The voice of entrepreneurs is needed now

Tax reform provision provides another example of why entrepreneurs need to be at the table for our communities.

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The voice of entrepreneurs is needed now
Jason Wiens
Policy Director Ewing Marion Kauffman Foundation

Opportunity Zones with entrepreneurs at the center have more potential to create the jobs, wage growth, and economic dynamism necessary to lift up distressed communities. #ZeroBarriers #OpportunityZones

Stop us if you’ve heard this before: a promising bi-partisan economic incentive program created in Washington, D.C., requires state and local guidance. Five years go by, and we wonder why this once-promising opportunity didn’t live up to expectations.

We encourage entrepreneurs, and those who champion entrepreneurs, to make sure state policymakers, especially governors, are aware of the Investing in Opportunity Act so that it better supports all of our communities.

Email your governor and ask, "How are you designating Opportunity Zones in regard to the Investing in Opportunity Act?"

Email Your Governor

From our point of view, that happened in the past because entrepreneurs weren’t at the table helping to drive the conversation, and the incentives got used for more traditional economic development purposes that didn’t support entrepreneurs or help young firms grow.

However, with a recently passed provision in the tax reform law, we have a chance to break this rut and keep this promising program … promising. If we act soon, entrepreneurs and those who support entrepreneurs can make a difference.

A tale of what’s possible

As a whip-smart Ivy League student studying natural resources at Cornell University, Sarah Bellos had a world of choices after graduating. She could have followed a path many of her peers took, accepting jobs at big companies in New York, or with the government in Washington, D.C.

But Sarah was pulled in another direction.

She was horrified at a rapidly collapsing agricultural system and worried sick about the environmentally harmful products we all consume. Case in point, it’s likely that the "blue" in your blue jeans comes from formaldehyde.

Sarah realized that many big companies, such as Levi’s, wanted to source natural fibers instead of formaldehyde but didn’t have a ready, steady supply. So, she set out to create it.

Sarah moved to Franklin, Tennessee, in the north-central part of the state, and started working with farmers across Tennessee and Kentucky to grow indigo, with a goal of reaching the 100,000 family farms in the region that used to grow tobacco but had been left behind.

Today, her company, Stony Creek Colors, has raised more than $2 million, created dozens of jobs, and is building a successful business with customers like Levi’s.  The community has benefited from an influx of capital and new jobs because of Sarah’s business.

This is an inspiring story. But it doesn’t happen enough. As a country, we can no longer bear the cost of declining entrepreneurship.

Barriers to opportunity

Our nation’s makers, doers and dreamers face too many barriers when starting a business. Even Sarah, with her education and connections, had to overcome the challenges of geography to access capital and talent. Every community across the country has at least one entrepreneur like Sarah who has uncommon vision, talent, and potential, but can’t access opportunity.

Part of the problem is that capital is not distributed equitably. Just three states receive 75 percent of venture capital investment, for example. According to the Annual Survey of Entrepreneurs, among firms that started with at least $100,000 in capital, only 4 percent were Hispanic-owned and 1 percent were black-owned.

Systemic gaps in the market prevent the flow of capital to thousands of entrepreneurs like Sarah.

A new opportunity provides incentives for investors to close these gaps.

An opportunity for our communities and entrepreneurs

A little-known provision of the recently passed tax reform law called the Investing in Opportunity Act has some potential to address gaps in entrepreneurship that have left too many people and communities behind—but only if entrepreneurs engage in this conversation and help policymakers understand how it can support business creation and growth in underserved areas.

The Economic Innovation Group, which played a leadership role in advocating for the Investing in Opportunity Act, has summed up the opportunities.

Here are the basics:

  • If an investor sells any asset (real estate, stocks, private equity holdings) he/she can re-invest the gains into new businesses without paying capital gains on that investment for 10 years. If that same investor holds the investment for 10 years or more, he/she pays no capital gains on the NEW investment and gets a 15 percent discount on the original 10-year deferred capital gains. The value to private investors: you can defer the capital gains tax you would pay.
  • Investments must be in businesses that have a tangible presence (e.g. headquarters with majority of employees) in "Opportunity Zones," which will be census tracts designated by governors of all 50 states from among eligible tracts meeting specific thresholds for being economically disadvantaged. Governors can declare up to 25 percent of eligible census tracts in a state as Opportunity Zones.
  • Governors of all 50 states must declare Opportunity Zones by March 21. If your state’s governor doesn’t declare a zone, your state will miss out on this opportunity.

We’re not saying that this one incentive program will reverse the long-term decline of entrepreneurship. However, it is one tangible and real economic development policy that can give investors another incentive to look more closely at businesses like Stony Creek Colors and entrepreneurs in overlooked communities.

What can you do?

As we said at the outset, entrepreneurs and those who support entrepreneurs need to be at the table in these types of discussions.

The potential benefits of Opportunity Zones aren’t guaranteed to go to entrepreneurs. Investments in a range of projects would qualify for preferential treatment. If we are to infuse entrepreneurship into economic development models then we need to take every opportunity for entrepreneurs to tell their stories and encourage a broader thinking of incentive allocation.

In this specific case, if governors hear the voice of entrepreneurs in designating Opportunity Zones, they can identify areas of their states that have the highest potential to create a better entrepreneurial economy. Without entrepreneurs in these discussions, Opportunity Zones could be designed with other primary uses in mind (e.g. real estate development).

While other projects are not necessarily a bad thing, we believe an Opportunity Zone strategy with entrepreneurs at the center has more potential to create the jobs, wage growth, and economic dynamism necessary to lift up distressed communities.

To get the entrepreneurs' voice in this discussion:

  1. Call your governor’s office to make sure they are aware of this new law and ask how they are designating Opportunity Zones.
  2. If you are working on an economic development project or entrepreneurial community in a tract that meets the criteria, advocate for your governor to designate your census tract as an Opportunity Zone, and tell a story about how you can help entrepreneurs like Sarah.
  3. Stay tuned to Kauffman Currents and encourage friends to get connected for updates about how to engage with policymakers at all levels to create a new approach to economic development.

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