On an Alabama day so oppressive that the sweat pools on your face in the shade, Alex Flachsbart talks almost too rapidly to understand and drives around central Birmingham with similar velocity. Every few minutes, he pulls over to expound on a victory: neglected public housing, a long-empty factory, a crumbling department store, all being transformed into shiny apartments or airy office and retail space.
“This was one of Birmingham’s white-whale buildings,” Mr. Flachsbart said of a former Red Cross office that had been renovated into 192 rental residences. The development happened with the help of a powerful tax break created in 2017 to lure investors toward poorer neighborhoods, an idea championed by Democrats and Republicans and cited by former President Donald J. Trump as among his proudest economic policy achievements. (“One of the greatest programs ever for Black workers and Black entrepreneurs,” he called the incentive in an appearance this week at a National Association of Black Journalists conference.)
But the relatively low-income areas covered by the incentive, known as opportunity zones, didn’t benefit equally. On Mr. Flachsbart’s tour of new projects in downtown Birmingham, the stops dry up in the historically African American northwest quadrant. There, developable lots and vacant buildings haven’t received as much of the capital flowing toward the buzzier parts of downtown.
“O.Z. was a nudge there because it was already at a tipping point,” said Mr. Flachsbart, who has put together several of those deals as chief executive of a nonprofit organization called Opportunity Alabama. “There is a wall at about 17th Street.”
Birmingham and the rest of Alabama are a window into how money has and hasn’t soaked into the ground designated as opportunity zones over the past six years. Congress is taking a closer look as it considers extending the incentive, which expires in 2026 along with most of the 2017 tax law.
The provision has driven tens of billions of dollars into the construction of multifamily apartment buildings, adding new housing during an intense affordability crunch. But some consider it an expensive boondoggle that allows wealthy investors to enjoy higher returns by financing projects that they might have backed even without an extra carrot.
The incentive has not worked as well as backers had hoped for new and existing businesses, largely because of restrictions on how businesses qualify. So far, there is no concrete evidence that poverty has declined more in opportunity zones than elsewhere. Although one study found greater employment growth in the zones than in similar areas, most of the new jobs probably went to residents who lived outside them.
“I’m all in for ways to create family-wage jobs in hard-hit communities,” Senator Ron Wyden, the Oregon Democrat who is chairman of the Finance Committee, said in an interview, but reports “are not indicating that dollars are going to those type of places.”
Supporters argue that the incentive will become more effective as developers learn how to use it, and are able to combine it with other subsidies to pull off more ambitious projects, sustaining a recovery fueled by federal stimulus in places that for decades have been overlooked.
“There’s always going to be some use case in a big national program that doesn’t fit the spirit of the law, but I think those are outliers,” said John Lettieri, the chief executive of the Economic Innovation Group, a think tank that has championed the idea from the beginning. “I think the balance looks really good in terms of where it moved investment and the activities that it spurred.”
The opportunity zone idea was first laid out in a 2015 paper by Kevin Hassett, who went on to lead Mr. Trump’s Council of Economic Advisers, and Jared Bernstein, who holds the position under President Biden. It then became essentially the only bipartisan part of the Tax Cuts and Jobs Act, Mr. Trump’s first major legislative victory.
Unlike other tax incentives and subsidies, opportunity zones are available to anyone with investment income. They work by deferring and in some cases reducing capital gains taxes on that income, and wiping out taxes on the investment if it is held for at least 10 years. (The cost to federal coffers won’t be clear until the beneficiaries claim forgiveness on taxes they would otherwise owe.) In another unusual feature, the incentive isn’t parceled out by agencies or capped by a certain amount — it’s designed for flexibility and ease of use.
That ease of use drew criticism from the beginning. Governors designated the opportunity zones in their state from a pool of eligible census tracts, sometimes to favor a project already in the works rather than to maximize impact. Beyond anecdotes, it was difficult to tell where and how the funds were landing, since the law required essentially no reporting.
Investors were eager to take part. The high equity valuations of 2018 to 2021 created a glut of capital gains, which poured into funds set up for use in opportunity zones. By the end of 2023, funds tracked by the tax credit consulting firm Novogradac totaled $37.6 billion, which the firm estimates at only a quarter to a third of the total; the Treasury Department has disclosed hard numbers only up to 2020.
“We were kind of shocked that even through the end of 2020 by how wide the investment had been, and how quickly it expanded,” said Jason Watkins, an opportunity zone specialist at Novogradac.
Fund-raising slowed in 2022, as the stock market slumped and the power of the incentive started to wear off. But because the funds must be spent within two and a half years, that money kept projects moving even as others fell victim to skyrocketing construction costs and interest rates.
In Alabama, civic leaders raced to pull down some of the billions for their communities. But Mr. Flachsbart, who had been helping to connect people with capital gains to eligible projects, recognized that Alabama wasn’t going to get its share without a more concerted push. That’s why his nonprofit started a fund management arm to raise money closer to home, he said.
“People in Alabama, who understand the state, can fill those gaps, because they can see the kinds of unique market opportunities that we can see, sometimes in real time,” Mr. Flachsbart said. Still, he notes, capital follows the path of least resistance.
The incentive could be used for almost any kind of real estate or business, but the rules made it best suited for building apartments. Such projects were already a magnet for capital after years of underbuilding, and opportunity zones appear to have slightly amplified the impact, according to an analysis of census data by the Economic Innovation Group.
The tax benefits haven’t proved attractive for investment in housing restricted to low-income residents, since those properties tend not to appreciate much in value, but in some places so much market-rate housing was added that it likely weighed rents down anyway.
Take Huntsville, Ala., which was experiencing a job boom fed by aerospace engineering and advanced manufacturing. There, opportunity zones — which covered the city’s sprawling research park as well as its genteel downtown — intensified a white-hot surge in construction.
“We had this road map of how we were going to grow our economy,” said Shane Davis, Huntsville’s director of urban and economic development, sitting in a brand-new city hall supported by a burgeoning tax base. “When you overlay the opportunity zones, it just added fuel to the fire.”
The sheer volume of supply added in Huntsville — 24,000 multifamily units over three years — appears to have mitigated housing costs. Max Grelier, a co-founder of RCP Companies, is redeveloping a 140-acre former mall as a multiuse community with hundreds of apartment units. To attract tenants, completed units are priced 10 percent lower than he originally intended.
“Nobody’s really overly concerned about the market being able to absorb the product,” Mr. Grelier said. “There was just so much of it at one time.”
Huntsville is an example of a place where some development in opportunity zones would have happened anyway, and some was catalyzed or accelerated by the incentive. Early data showed that designated census tracts with relatively high income and low poverty — and those trending in that direction — were more likely to receive investment. Another paper found that places with more available land and some level of new development already also attracted the most interest.
Rural areas generally didn’t fare as well. Projects that did come together required careful planning and stacking multiple incentives.
Some urban environs didn’t have the natural advantages of rapid growth or large development sites. Woodlawn, a predominantly African American neighborhood of Birmingham left reeling by the white flight of the 1970s, has been a focus for local philanthropies and city grants. It received one significant investment with opportunity zone capital: A local music school bought and renovated an old movie theater as a space for lessons and performances.
But of Woodlawn’s possibilities are small ones that outside investors sometimes don’t consider worthwhile. David Fleming, the president of REV Birmingham, a community development nonprofit that has focused on Woodlawn, said the program could use more time to work.
“These incentive programs always seem to flow more quickly to the more obvious, ready-to-go projects and deals,” he said. “The more we keep it around and improve the program a little bit, it will have the potential for more impact.”
Those pushing for legislation to reauthorize opportunity zones want to make some tweaks: disqualifying some relatively well-off census tracts, for example, and allowing investment managers to pool funds to increase the available capital. Mr. Flachsbart has also advocated funding for local organizations like his that can serve as matchmakers for worthy projects.
Cornell Wesley, the chief economic development officer for Birmingham — which has a Black majority population — doesn’t think that goes far enough. Since Black people typically don’t have capital gains to put into an investment fund, he notes, they have been largely unable to benefit directly from the program’s tax breaks. And the real estate development industry in the state is overwhelmingly white.
That’s why he’s focused on projects that have some local government participation, whether through publicly owned land or through extra incentives. That way, at least the construction can be harnessed to create jobs for local people.
“We may not be able to control who the developer is,” Mr. Wesley said, “but many of our incentives will come with the attachment of ensuring that there are minority subcontractors associated with it.”
Jim Tankersley contributed reporting.