PD Editorial: An opportunity for California to attract investors

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The Trump administration hasn’t done many favors for California.

But Santa Rosa officials are counting on a capital gains break in the 2017 tax law to boost one of their top priorities: reshaping downtown into a vibrant, urban residential hub, with mid-rise apartment buildings where young professionals and empty-nesters can live near rail and bus lines and restaurants, theaters and shops.

A matching state tax break would make investments in Santa Rosa and other California communities even more attractive.

Santa Rosa’s vision — which has the ancillary benefit of reducing greenhouse gas emissions — isn’t new, and it isn’t out of line for a city of 180,000 people. Moreover, the timing is good, with Bay Area residents and companies on the lookout for nearby alternatives to the punishing cost of living in San Francisco and Silicon Valley.

Yet the goal has proven elusive.

To bury a reputation as a tough place for builders to do business, Santa Rosa is offering a menu of incentives, including density bonuses, reduced fees and an express lane for applications from interested builders.

There is interest: A group of about 40 Bay Area developers recently toured downtown to look at possible building sites.

So far, however, no one has applied.

“At the end of the day,” Assistant City Manager David Guhin told the Editorial Board, “it takes private investment.”

That’s where the federal tax law comes in.

The law probably is best known for sticking about a million Californians with an estimated $12 billion in additional taxes for 2018 by capping the deduction for state and local tax payments.

But it also created “opportunity zones,” where investors can get federal breaks.

The zones are census tracts with poverty rates at or above 20 percent, or with median family incomes below 80 percent of regional averages.

Investors who put money into an “opportunity fund,” which backs projects in the newly created zones, can defer federal capital gains taxes for seven years. If they hold onto the investment for 10 years, they’ll pay no tax on the gain.

At least 90 opportunity funds have been established, according to news accounts, and investors are expected to jump in quickly to enjoy the full benefit of the program, which is scheduled to expire in 2028.

Last month, three Sonoma County locales were designated as opportunity zones: Roseland, the Springs area on the outskirts of Sonoma and downtown Santa Rosa.

That’s one more incentive to invest here, Santa Rosa is telling prospective builders.

“The big catch is the state hasn’t officially followed suit yet,” Guhin said.

At least 34 other states are offering tax advantages for investing in opportunity zones.

Gov. Gavin Newsom, speaking at an opportunity zone symposium at Stanford in March, said California should, too. His budget proposal included language conforming state and federal tax laws regarding opportunity zone investments.

The deadline for approving a state budget is June 15. It will be a missed opportunity for Santa Rosa and California if the final budget doesn’t match federal incentives to invest in California’s opportunity zones.

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