Doubts Emerge on GOP Tax Breaks to Lure Investors in Rural Zones

On the fringe of Appalachia and nestled between rolling hills with wooded forests, Killbuck, Ohio, is the kind of place that investors tend to pass over. Federal and state officials tapped it, along with some 8,700 other “distressed” census tracts, as an opportunity zone during the first Trump administration, offering federal tax breaks to anyone willing to invest there.

Seven years later, Killbuck hasn’t seen a single opportunity zone investment.

Now, Republicans are trying again to drive investment into towns like Killbuck, adding deeper short-term tax breaks for investments in rural opportunity zones as part of their new tax-and-spending law. Lawmakers pitch the new provisions as a windfall for small-town America, a way to see some share of the opportunity zone investment—mostly in real estate—that overwhelmingly has flowed to urban areas.

But investors and critics are skeptical that the law will spur a rush of rural investment, in part because long-term investors get the same break regardless of where they invest. Even proponents are wary of calling the new law an outright win for rural areas.

Regulators will need to patch the program before significant investment starts flowing to rural tracts, said Jason Watkins, a partner at consulting giant Novogradac.

“There’s absolutely more work to do,” he said.

Graphic: Andrea Vittorio/Bloomberg Tax

Fundamental Challenge

The GOP law makes permanent the Opportunity Zone program established in the party’s 2017 package.

“The changes will result in more targeted investments into small towns nationwide,” Rep. Mike Kelly (R-Pa), chair of the House Ways and Means subcommittee on tax, said in a statement.

The first iteration has struggled to generate rural investment because urban projects maximize the program’s most lucrative aspects.

Once investors realize capital gain, they can defer their tax liability for five years if they put the funds toward projects in an opportunity zone, low-income census tracts nominated by governors. When the tax bill comes due, investors need only pay taxes on 90% of that gain. Under the new law, that drops to 70% if the investors put their money in rural zones.

But if investors manage to keep their investment—rural or otherwise—for a decade, they can keep their future gains tax-free.

That last piece is important, said Nick Rosenthal, co-CEO of Griffin Capital Company, a private equity firm that invests in OZs. The initial incentives are nice, he said, but the most lucrative aspect remains the tax-free gains after 10 years.

Rosenthal said that simply investing in any opportunity zone is less important than making a good investment there, which Griffin Capital has determined is multifamily housing in metropolitan markets. He said some of his clients have expressed interest in the new rural incentives since the law was enacted July 4. But he’s told them to instead aim for the 10-year benefits and stick to what’s worked in the last eight years. Despite the initial benefits, investing in riskier rural projects could leave money on the table long-term.

“Investors are losing the forest through the trees,” Rosenthal said he’s been telling clients.

Many other major OZ investors have drawn similar conclusions. A 2024 Novogradac report found that capital raised by residential-only OZ funds dwarfed other asset classes, and the bulk of the other capital went toward urban-focused uses like retail or office space.

That pattern has left behind rural locations like Killbuck, where real estate isn’t the most sound investment. Almost no money went toward projects in rural areas of Ohio, found an analysis by Good Jobs First, a nonprofit generally opposed to the program. That mirrored a 2024 reportfrom Congress’s Joint Committee on Taxation, which found that almost 94% of investments went toward urban areas nationwide.

Because the long-term tax savings are so lucrative, OZs are bad at spurring investment that wasn’t going to happen anyway, said Anya Gizis, an economic research analyst at Good Jobs First who wrote the Ohio report. While the new incentives might send a flurry of investment to rural areas, Gizis said it’s hard to imagine investors flocking there without an explicit requirement.

“I don’t think it’s really going to make that much of a difference,” Gizis said.

Fight for Manufacturing

Mark Leininger has sensed a similar problem in his role as the county official overseeing the OZ that includes Killbuck, one of the only jurisdictions in that census tract with sewers and running water. It’s hard to get any investment in a place like that, opportunity zone or not, said Leininger, director of the Holmes County Economic Council. What little investment he sees usually comes from expansions of existing businesses.

Novogradac’s Watkins hopes rural OZs see investment from already-operating businesses, because it’s unlikely real estate investment will flood the rural zones.

But a manufacturing company might go there, he said.

Regulations from the 2017 program put a squeeze on investors looking to put money toward existing business: To qualify for funds, businesses needed to have purchased 70% of their tangible assets after 2017. That meant existing businesses needed to more than triple their amount of tangible property, something Watkins said isn’t feasible. Spooked, investors instead flocked to real estate.

Watkins brought his concerns to President Donald Trump’s transition team in a January letter, but his recommendations didn’t make it into the final bill.

The Treasury rebuffed similar calls when it crafted OZ regulations for the first iteration of the program. Watkins hopes that the current Treasury might come to the opposite conclusion.

“Let’s make sure the rules are modified so that the types of investments that work in rural areas can work,” Watkins said.

Leininger hasn’t completely abandoned his opportunity zone on the fringes of Appalachia. At this point, he expects investment to come by way of miracle, from some angel investor with ties to the area. Otherwise, he said, “It’s kind of a hard sell.”