The federal opportunity zone program, aimed at spurring growth in underserved areas, could cause major budget pain to New York City and state, according to a new watchdog report.

Passed as part of the Tax Cuts and Jobs Act in December 2017, the program allows investors to defer or avoid taxes on capital gains if they are invested in qualified opportunity zone funds and placed in low-income communities. Nationally, nearly 9,000 communities across the United States were nominated. In New York, there are 514 approved and designated census tracts in the program that include areas across the city, Long Island and rural parts of the state.

A Citizens Budget Commission report released this week, reported by Bloomberg, has found that the the program could result in the loss of $2B in tax revenue for the federal government.

New York state and city budgets — because the state generates 14% of all capital gains nationally — could be disproportionately affected. The annual loss could be as much as $63M for the state and $31M for the city, per the CBC report, for the next 10 years.

That figure could increase as opportunity zones participants begin to pull their money out.

"For investors and fund managers, the combination of deferring gains, reducing tax bills, and excluding future gains from taxation will boost returns on investment," the CBC wrote in the report. "The program, however, may come at a high price to taxpayers."

The programs could make up for the losses if the intended development does happen, in the form of higher property and payroll taxes from the jobs and projects created. But opportunity zone critics and advocates alike have criticized the lack of oversight or tracking written into the regulations, which could prevent any concrete evidence as to positive or negative effects of the program.

"Economic development spending in New York continues to increase without meaningful improvements in transparency, program design, or performance measurement," the CBC report noted. "The state’s decision to conform to the federal OZ program without imposing additional transparency or accountability measures adds to this trend."

The new zones have sparked a wave of excitement throughout the commercial real estate industry. Supporters of the program say it will push billions of dollars into low-income communities from investors who would have never invested there otherwise.

However, so far the main flurry of activity has occurred around events and marketing opportunities for the zones, as Bisnow reported earlier this month, not in investing in properties or businesses yet. Early data from CoStar shows funds are only bringing in about 10% of their targeted capital.