California Governor Renews Push for Opportunity Zones

Bloomberg Law

California Gov. Gavin Newsom has introduced a new proposal for state-level opportunity zones.

California Gov. Gavin Newsom has introduced a new proposal for state-level opportunity zones.

By Laura Mahoney

August 23, 2019

California Gov. Gavin Newsom renewed his push for state-level opportunity zone tax breaks with a revised proposal that loosens rules for affordable housing and green energy projects to qualify.

Newsom’s updated proposal—a modified version of federal opportunity zone tax breaks that allow investors to defer or reduce state tax on gains from investments in the zones—keeps the basic outlines of what he first released in May. In addition to limiting eligible projects to housing and green energy, the governor would still cap investments from specific funds at $100 million, cap total state allocations to $5 billion over the life of the program, and penalize funds that fail to report information about their progress. Newsom, a Democrat, released the proposal Aug. 22.

The governor wants lawmakers to enact the program before they adjourn for the year Sept. 13. Legislators pushed talks on the details of opportunity zones to the end of the legislative session but made room for the program in the state budget that was enacted July 1. 

What’s New

Key changes in the new proposal, according to the Department of Finance, are:

  • High-density housing projects could have fewer units available to low-income households than projects that don’t meet density bonus requirements under a separate state law;

  • The Franchise Tax Board, which would administer the program, would have more flexibility to expand the list of eligible green technology projects as they are approved by other state agencies such as the Public Utilities Commission.

  • An option for funds to exceed the $100 million allocation cap through a more robust vetting at the Governor’s Office of Business and Economic Development is eliminated, making the $100 million cap per fund the maximum.

Lawmakers Involved

Newsom’s office worked with some lawmakers on the updated proposal, including Sen. Robert Hertzberg (D), who has a separate bill that would establish a new board of state officials to oversee the program and allocate investments among zones throughout the state.

Hertzberg’s spokeswoman said Newsom’s new proposal doesn’t contain everything he wanted “but overall we would rather there be some kind of conformity than none at all” with changes in federal tax law. 

A group representing investors that has called for expanding the program to more types of projects said the updated proposal is a positive step.

“This proposal is an important step forward in California embracing the potential of opportunity zones, particularly as a new pathway to grow our clean economy and expand housing options for low and moderate income Californians,” Kunal Merchant, president and co-founder of CalOZ, said.

Labor Groups Opposed

But labor groups that are part of the California Tax Reform Association oppose a California-specific program and are pushing to kill the governor’s proposal. In a Aug. 20 letter to Senate and Assembly leaders, the group said it will oppose all opportunity zone bills, whether they are tied to the state budget or stand on their own, because the program would create more benefits to wealthy investors on top of those they already gained through federal tax reform.

“Unfortunately, the premise of the OZ program is flawed at its core, and legislative clarification will not insulate the state from the numerous negative impacts we can rightfully anticipate would occur,” the association said in its letter.

California designated 879 Census tracts as opportunity zones in March 2018. They are spread across 57 of California’s 58 counties, and many have poverty rates of at least 30%.

To contact the reporter on this story: Laura Mahoney in Sacramento, Calif. at lmahoney@bloomberglaw.com

To contact the editors responsible for this story: Jeff Harrington at jharrington@bloombergtax.com; Megan Pannone at mpannone@bloombergtax.com

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