Maryland bills hinder opportunity zone investment, advocates warn

ANNAPOLIS — Backers of a federal program touted as a pipeline for investment into downtrodden communities worry that a pair of General Assembly bills may curtail the initiative’s chances to succeed in Maryland.

Bills under consideration by legislators would place significant limits on incentives provided by the state for investments in opportunity zones. Advocates of the federal program argue the changes could deter Maryland-based financiers from starting qualified opportunity zone funds and repel investment in local businesses and real estate.

“If people have trouble with the opportunity zone philosophy go to Congress and change it, don’t universally disadvantage your own state,” said Brian Darmody, CEO of the Association of University Research Parks.

Opportunity zones were created as part of the federal Tax Cuts and Jobs Act of 2017. The zones, in theory, encourage reinvesting capital gains in downtrodden census tracts with enticements, such as deferring taxes on capital gains until 2026 or paying no capital gains taxes on appreciation on investments held for a decade.

The latest bill to concern advocates, The Opportunity Zone Tax Deduction Reform Act of 2020,  requires Maryland investors to include federally deferred or excluded capital gains when reporting adjusted gross income or modified income to the state. The legislation, Senate Bill 263 and House Bill 224, are sponsored by Sen. Jim Rosapepe, D-Prince George’s, and Del. Julie Palakovich Carr, D-Montgomery.

A fiscal note attached to the tax deduction act estimates the measure will increase General Fund revenues by $13.5 million, Transportation Trust Fund revenues by $2 million and Higher Education Investment Fund revenues by $800,000 in fiscal year 2021. It’s projected those increases in revenue, however, will taper off to $10.8 million to the General Fund, $1.6 million to the Transportation Trust Fund, and $700,000 to Higher Education Investment Fund by 2025.

Decoupling from federal policy regarding capital gains investment, Palakovich Carr said, won’t deter Maryland-based investors. That’s because the major benefit from opportunity zones is derived from the break on federal, not state, capital gains taxes.

Assuming the 8% return, most opportunity zone funds are aiming to produce a $100,000 investment held for a decade that would earn roughly $215,000, she said. The investor would owe the federal government $20,230, having been forgiven $30,940, or 61% of those taxes.

Under the current policy, Palakovich Carr said, Maryland would only forgive a few thousand dollars. While she described the revenues generated as a result of taxing those capital gains as substantial.

“This is just another way to give wealthy people a tax haven for capital gains,” Palakovich Carr said.

Leonard Mills, CEO of Maryland-based Verte Opportunity Fund, told a Senate Budget and Taxation Committee hearing Wednesday he intended to raise $50 million, and that in-state businesses represent half of his venture’s portfolio. If Maryland taxes capital gains on those investments, he warned, it will chase backers out of the state.

“Although investors in Maryland might prefer to invest in the state’s businesses and real estate projects, their investment dollars are fungible across state lines. They will simply move their capital to other states and thereby providing needed economic development to those states rather than Maryland,” Mills said in the written copy of his testimony.

As one of the few states who tax capital gains, Darmody said, decoupling from federal regulations puts Maryland at a greater disadvantage in boosting capital going to local real estate projects and operating businesses.

“I think that Maryland should be doing everything we can to attract opportunity zone investment, especially from its own residents and corporations … and that bill in particular is bad public policy,” he said.

The House version of the Opportunity Zone Tax Deduction Reform Act of 2020 is slated for a hearing in the Ways and Means Committee at 1 p.m. on Feb. 12.

Local advocates of opportunity zones also said they oppose legislation, Senate Bill 122 and House Bill 45, that roll back state incentives for opportunity zones, which the legislature approved last year.

The legislation’s sponsors, Sen. Cory McCray, D-Baltimore, and Palakovich Carr, said the changes are intended to fix “technical” issues and close “loopholes” in Maryland’s opportunity zone incentive program.

Those proposed alterations include placing a 2021 sunset on state tax incentives, restricting tax credits for biotechnology and cybersecurity firms to business that opened or expanded after March 1, 2018, and require opportunity zones receiving state incentives to pay the higher of 120% of the state minimum wage, or 120% of the local minimum.

“Some businesses (eligible for incentives from Maryland) are already existing (enterprises). That’s not what it was for, it was for new businesses,” McCray said last month, explaining why he wanted a sunset placed on tax incentives.

Darmody, whose organization represents the interests of more than 700 research, science and tech parks and innovation districts, said the changes add uncertainty that will scare off potential investors.

“I don’t think the General Assembly should be changing the rules when we haven’t had a chance to test (the incentives) out,” he said.