State governors selected the zones from a list of eligible census tracts, based on a formula used to calculate eligibility for another federal effort to aid struggling areas, the longstanding New Markets Tax Credit. Governors were allowed to designate one-quarter of eligible areas as opportunity zones. Their designations were approved by the Treasury Department.
Most of the zones are in areas that have fallen behind economically, despite robust growth across the American economy. Ms. Gelfond and Mr. Looney calculated that the average poverty rate in a designated zone was 29 percent in 2016, nearly twice the national average. The zones are more heavily disadvantaged than the eligible areas that governors did not select, they found, and generally target areas where economic mobility is low. In other words, states did largely select areas that were truly in need of investment and economic help.
But the relatively broad criteria allowed governors to choose some low-poverty, higher-income, rapidly developing areas adjacent to low-income zones. They constitute about 200 of the nearly 8,800 zones that Treasury approved, including the waterfront area that Amazon has chosen in Long Island City.
Brookings estimated that 11 percent of the final opportunity zones have lower poverty rates than the national average. A third of the zones in Washington, D.C., for instance, are already gentrifying quickly, according to estimates by the Urban Institute. Among the states, New York has the highest share of gentrifying areas, with 13 percent of its zones in areas that are beginning to prosper.
Areas like Long Island City “are already getting a lot of capital,” said Brett Theodos, a principal research associate in the Metropolitan Housing and Communities Policy Center at the Urban Institute. “This use case was allowed from the beginning. Whether that’s a good use of public subsidies is another question.”
After Mr. Trump’s tax cut passed, Mr. Theodos developed a ranking system of sorts to help states steer their designations toward areas that most needed the help. The system assigns each eligible tract in every state an “investment score,” which measures commercial, small-business and housing lending activity on a scale of 1 to 10 based on the need for investment. It also attaches “socioeconomic change flags” to areas that appear to be gentrifying, based on recent upswings in median income, housing costs and the share of residents who have college degrees or are white.
The riverfront tract in Long Island City scored a 9 on that investment scale, and was flagged for gentrification.