A new bill in the state Legislature would supplement federal tax incentives by offering a state tax break to those that invest in opportunity zones.
The federal opportunity-zone program — passed as part of the Tax Cut and Jobs Act in 2017 — now provides a break on capital-gains taxes to those who invest in so-called opportunity zones, which are typically places where development has been slow to occur. Wisconsin has 120 opportunity zones, which were chosen in part using census data.
The new bill, labeled Senate Bill 440, would in effect allow opportunity zone investors to double the tax-break percentage they can receive from a project in a Wisconsin opportunity zone, said Michael Welsh, director of legislative affairs and communications at the Wisconsin Economic Development Association, which helped draft the bill.
“We wanted to make sure Wisconsin investment dollars stay in Wisconsin, instead of going out of state,” Welsh said. “We thought, ‘Why don’t we sweeten the pot?’ It’s essentially doubling the tax benefit on the state level.”
The bill was introduced this week and referred to the Senate Committee on Agriculture, Revenue and Financial Institutions. Its authors are Sen. Dan Feyen, R-Fond du Lac, and Rep. Nancy VanderMeer, R-Tomah, and it has already attracted bipartisan support.
A spokeswoman for Feyen said if the bill passes, it will give investors in Wisconsin opportunity zone projects a 20% to 30% break on their capital-gains taxes. Lawmakers are working to get the bill passed quickly this fall, noting that the federal opportunity zone program expires in 2026. A fiscal estimate of the bill hasn’t yet been completed. Welsh said the bill would most likely have a “relatively minimal” effect on the state’s tax collections.
With the bill, Wisconsin is following other states that have been trying to provide additional incentives for opportunity zone investors. Earlier this year, Ohio introduced legislation that would give investors in that state’s opportunity zones a 10% break on state income taxes. In Alabama, lawmakers passed a bill that would bolster the federal government’s incentives with a state tax break.
All this comes even as developers, local officials and others are still trying to understand how opportunity zones work. Federal officials, for their part, are working on guidelines for the infant program’s operation.
Generally speaking, investors who want to take on a project in an opportunity zone must put their money into what’s known as an opportunity-zone fund. Funds of this sort are required under federal law to spend 90 percent of their assets on development projects in a zone. For every month that requirement is not met, the fund will be subject to a fine.
Current law calls for the opportunity-zone program to expire on Dec. 31, 2026. Until then, capital gains that are placed in opportunity-zone funds will not be taxed. Investors can also avoid paying taxes on profits from opportunity-zone projects, so long as they keep their money invested for 10 years.
Similar rules are found in the Wisconsin bill. For money held in a Wisconsin project for at least five years, for instance, investors could prevent 10 percent of their deferred gains as counting as income for state tax purposes. After seven years, investors could exclude 15% of their gains. After 10, they could exclude all of them.
To qualify for state incentives, developers would have to ensure 90 percent of the money spent out of an opportunity-zone fund goes to Wisconsin projects. Developers who didn’t meet those criteria would be subject to federal penalties and would have to pay a state penalty amounting to 33% of any federal fine.
Welsh said one goal of the new bill is to encourage investments in opportunity zones. Although opportunity zones are distributed throughout the state, some places will inevitably more be more attractive than others to investors. Because there’s no guarantee the mere existence of the zones will lead to construction, state officials are seeking another way to give developers a nudge.
“We don’t want to make this onerous,” Welsh said. “We want to keep this pretty seamless and easy.”
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