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Place-based tax incentives, such as the New Markets Tax Credit (NMTC) and Opportunity Zones incentives, are often used to promote investment in low-income neighborhoods. However, not all low-income neighborhoods have an equal need for investment subsidies. Subsidies for investment in already gentrifying neighborhoods, for example, may reflect inefficient inframarginal investment, and they may lead to inequitable outcomes. Critics fear that when gentrifying neighborhoods are eligible for tax incentives, they will draw investment away from the neighborhoods that need it most. However, few studies have provided empirical analysis to assess whether these concerns have merit. Through a novel geospatial analysis of the location patterns of tax-subsidized projects, this Article provides new evidence that critics’ concerns are justified. This Article analyzes 15 years of NMTC data to explore the location patterns of tax-subsidized projects in 20 U.S. cities. It employs two spatial analysis methods, quadrat density analysis and negative binomial regression analysis, to describe the location patterns of NMTC projects and their relationship to two variables known to correlate with gentrification: high vacancy rates and increasing rental rates. The quadrat density analysis reveals that, in most cities, NMTC project density is highest in eligible census tracts that had high vacancy rates, increasing rents, or both. The results of the negative binomial regression analysis confirmed that, in many cities, high vacancy rates or rent increases were statistically significant predictors of NMTC investment. Together, these results provide new evidence that gentrifying census tracts may draw tax-subsidized investment away from other eligible areas. They also suggest that a commonly proposed Opportunity Zones reform—to add statutory safeguards modeled after those in the NMTC—would fail to prevent tax-subsidized investment in places that are already gentrifying. The observed spatial patterns reflect inefficient allocations, limit the NMTC program’s ability to promote equitable change, and cast doubt about whether federal regulators can effectively shape program outcomes. Opportunity Zones are likely to have similarly inefficient and inequitable outcomes. Therefore, this Article argues that statutory and administrative reforms are necessary to reduce the frequency at which tax incentives are used to subsidize investment in neighborhoods that are already gentrifying. This study has profound implications for the $5 billion per year federal NMTC program, the $3.5 billion per year federal Opportunity Zones program, and state-level tax incentives modeled after these federal tax laws.

This Article develops a typology of place-based investment tax incentives that can be used to evaluate the relevance of empirical findings, identify new areas of research, and predict the impact of specific tax incentive designs. This typology will be especially valuable for the purpose of analyzing the new federal Opportunity Zones investment tax incentives. This Article makes several contributions to tax, poverty, and empirical legal literature. First, it defines the category of place-based investment tax incentives and identifies key elements of variation across the category. Second, the typology presented here can be used by both tax and poverty law researchers to help assess the applicability of existing empirical studies to specific types of place-based investment tax incentives. Third, this Article identifies areas for further legal and empirical research. As this Article explains, community oriented types of place-based investment tax incentives, which contain features specifically designed to benefit residents of poor communities, are uncommon under existing law. These rare types of tax incentives are theoretically promising and enjoy some empirical support; nevertheless, due in part to their rarity, they have been largely understudied. The most complete understanding of place-based investment tax incentives, therefore, will require additional research about the ideal design and impact of community oriented investment tax incentives.

Place-based investment tax incentives known as enterprise zone laws have historically been used as a method for subsidizing investment in low-income communities. Scholarly and policy treatments of enterprise zone laws commonly discuss them as if there is a unified approach to designing these programs. This report finds, however, that although most (33/50) states have enterprise zone laws, these programs vary significantly in important respects — including zone eligibility requirements; eligible investment types; incentives to invest in human capital or affordable housing; and taxpayer eligibility. Understanding these variations is particularly important to understanding how past experience with enterprise zones can inform new place-based incentives, such as those that have been introduced in the federal Opportunity Zones program.