this new policy. And so you do not just at
the Federal incentive. You look at what are communities
actually doing. Let's not ignore the fact that states and
localities have a vast toolkit if policy and regulatory tools.
There are local anchor institutions and partners and
philanthropies that can play a part and we cannot judge a place
that had none of those assets activated in the same way that we
judge a place that had all of those assets activated on behalf
of their Opportunity Zone strategies. So we need to look at
what places are actually doing to implement locally what is at
its best a powerful Federal tool, but one that does not have
any kind of mandatory uptake. A community can choose to use it
or not. They can choose to have a strategy or not. And if they
do not, we should naturally then expect weaker results in those
communities.
Chairman KIM. Okay, great.
Hopefully, we will get to do a second round of questions
but I just want to quickly hand it over to my Ranking Member to
follow up.
Mr. HERN. Thank you, Mr. Chairman.
There is so much to talk about here. I have, as I
mentioned, 23 in my district. I live within 5 miles of 19 of
those. And being a long-term investor and developer in real
estate, small business owner, I am always looking like any
entrepreneur would be, what is the next opportunity?
I do agree where the successes are coming, or where at
least obviously it is a very short window here we are looking
at, but just anecdotally seeing who are investing in these
areas. There are large real estate plays. One would have to ask
why these areas became blotted, which many of you all in this
area you look at that and you say a lot of this, there have
been people moving out of these areas where newer neighborhoods
are developed. Crime is driving a lot of this. Changing in
traffic patterns, road development or lack of development, loss
of jobs, many, many things. One would argue that to bring
these, revitalize these neighborhoods or these particular OZs
would be to bring business back in which is why we are talking
about this today. I have always said that most people do not
move to a city or to an area because small businesses grow. It
is usually a larger business, and small businesses are those
who service the employees that work at those larger businesses.
So there is a lot to digest in all of this. Again, I have
looked at this, I have shared this with our staff. I have
looked at this since the moment it was launched, and I have
talked to many, many colleagues, including tax attorneys and
fellow developers and it has been very interesting to try to
figure out how to make these work personally.
But with that said, I would like to start with you, Mr.
Lettieri. Can you just give us any examples where people have
invested in the qualified opportunity funds and how those are
being invested in small businesses?
Mr. LETTIERI. Sure. I think there are a couple of examples
I would point to.
One is we see some interesting sectors emerging with
Opportunity Zones in use. One of those is vertical farming. So
you see there have been a number of vertical farming companies
and businesses that have started up either to invest in that
sector or as businesses qualified for opportunity fund
investment. And so that seems to be a sector that in the early
stages with the limited regulatory clarity that we have still
nevertheless works well with the nature of the incentive.
As I mentioned in my testimony, a lot of the businesses
that are seeing support from Opportunity Zones thus far are
local amenities like grocery stores and medical clinics and
things that we would want to take for granted in any kind of
stable community. There is broadband businesses that are
standing up to service the connectivity gap in a lot of the
low-income areas.
So there are a lot of creative use cases in the business
space that can be used. But I want to again underscore,
Opportunity Zones is an equity incentive many, if not most
businesses do not need or qualify for equity investment. So we
have to understand that this is a tool that is going to fit a
specific and very important market need, one that creates and
can support growth companies. But then, as you mentioned, can
support a stronger ecosystem of other small businesses and
service industries that support those larger employers. What a
lot of these communities lack is a real anchor kind of growth
company and what is going to be required to bring them back are
some stable and growing employers that can add to the tax base
that can create jobs, et cetera.
To Arron's point, when we think about what benefits low-
income people, we know from an emerging body of research that
concentrated poverty and economic segregation is one of the
very worst things, especially for a child growing up in those
types of communities when you look at their long-term life
outcomes. When you think about growing up in a concentrated
poverty area or a distressed city, services are often lacking,
schools, ambulances, fire trucks, police. Those are things that
they cannot take for granted the way we can in more prosperous
areas. So putting businesses and development in these areas
that rebuild the tax base is also an important side benefit to
the communities and to the most vulnerable residents because it
creates a base of resources that they do not currently have or
cannot currently rely on.
Mr. HERN. Mr. Lettieri, if I may, just with the remaining
time I have here, you did allude to something that none of the
other three touched on, or maybe I missed it. We try to do this
a lot. I have only been in Congress less than a year now but I
have seen it throughout my lifetime. We try to fix a lot of
national problems or a lot of local problems with national
Band-Aids, if you will. And I realize it is around the Tax Code
that we do that. But it seems to me that the people and the
entities that are most equipped to fix these areas are the
communities, the cities that most of these areas lie or the
states that they lie in. And it would seem that as we go
through and we look at these that it would be important that we
figure out how to include the state and the local governments
in these as well in a fashion that is outside the private
investment as well. Because, again, I look at these, I look at
the people who are investing in these areas are very, very,
very wealthy individuals. The money knows no politics. And so
it is really about return opportunities.
And I look forward to listening to the rest of the
questions today and us coming out here with some solutions as
we go forward. But I do agree the reporting is just so
critical.
Thank you, Mr. Chairman.
Chairman KIM. Great. Thank you.
Why do we not proceed? I am going to turn it over to
Congresswoman Davids for her questions.
Ms. DAVIDS. Thank you, Chairman.
And I would just like to first thank the Ranking Member for
acknowledging the loss of our colleague, Mr. Cummings.
I also, this is unintended but I am going to, it is like we
planned it, I am going to follow up on the Ranking Member's
question.
But first I want to just kind of talk a little bit about
the district that I represent is the 3rd District in Kansas.
And Ms. Vasiloff, thank you for in your testimony, written
testimony and also your testimony in front of us here today
mentioning the good work that AltCap is doing. They recently
moved. Well, not moved but they have included Kansas in their
service area, so I have spent quite a bit of time talking to
the folks at AltCap, and they are definitely doing a lot of
really good work in supporting small business growth in our
community.
So I know the hope for increased investment in Opportunity
Zones, it is definitely exciting and it is promising and that
there are a lot of factors to consider. And oversight,
especially from what we have heard today, oversight that needs
to be done to ensure that the progress from this program or
incentive is equitable and that it is sufficient.
The State of Kansas has 74 designated opportunity zones and
those are in a lot of different kinds of areas--rural,
industrial, urban, suburban. And in the 3rd District alone, we
have got 11 Opportunity Zones. They are in Olathe, in Lenexa,
which are both in Johnson County, and then Kansas City, Kansas,
which is in Wyandotte County. And each zone and each
neighborhood is dealing with its own unique set of challenges
which I am sure you all are familiar with. Every community has
its own unique flavor.
We want to do everything we can on this Committee to
support and promote small business growth and making use of
investments in the way that we can. So I will start with Mr.
Theodos. You already mentioned community involvement in your
testimony, and then the Ranking Member also started to bring up
that concept. I am curious from you, and then everybody else,
know that I have used half the time, to talk a little bit about
how we can bring communities into the conversation in a more
effective way, and what kind of role they need to play and at
what stage because I think that oftentimes communities will
find themselves trying to give input and a lot of decisions
have already been made. So if you could talk a little bit about
that that would be appreciated.
Mr. THEODOS. There are some fundamental disconnects that
make that hard with this incentive. There is not the legal
structure or mechanism by which cities or states or counties or
resident association or groups can engage to have a say or even
to know whether this capital is deployed in their communities.
These are private investments that can happen. They need not
involve public sector dollars beyond the OZ financing or
community residents themselves. So residents may not know this
is going on. Even if they do know they may not have any access.
Sometimes cities have the ability to control zoning or other
elements but not all places have that opportunity. And so it
will be a challenge to think how OZs allow for any reason
community engagement process in a mandatory required or even
encouraged way.
Ms. VASILOFF. You know, you can use this incentive
anywhere. And so you sometimes have the dynamic of communities
almost competing with one another for access to Opportunity
Investors investors. So in the conversations we have had with
some of our members, particularly some serving rural
Opportunity Zones, maybe do not have some of the other folks
engaged that even a Kansas City community does have in place.
And so I suspect that some of those areas are going to be
bypassed by investors; but we do not know yet.
Mr. SEYBERT. I will quickly add that when I speak to mayors
and governors across the country, I advise them to play both a
strong defense and offensive game in regard to Opportunity
Zones. Just start with the needs of your community. Understand
the capital that is needed and then form strategies around
that, not strategies around Opportunity Zones alone.
Ms. DAVIDS. Thank you. And I yield back.
Chairman KIM. Great. Thank you.
I will now turn it over to Congressman Stauber. You are
recognized for 5 minutes.
Mr. STAUBER. Thank you, Mr. Chair, and Ranking Member Hern
for putting on this discussion today. And also to the
witnesses. I appreciate your expertise in the areas and your
thoughtful consideration to the questions that we are asking. I
have got a few myself. I will make a comment first.
Opportunity Zones are a huge deal for Northern Minnesota.
With over 30 Opportunity Zones in my district alone, we are
making sure rural America knows and that rural America matters.
In fact, I have had the constituents ask how can they have
their own town designated an Opportunity Zone since I started
here in Congress 10 short months ago. The economic potential
from an Opportunity Zone designation is being felt by our
communities.
With all good ideas though come some challenges. To that
end, Mr. Lettieri, what did Congress get right and wrong with
the Opportunity Zones? And then the second question is what
information is still needed to give the Opportunity Zones a
chance to really be successful?
Mr. LETTIERI. Thanks for the question.
With some intellectual humility here I will say there are a
lot of the answers to that question that we will not know for a
while. And this underscores again the need for both patience
and data.
I think one thing it got right that I think is a key
differentiate between this policy and other previous programs
is the flexibility and scalability of the incentive. Typical
tax credit programs cap out at a relatively low dollar amount
relative to the national scale of need. So if you have a $3
billion tax credit program and a couple dozen investments in
low-income communities around the country, those may be great
investments for those individual communities. It offers no
promise of scale to be able to meet a wide array of needs in a
wide array of places.
So the fact that this is non zero sum, the fact that your
district and the communities in your district can benefit at
the same time that other places in your state can benefit
without it being as zero sum in nature as a scarce tax credit
is a huge deal and I think one of the key features here. The
flexibility of use case as well. The fact that you can have
multiple reinforcing investments in different sectors in the
same community. So housing at the same time you are investing
in businesses, at the same time you are investing in
infrastructure, that is really important because as we know,
these communities have needs in bunches, not just one specific
type of need. And if you get that kind of clustering effect,
that is what we know is going to be the most effective in
building a durable economy over the long term.
I think some of the weaknesses have been already noted and
some of them are also inherent to any specific policy. It is
not going to solve on its own really any problem except making
capital access easier. It is a tool. It is not a strategy in
and of itself.
To the congresswoman's question about what communities can
do, one thing that really enhances the market opportunity for
communities and gives them more control is doing what they
should be doing anyway, which is assessing what are our needs
and assets? What is our vision for how we want Opportunity
Zones used? How do we pitch that to the private sector?
And about 50 cities have already done that through an
Opportunity Zone perspective led by an organization called
Accelerator for America which is a group of mayors around the
company. That is a great way to assess what are our needs?
Let's take stock of our assets. Many of these assets are
publicly owned and doing nothing for the community and not
presenting any value to investors either. And so activating
those latent assets is a huge deal and Opportunity Zones gives
us a chance to do that.
Mr. STAUBER. I appreciate the answer.
One of the things that I look at, I, too, and a small
business owner going on 30 years, and so one of the things I
look at is the ability to access capital. That is tough for
many small businesses. But I have to just say from the three
other witnesses, from this small business owner, I just felt
like there were more government layers that you would like to
put in place. And from my standpoint and from what I am hearing
from constituents is we need rules and regulations. We need to
look at the return on the investment but the additional, I
think that is a disincentive. I think that the government is
not necessarily the answer all the time. This public-private
partnership I think has that ability. But to put the layers
upon layers, we are trying to reduce the regulations as much as
possible keeping in line with the return on the investment and
also giving us the opportunity to look and see if it is
successful. But just what I heard was just, you know, from this
small business mind just over and over, the regulations and
what you are asking these investors to go through, I just felt
that maybe we ought to have a little bit more flexibility in
allowing the investments to be made by the private partners or
private capital to have an influence to hit our small
businesses and the communities that need it the most.
Like I talked about the 30 communities in the district that
I represent, Minnesota 8th, is extremely important. So I do
appreciate your comments and your expertise.
Mr. Chair, I yield back.
Chairman KIM. Thank you.
We are going to turn it over to Congresswoman Houlahan.
Over to you for 5 minutes.
Ms. HOULAHAN. Thank you, Mr. Chair. And thank you to the
panelists who have come.
I represent a community in Pennsylvania just outside of
Philadelphia. We have at least two Opportunity Zones in our
community, and just by way of data, the median household in
Coatesville, which is one of our zones, is $38,000 roughly, but
people in poverty is 30 percent. Median house value there,
$115,000. In the city of Reading, which is part of my
community, the median household is about $29,000. People in
poverty is 36 percent. Median value of homes are $69,000. And
that is in comparison to my whole district which is about
$84,000 in median income, 29 percent in poverty, and the
poverty value of about $300,000.
I also come as a businesswoman as well, as an entrepreneur,
and you all talked a little bit about some really important
words. Mr. Theodos, you talked about mission-driven projects.
Ms. Vasiloff, you talked about elevating existing businesses.
And Mr. Lettieri, you spoke a little bit about philanthropic
entities in business. And everyone, including our Chair, spoke
about measuring what matters, the need to be able to measure
success and to be able to know in the long term whether or not
this is working.
Can you all speak to the degree that you can about your
thoughts about vetting standards for the companies themselves?
And let me get some specifics about that.
Recently, the business roundtable CEOs talked about the
market signals that are talking about the importance of
companies that are thinking about people and planet as well as
profit, a shared prosperity, an inclusive economy, the
importance of finding companies that are not only thinking
about maximizing their shareholder value but also thinking
about the triple bottom line. Is it something that you would
consider as being a viable opportunity if we asked of these
companies that are coming into these communities or these
companies existing in these communities already, if they held
to a certain standard of corporate social responsibility?
Mr. THEODOS. I would encourage the use of Federal resources
to be in advancing community benefit and need. This is not
simply a regulation. This is actually Federal spending. And so
when we think about what we are getting out of it, we should,
in fact, desire to get out of it what we should and want to
benefit. And the nice part about how this was initially
designed is there is a certification process in place for
opportunity funds. And funds could be legitimate gatekeepers if
they are certified to pick and invest in mission-driven
projects. As currently advanced by Treasury, there is a self-
certification process, which allows any actor to step through
the door in a way that does not steer or any way direct the
program or the dollars towards mission-driven projects.
Ms. HOULAHAN. Thank you.
Would anybody else like to contribute to that?
Mr. SEYBERT. I would just say quickly that while I agree
that it would be nice for that to exist, we do have a voluntary
framework that has been put forward by philanthropy and we put
forward our own. And the uptake as a percentage of the
identified industry is relatively small today. The Ranking
Member mentioned the reasons that these communities are
distressed to begin with, and I do not think that we should
ignore the historical conditions that led to disinvestment in
these communities, particularly concentration of poverty really
driven by racism and discrimination in many of these places.
And while voluntary frameworks are useful for those actors who
want to do the right thing, and we applaud the business
roundtable for taking that action, we know capital does not
flow to these places. Not because these places are not worth
investing. Not because there are not good ideas or smart people
or growing businesses. It is because the market does not value
these places. And this incentive creates an opportunity. Right?
But without something further to nudge a market in the
direction, you know, I fear personally that what we are going
to do is reinforce those stereotypes that exist in the way that
capital flows currently. And I do not see any mechanism where
we sit today to address any of that inequity, particularly
racial inequity in a lot of these places. So I am all for
voluntary frameworks. We want every good actor to act to their
fullest extent, but we believe that it may not be enough.
Mr. LETTIERI. I agree. I would be concerned about anything
that adds a new hurdle to already struggling areas. So things
that may sound good in intention but really come down to the
eye of the beholder. So what is a mission aligned investment?
There are a lot of different ways to define that.
Ms. HOULAHAN. Of course.
Mr. LETTIERI. And creating a national standard for such a
wide variety of communities I think carries some potential
downsides that may have exactly the opposite of the intended
effect. And so it is the kind of thing where I would want to
see a lot more state and local agency engagement in that kind
of a process to shape the outcomes.
Ms. HOULAHAN. Do not disagree. I guess my concern is when
you are talking about the taxpayers' dollar and resources that
are benefitting communities, we should have some say in who
gets the money and we should have say in what sort of actors
they are. And I do agree that there ought to be in some ways a
voluntary process there but also certainly one that
incentivizes people to be good stewards to communities.
Thank you. And I am sorry, I have run out of time. I yield
back.
Chairman KIM. Thank you, Congresswoman.
Just a few other questions. Why do we not do sort of a
quick second round here in case anybody else has some follow
up.
I will keep mine brief but building off of the first
question I asked just about how do we measure the success, the
reason I wanted to just ask that is it helps me kind of frame
then the question of what information do we need? If the four
of you are in agreement to some extent in terms of needing to
have some type of information, some type of reporting, I would
like to just try to leave this hearing with a better sense of
what all you recommend we need in terms of the scope of that
information and from who.
Mr. Theodos, you kind of went through if I remember the
who, what, where, when, and how much; is that correct?
Mr. THEODOS. Yeah. There are three things that I would like
to convey. First, the information needs to be collected not on
the tax form because we need to get the information out. And so
we need the information collected not on the tax form.
Second, what we need collected is that simple who, what,
when, where, how much. Every investor ever has known those
details about every investment they have ever made and so those
are not cumbersome reporting requirements. Those are basic
inventory tracking. So very straightforward, not cumbersome.
And then the third important step is we need this
information distributed publicly so that Congress and mayors
and governors and others can know, including community
residents, how their Federal resources are being deployed in
their district.
Chairman KIM. Yeah. Well using that as just sort of a
framework for discussion, what would be the reactions from the
three of you? Are you in agreement with that approach of
framework? Do you think there needs to be more or less
information? That would be just helpful for me to understand.
Ms. VASILOFF. I think this is an area where there is a lot
of agreement. And in fact, there is a bill in the house that
you all have an opportunity to support that would go a long way
towards putting some of these things in place. I think all of
us are supporting this legislation actively.
Chairman KIM. Okay. Same for the two of you in terms of
that framework?
Okay. Well, that is helpful from my end.
Ranking Member?
Mr. HERN. Just a quick statement.
I was really pleased with the responses that we got from
our witnesses today. What things, since we are short on the
information, I would caution us of not trying to kill this
program right off the bat here. I mean, there have been some
comments made that, you know, became very political in
narrative. I think you said, Mr. Seybert that the racial and
discriminatory. I can think of half of mine that are not in
racially discriminated areas. They are where big industry
changed, move abroad, left very large vacant buildings out near
the airport, industrial parks. It has nothing to do with racial
discrimination or anything of that kind of stuff. So I would
challenge us to please keep this on the narrow. I mean, you all
have some great ideas. I think you can expect what you inspect.
And as the Chairman said, it is very difficult to make hard
decisions unless you really have some fact-based information.
So I would challenge us.
Mr. Theodos, I think you nailed it perfectly. We have got
to get this information. In our state, the lieutenant governor
is in charge of managing Opportunity Zones. I think there needs
to be a person that has the interest of seeing these
communities grow, whether it is the mayors that can roll up
locally into the state level. I do agree with you, it needs to
be outside the tax process because, again, I can tell you that
the largest investor in Opportunity Zones in our area is a
very, very wealthy gentleman from the other side of the aisle
that I am on that was not investing in those areas until these
Opportunity Zones came along.
So in a free market society, capital will flow where it is
incentivized to go and to get the best RY. And as long as our
country is under free market principles without government
interference that is what we would always hope it to be. But
again, I think we do need to know who is going there so that we
can adjust because currently all we are using is our census
trap to define these areas which may or may not be right. Maybe
we need to have additional metrics to define how these
opportunity zones are laid out and designated.
So again, thank you, Mr. Chairman.
Chairman KIM. Thank you.
I agree with you wholeheartedly. I think all of us kind of
hit the same points. We all have different qualitative analysis
that we are bringing to the table, stories that we have heard
or examples. And your insights were incredibly important. I
think the Ranking Member and I are in agreement that there
needs to be more, and especially on the quantitative side which
I was glad to hear all four of you are in agreement of. And we
will think through how best to be able to approach this going
forward.
We are all aware that the places in this country that need
capital investment to bring back jobs and revitalize
communities, that these are incredibly important and that this
will only happen if small businesses are given the chance to be
able to lead the way. You can look no further than my home
state of New Jersey where small businesses in my district
simply need affordable access to capital and simple fair tax
policy that allows them to compete against big corporations.
While Opportunity Zones have the potential to do this, there
are still many outstanding questions and concerns that need to
be addressed.
My hope is that today's hearing allowed us to dive deeper
into the subject and how we can improve any place-based
policies to improve outcomes in communities that are
desperately needed.
I just want to take this moment again to just thank the
four of you for coming out. I am sure we will continue to draw
upon your expertise and your insights on this going forward and
look forward to working with you as we try to figure out what
is best for our communities, for our small businesses, and some
of our most disadvantaged communities in our area.
With that, I would ask unanimous consent that members have
5 legislative days to submit statements and supporting
materials for the record.
Without objection, so ordered.
And if there is no further business to come before the
Subcommittee, we are adjourned. Thank you.
[Whereupon, at 11:10 a.m., the subcommittee was adjourned.]
A P P E N D I X
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]