Opportunity Zones are a US model that Canadian First Ministers consider, as a way to address the growing urban-rural economic divide.
The Council of the Federation meeting on December 2 will be an opportunity for provincial and territorial premiers to set aside their differences and coalesce around a set of shared priorities to advocate to the federal government. One key issue of common interest is Canada’s growing regional economic disparity in general and the urban-rural divide in particular. Developing a policy agenda to extend opportunity to rural and economically distressed communities ought to be an animating priority for first ministers.
Place-based economic disparity is hardly new. Canada’s economy has been urban-centric for several decades. But the transition from a goods-producing economy to a knowledge-based economy is accentuating this tendency toward a concentration of investment, jobs and opportunity in our major cities.
Research shows that knowledge-based industries such as financial services or technology tend to cluster in a small number of major centres due to a combination of labour specialization and the benefits of knowledge spillovers. The result is a feedback loop whereby the flow of human and financial capital to places such as Silicon Valley, Boston and New York starts to compound. Urban scholar Richard Florida describes it as “winner-take-all urbanism.”
Canada is not immune to this trend. Just consider that Toronto alone is responsible for nearly 20 percent of Canada’s economic output. Add Montreal, Vancouver, Calgary, Edmonton and Ottawa-Gatineau, and six cities represent more than half of all economic activity in the country. Rural areas, by contrast, represent 90 percent of Canada’s municipalities and yet make up only just over a quarter of our economy.
This has obvious implications for people’s ability to find work and opportunity. It is striking, for instance, that, of Ontario’s 865,000 net jobs created between January 2008 and August 2019, 75 percent were concentrated in Toronto and 12 percent were in Ottawa. The parts of the province that don’t belong to a census metropolitan area lost 76,000 jobs over this period. The national picture isn’t any better, by the way. Rural employment nationally is still below pre-recession levels, while in larger centres employment is up by close to 15 percent.
The upshot is that the “agglomeration effects” of the knowledge-based economy are contributing to growing place-based bifurcation in Canada. American scholar Will Wilkinson refers to this dynamic as the “density divide.”
We increasingly have a multipartisan commitment to try to broaden economic opportunity to include rural and economically distressed communities.
The good news is that Canadian policy-makers are starting to recognize the economic, political and social risks associated with a growing urban-rural divide. Prime Minister Justin Trudeau has appointed a federal minister for rural economic development. Alberta Premier Jason Kenney committed to a suite of new rural-focused immigration initiatives in his election platform. And the Ford government in Ontario recently announced it is considering “potential changes to the tax system” to boost investment in rural and undercapitalized parts of the province. We increasingly have a multipartisan commitment to try to broaden economic opportunity to include rural and economically distressed communities.
The question is, What can policy-makers do about the divide?
The answer may lie in a new, bipartisan policy experiment in the United States. The Opportunity Zones model, originally cosponsored in 2017 by Democratic Senator Cory Booker and Republican Senator Tim Scott, is attempting to use a combination of tax inducements to pull private investment into undercapitalized communities. It is too early to render judgment on the model’s overall effectiveness, but its objectives and basic design warrant the attention of Canadian policy-makers.
The Opportunity Zones model is targeting an estimated $6.1 trillion in unrealized capital gains as a prospective pool of private capital for American communities starved for investment. The federal framework provides a set of preferential tax policies on capital gains in order to induce investors to deploy their capital into roughly 8,700 neighbourhoods and communities that have been designated as Opportunity Zones due to their poor economic performance. Investments must flow through qualified Opportunity Funds (special-purpose funds set up by foundations and private fund managers to participate in the initiative) and must target qualified assets including real estate, equities and business start-ups.
One of the strengths of the model is that it is a largely bottom-up exercise. The policy framework was established by Washington, but the designation of the Opportunity Zones was carried out by state governments using a common set of economic criteria. Each state was generally allowed to designate up to 25 percent of its low-income census tracts, based on its poverty rate or level of median family income. Research by the Urban Institute verifies that the states have generally targeted places with high poverty rates, low investment and poor employment performances.
Investment decisions are, by and large, left to a combination of market forces and investor choice. The only real condition is that investors must invest in a designated zone. The model is otherwise generally market-driven and neutral with respect to asset classes, investment structure and rates of return. Some Opportunity Funds are targeting high rates of return and others are driven by “social impact” objectives. But the key point is that these decisions are not centrally planned.
A final strength of the model is its intergovernmental cooperation and policy innovation. Opportunity Zones represent an affirmation of the virtues of federalism. Washington has set a basic framework, and states and localities are augmenting it with their own policies and priorities. Several states have matched the federal tax preferences. Others have gone further and enacted a wider panoply of policy incentives (including skills training, loan financing and so on) in order to leverage the federal framework. Cities similarly have actively participated, through community development corporations and local business associations, to try to use Opportunity Zones to bring private capital into their communities. The result is a combination of new energy, ideas and much-needed attention to rural and economically distressed parts of the United States.
It is worth recognizing that the initiative has faced some challenges. There have been political issues involving the designation of certain Opportunity Zones and delays in rolling out the regulations for some types of investments. But the model has been designed with a careful eye to minimizing distortions and creating the conditions for long-term, sustainable investment. It is notable, for instance, that even lower-band estimates find that Opportunity Funds are expected to raise as much as $44 billion in private capital.
The Council of the Federation should champion the Opportunity Zones model here in Canada. It is an innovative policy model that can transcend partisanship or regionalism. Premiers must remember that the urban-rural divide is not limited to any one province or territory. This can be a nation-building project.
Making progress on the Opportunity Zones model will require intergovernmental cooperation. The federal-provincial integration of tax policy and administration in most provinces and territories requires that Ottawa participate. This should not necessarily be perceived as a major impediment. There are reasons to think that the Trudeau government could be receptive to the idea, given its commitment to inclusive growth, and that Opportunity Zones would require no new public spending. The Council of the Federation should use its upcoming meeting and accompanying communiqué to promote and support the Opportunity Zones model in Canada.
At a moment when our political leaders ought to be searching for ways to promote national unity, an ambitious, innovative agenda to extend economic opportunity to rural and economically distressed communities is a worthwhile bet. Opportunity Zones can represent a breakthrough not just for Canadian federalism but for bridge-building between our urban and rural communities.
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