The legislative grab bag that became the Tax Cuts and Jobs Act of 2017 contains an obscure provision that might spur investment in Berkshire County's poorest areas.
No money is flowing yet, but economic development advocates in the region are hopeful that a law panned by some as a giveaway to rich Republican donors might, in time, bring benefits to distressed communities.
The law allows investors to avoid paying capital gains taxes for 10 years or longer if they steer money into new "opportunity zones." Capital gains are taxable profits captured from sales of investments like stocks or other properties, including real estate.
States were able under the law to nominate zones to the Treasury Department. In Massachusetts, 138 were accepted, including six from Berkshire County: two each in Adams, North Adams and Pittsfield.
"On the surface, it seems like it could be a pretty good way to bring money into these opportunity zones for economic development," said Thomas Matuszko, executive director of the Berkshire Regional Planning Commission.
But planners are waiting for the Treasury Department to issue guidelines that go beyond the "frequently asked questions" on its website.
Deanna L. Ruffer, Pittsfield's director of community development, said the zones could attract investment into areas marked by high rates of poverty and joblessness.
"We're very hopeful about it," she said in an interview. "We've been very intrigued by and excited by the opportunity that may come."
But she cautioned that the preferential tax treatment offered under the new law still must prove attractive to investors.
"How that all happens and who becomes interested in setting up funds is in the evolutionary phase," Ruffer said.
Little notice
A statement on the White House website says that the creation of the incentive zone is the first of its kind since the Clinton administration.
The measure, it said, provides "an opportunity for mainstream private investors to support businesses and distressed communities with the creation of Opportunity Zones."
The inclusion of the zones won little notice in coverage of the act, which passed without any Democratic Party backing in Congress amid concerns by congressional budget analysts that the law would add $1 trillion to the federal deficit over 10 years. The law reduced the maximum corporate tax rate to 21 percent and doubled the estate tax exemption from $5.6 million to $11.2 million — among many other features.
The roughly 500-page document passed with amendments drafted by lobbyists, according to press accounts.
President Donald Trump said after the measure's passage Dec. 22 that the law would likely hurt him personally, declaring, "This is going to cost me a fortune, this thing, believe me."
An analysis by The New York Times found that, if passed in 2005, the year for which a partial Trump income tax return is available, the current president would have saved $11 million in taxes.
The nonpartisan Tax Policy Center, a venture of the Urban Institute and Brookings Institution, said that in general under the new law, "higher income households receive larger average tax cuts as a percentage of after-tax income, with the largest cuts as a share of income going to taxpayers in the 95th to 99th percentiles of the income distribution."
A separate Brookings report June 14 concluded that the law will cut federal revenues by "significant amounts, even after allowing for the impact on economic growth. It will make the distribution of after-tax income more unequal."
When it comes to the new opportunity zones, people of wealth gain a new way to shelter capital gains earnings from taxation.
Steering investment
But at the same time, that tax avoidance becomes a means of steering investment into poor areas.
The eligible zones are census tracts that are home to stubborn economic disadvantage. Each of the three communities eligible for tax-sheltered investment lead the county in rates of poverty. For the 2011-15 period, the Census Bureau's American Community Survey data show overall poverty rates in Adams of 9.8 percent; in North Adams of 18.5 percent; and in Pittsfield of 17.2 percent.
Poverty rates in the specific census tracts accepted as opportunity zones are higher locally and nationally: over 32 percent, compared with an average of 17 percent. Median family incomes in qualified tracts are 37 percent below area or state averages, according to the Treasury Department.
In his first State of the City address in February, North Adams Mayor Thomas Bernard said he planned to seek an opportunity zone designation. He got two.
"This new federal program promotes investment in low-income communities by providing tax incentives for the reinvestment of capital gains in housing and economic development projects," Bernard said at the time.
Investor action
Investors can create partnerships or corporations for the purpose of steering untaxed capital gains into the new zones, the first of which were listed in April.
Such investments must be reported on tax returns as having been made in a "qualified opportunity fund."
No approval or action is needed by the IRS, according to the Treasury Department.
An investor "self certifies" that the untaxed gain was channeled into a business venture in one of the allowed zones, Treasury rules say.
In a statement on the Treasury Department website, Secretary Steven T. Mnuchin suggests that opportunity zones were not an afterthought in the legislation.
Instead, he called them one of the "most significant" provisions of the law.
Investments kept in place for the 10-year life of the zones are eligible for further tax savings.
Ruffer, the Pittsfield director of community development, said the zones affected in her city include parts of downtown and the Tyler Street area. Projects that could benefit from the incentive include community developments as well as strictly private efforts.
"We're poised to help investors consider real estate and business investments in those two zones," Ruffer said.
Larry Parnass can be reached at lparnass@berkshireeagle.com, at @larryparnass on Twitter and 413-496-6214.