What Determines Where Opportunity Knocks? Political Affiliation in the Selection of Opportunity Zones

Abstract

We examine the role of political affiliation during the selection of Opportunity Zones, a place-based tax incentive enacted by the Tax Cuts and Jobs Act of 2017. We find governors are on average 7.6% more likely to select a census tract as an Opportunity Zone when the tract’s state representative is a member of the governor’s political party. Further, we find that this effect ranges from 0.0% to 25.6% depending on the state-level information channels governors used to select Opportunity Zones, such as engagement of professional advisors and implementation of public comment procedures. These effects are incremental to local demographic factors that increased the likelihood of selection, such as lower income levels and preceding improvements in local conditions. Analysis of the early response to Opportunity Zones (e.g. commercial real estate transactions, new building permits, and construction employment) shows that initial business investment occurs only in those states where the role of political affiliation was mitigated via the state-level information processes. These results provide evidence relevant for concurrent and future academic literature studying this incentive, for five current Congressional legislative proposals to amend the incentive, and for potential Opportunity Zone investors by informing the extent to which state-level politics and processes affected the implementation of this new incentive.