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CAIN’S VISION for Opportunity Zones

• Renew distressed inner cities by reversing counter productive incentives and bureaucratic micromanagement by re-introducing market based entrepreneurship.

• Create the most productive environment, rather than trying to control outcomes.

• Understand there is no “one size fits all” approach and leave the highest degree of freedom to the creativity of local entrepreneurs and risk takers to figure out kind of businesses to create, what type of jobs to create and how big or small the job creators should be.

• Take a comprehensive approach that addresses the extra burdens government places on inner cities. The “Government Wedge” drives employment and wages everywhere,including inner cities. But only in inner cities is the Wedge compounded with the adverse consequences of “social engineering” and “industrial policy”.

• Acknowledge that production drives the economy. The mindset that “consumption drives the economy” is supportive of welfare dependency and redistribution schemes. The production mindset says “To better myself, I must make someone else better off. Before I can satisfy my needs I must first satisfy another’s needs.” With this mindset, Opportunity Zones can be viewed as areas rich in underutilized human resources and potential.

• Recognize that people respond to incentives. We have negative outcomes in inner cities largely because of negative incentives.

• Make it incentive based, so that only positive results and success are rewarded.

• At present, the phase out of means-tested benefits acts like a very high marginal tax rate. Much of the inner city population faces a marginal rate of 70% to over 100% as income moves from $22,000 to $40,000, if the phase out is treated as a tax. Why try to earn one more dollar if 70-100% is taxed.poverty trap can be closed.

• Tax relief should focus on payroll taxes since most new businesses are not profitable in early years. Further, this would attract lower skill, labor intensive businesses which would be a better match for the labor force.

• Make the application process voluntary but competitive. Base the award of an Opportunity Zone on how far state and local authorities are willing to go to increase incentives and reduce barriers and how much local support is in place. Essentially, we “match” only the best ideas that are most likely to succeed.

• Ideally, the zones should apply their understanding of Cain’s 3 Economic Guiding Principles:

1. Production drives the economy, not spending,

2. Risk taking drives growth

3. Measurements must be dependable, and focus on how reducing the “Government Wedge” enhances productive activity.

• Create a limited number of Opportunity Zone designations so that the scarcity drives value and encourages competition, but encourage each zone to be as large as possible.

• Establish minimum qualification standards based on poverty levels, unemployment levels and other objective measures indicating a distressed area.

• Winning districts will be awarded an Opportunity Zone based on the ability of local entrepreneurs to identify barriers holding them back. These will vary market to market.

• Only those in the zone know best what is holding them back. There will be no one size fits all. The following are issues we hear most often and represent a few examples:

• Local permitting process is to slow and cumbersome.

• All building codes, regulations, restrictions, and requirements should be reviewed from the standpoint of whether they impede economic growth.

• Minimum wage laws prevent many unskilled and inexperienced workers (i.e. teens) from getting their first job and prices them out of the market

• Zoning laws are outdated and hold back development

• Prevailing wage laws unfairly restrict the supply of labor

• There should be more tenant control of HUD properties

• Access to contracts and capital is skewed towards big business

• Incentives that are anti family should be repealed.

• Help should be based on a “hand up”, rather than a “hand out”

• Allow not just local governmental authorities but community groups, churches, and private sector associations, to submit plans indicating how barriers should be reduced and incentives increased to best suit their local circumstances. This empowers the community to take action without relying on the establishment to take the first step.

• Applicants should demonstrate visibility and local support of proposals.

Opportunity Zone Design

• The 9-9-9 Plan will essentially turn the whole country into one giant Opportunity Zone. Some of the most attractive features of the original Enterprise Zones, such as a zero capital gains tax, immediate expensing of business equipment, and no payroll taxes are “factory installed” in the 9-9-9 Plan for the whole country to benefit.

• In addition, districts designated as Opportunity Zones will have the following additional benefits:

• Deductions to employers for the total amount of payroll within in the Zone, subject to income limits. By basing it on payroll and not income, it reduces “gaming” and helps new businesses which generally don’t generate profits in early years.

• Value-added businesses that are more labor intensive get the most “bang for the buck.” This will match the existing labor pool better than, say, a high tech R & D lab or a law firm.

• Deductions will not be limited to “new” businesses or “new” jobs but are designed to benefit all within the Zone. Why not provide relief and reward those already struggling in the Zone, many of whom have been doing so for a long time. They are most likely to lead to economic renewal.

• Anyone living in the Zone will get a deduction (not a credit) and anyone working in the Zone will get a deduction (subject to income limits).

• Means tested benefits should be restructured or reformed so they don’t counteract the incentives for work.