Here’s how the federal tax bill could encourage investment in 25 poor Alaska communities

WASHINGTON — Struggling communities in Alaska could find themselves in line for new investments in the near future if a provision of the tax bill passed in December encourages investment like its congressional backers hope.

Time is nearly up for Gov. Bill Walker to pick 25 "distressed" communities in Alaska to designate as "opportunity zones" where investors can win tax breaks by investing their money.

The new law gave Walker until March 21 to choose the communities out of 68 qualifying census tracts, for approval by the Treasury Department. But it allows for a one-time 30-day extension, which the governor plans to request, according to his press secretary, Austin Baird.

Walker's "team is currently working to make sure Alaska takes full advantage of this program and is able to make the best use of these opportunity zones," Baird said Friday.

Once the federal government signs off on the chosen zones, private investors will be able to defer capital gains taxes — or avoid some of them entirely — by investing their money in those distressed communities.

People often hold off on selling stocks, bonds, real estate and other items on which they will make a profit because they will have to pay capital gains tax on that profit, even if they plan to reinvest the money elsewhere. This tax provision offers a chance to defer and sometimes lessen the tax money owed, if the money is reinvested in these opportunity zones.

There are potential zones across the state, including in areas around Anchorage, Juneau and Fairbanks, as well as more far-flung and rural locales.

Proponents of the law say that there are trillions of dollars being kept out of the economy by investors avoiding tax penalties. But by opening an opportunity zone investment fund and using the money to start businesses in qualifying areas, investors will be able to avoid losing money and add new jobs in a community that needs them.

The provision passed without much notice — and no floor debate — as part of the tax bill that Congress passed in December. It came from a bill introduced in 2017 by Sen. Tim Scott, R-S.C., along with some bipartisan support.

Neither Alaska senator co-sponsored the legislation at the time. But Sen. Dan Sullivan is part of Scott's "Economic Opportunity Coalition," a group focused on measures like this one.

Scott got his opportunity zone bill from the Economic Innovation Group, a think tank founded by Sean Parker, known for launching Napster and once running Facebook.

EIG identifies "distressed communities" by a set of seven factors: adults with high school diplomas; the poverty rate; prime-age adults not working; the housing vacancy rate; the median income ratio; the change in employment in recent years; and change in number of business establishments.

"The Great Recession gravely impacted distressed communities, and the subsequent recovery has done little to help them rebound. Yet the roots of their economic dislocation generally predate the latest economic cycle. In fact, most of today's distressed ZIP codes have no gains in employment or business establishments to show for the first 15 years of this century," according to an EIG report.

The idea is that bolstering local businesses leads to more local businesses. Fill the storefronts, and jobs will follow.

The opportunity zones provide investors several levels of incentives to invest in pained communities and keep their money there.

People of means can take money that would normally be subject to capital gains taxes if they moved it and invest in opportunity zones. The capital gains they would normally have to pay can be deferred until the end of 2026, or until they move the money again, whichever comes first.

There's also a tax break on that original investment, depending on how long the investment remains in the community. There is a 10 percent tax discount at five years, and 15 percent discount starting at seven years. Profits from additional investments in the fund, if it is held for 10 years, will be exempt from capital gains taxes.

The idea is to encourage investments to stay in a community, rather than something that ends up becoming an accounting trick for the wealthy.

Despite Alaska's vast rural landscape, the state actually falls far below national average for populations in distressed communities. Just 3.6 percent of Alaskans live in distressed communities, compared to 15.2 percent in the average state, according to EIG. (More than half of Americans living in such communities are in the South.)

Sullivan is hopeful, however, that the provision "has significant potential to spur economic growth in our state," he wrote in a letter to Walker on Thursday.

"No doubt, choosing which zones will qualify will be a complicated process and I'm confident that you'll reach out to communities and businesses across Alaska to ensure that the Opportunity Funds are used to promote economic growth in our underserved communities," Sullivan wrote.

Baird did not say how the governor's team was narrowing its potential options from the 68 census tracts that meet the federal criteria.