Tax Incentives Enter the Defense Frontline: How the US Leverages Opportunity Zones to Bolster Shipbuilding and Submarine Capacity
The constraints on the US defense industrial base now lie less in budgets than in physical capacity. Washington is turning its tax code into a quiet lever to mobilize private capital and rebuild maritime manufacturing.
3 Key Takeaways
- Physical Bottlenecks: Shipbuilding capacity depends on more than defense budgets; it rests on physical assets, yards, drydocks, skilled labor, and long-term capital.
- Long-term Alignment: The revised Opportunity Zone rules defer capital gains tax and exclude later appreciation, and their 10-year holding period matches the long build-out of defense infrastructure.
- New PPP Financial Models: In cases such as CapZone and the Mobile Naval Yard, private capital invests in physical shipyard infrastructure and pairs it with AI compliance systems, creating a new model for public-private partnerships.
The pressure on US military capability is moving from defense budget lines down to the industrial floor. For the Navy, submarines and warships are not off-the-shelf items that can be delivered as soon as a contract is signed; they depend on shipyards, drydocks, physical facilities, skilled welders, castings and forgings, modular assembly, port infrastructure, and long-term training pipelines.
The Navy's FY2027 shipbuilding plan, released in May 2026, says the service will invest $6.2 billion over fiscal years 2027 to 2031 to strengthen the Submarine Industrial Base (SIB), with the goal of raising output to at least one Columbia-class ballistic missile submarine and two Virginia-class attack submarines a year. The plan calls this the Navy's top industrial base priority.
This rebuilding cannot be funded by the defense budget alone. The United States is increasingly using its tax system as a tool to mobilize capital for defense capabilities. The clearest examples are the revised Opportunity Zones (OZ) framework and CapZone's United Submarine Alliance Fund. According to the US Department of the Treasury, the 2025 "One Big Beautiful Bill Act" made OZ tax incentives permanent and set up a 10-year cycle for redesignating zones.
The regime fits shipbuilding not because the sums are large but because the reward comes in year ten
| Dimension | Ordinary capital markets | The Opportunity Zone regime |
|---|---|---|
| Time preference | Favors a fast exit. | Rolling eligible capital gains into a Qualified Opportunity Fund defers the tax; hold for at least ten years and the appreciation is excluded through a basis adjustment. The largest reward sits at year ten. |
| What assets it fits | Liquid holdings with a clear exit. | Shipyard land, drydocks, module fabrication, training centers, and port infrastructure: all take years to stand up, and none can be moved. |
| The gap it addresses | Short-term grants buy equipment, not throughput. | For the defense industrial base, patient capital suits land, plant, and equipment better than short-term grants. The Navy’s FY2027 shipbuilding plan (released May 2026) commits $6.2 billion over FY2027–2031 to the submarine industrial base, targeting at least one Columbia-class and two Virginia-class boats a year. |
| Where it applies | Capital gravitates to metropolitan, liquid markets. | The revised regime tilts rural: the substantial-improvement threshold drops from 100% to 50% for wholly rural zones, and 3,309 of the 8,764 existing zones are designated as such. |
From Community Renewal to Strategic Defense Capital
Opportunity Zones began as a community development tool. Under IRS rules, Qualified Opportunity Zones are economically distressed communities where eligible new investments receive preferential tax treatment. Investors who reinvest their capital gains in a Qualified Opportunity Fund (QOF) can defer the tax on those gains. If they hold the investment for at least ten years, any appreciation is excluded from capital gains tax through a basis adjustment.
What makes this design useful for defense is that it changes capital's time horizon. Financial markets generally favor quick exits, whereas shipyards, modular manufacturing sites, training centers, and deepwater ports take years to build out. Because the OZ framework saves its main tax benefit for long holding periods, it encourages investors to keep their money in physical assets and local industry.
For the Defense Industrial Base (DIB), this kind of patient capital is better suited than short-term subsidies to closing gaps in land, plant, and equipment. The revised rules also tilt toward rural and non-metropolitan areas. Under 2025 IRS guidance, the "substantial improvement" threshold for property in Opportunity Zones made up entirely of rural areas falls from 100% to 50%, and 3,309 of the 8,764 existing zones qualify as entirely rural.
This matters for defense production. Many shipbuilding, energy, critical mineral, storage, aerospace, and supply chain nodes are located far from major financial centers. If tax incentives lower the barrier to investment, places that capital markets have long overlooked have a chance to reconnect with national industrial and security needs.
The Maritime Crisis Gives Tax Policy a National Security Dimension
The decline of the US maritime industry has made this tax tool a matter of national security. The White House's 2025 executive order "Restoring America's Maritime Dominance" stated that decades of government neglect had weakened US commercial shipbuilding capacity and the maritime workforce, eroding national security. The order called for rebuilding maritime manufacturing capacity, expanding recruitment and training, and securing more stable funding.
The order also called for a plan for "Maritime Prosperity Zones," modeled on Opportunity Zones, to attract US and allied investment in maritime industries and waterfront communities. The policy role of the OZ program is widening: once mainly a tool for community development and local revitalization, it is becoming a model for rebuilding US shipbuilding, ports, the maritime workforce, and supply chains.
The CapZone case matters because it ties this tax incentive directly to submarine production capacity. A 2024 announcement from Naval Sea Systems Command (NAVSEA) noted that the US submarine industrial base had shrunk to one-third of its size 30 years earlier, that submarine production must nearly double, and that an additional 3.5 to 4.5 million hours of modular production and assembly work are needed each year.
CapZone's United Submarine Alliance Qualified Opportunity Fund acquired the 355-acre Alabama Shipyard and renamed it the Mobile Naval Yard. The goal is to develop an additional 75% of the site into infrastructure supporting submarine production, workforce training, and industrial capacity.
This is more than a land deal. NAVSEA noted that the Gulf Coast site has a deepwater port, existing facilities, infrastructure, and a skilled labor pool, and sits next to Austal USA, an established Navy shipbuilder. The yard is slated to support Columbia- and Virginia-class submarine module fabrication, additive manufacturing, and workforce training.
The Navy is thus shifting part of the pressure on capacity from a few large prime contractors to regional defense nodes. Distributing capacity this way helps reduce single points of failure and brings local industry back into the national defense supply chain.
Three Direct Impacts: Assets, Capital, and Public-Private Partnerships
The arrival of Opportunity Zones in the defense sector has at least three effects.
First, defense infrastructure becomes an investable asset class. Traditional tools such as government grants, defense procurement contracts, and Defense Production Act (DPA) funding target specific equipment, production lines, or companies. OZs, by contrast, package land, shipyards, plants, training centers, and energy infrastructure into long-term investments, allowing private capital to take part in building defense capacity on the basis of after-tax returns.
Second, the pool of capital available to meet Navy requirements grows. The Defense Department's 2024 implementation plan for the National Defense Industrial Strategy (NDIS) prioritized Indo-Pacific deterrence, munitions, missiles, submarine production, supply chain localization, cybersecurity, and materials stockpiling. Rebuilding on this scale requires mobilizing government, private, and allied resources together.
Third, a new generation of public-private partnerships (PPP) gains a financial structure. In this model, the government signals demand and sets oversight requirements; private funds acquire physical assets, raise capital, and manage operations; and technology companies supply digital and compliance systems.
In 2025, ServiceNow and CapZone announced a strategic partnership to deploy the ServiceNow AI Platform as the digital backbone for mission-critical manufacturing facilities. Beginning with the Mobile Naval Yard, the platform will deliver solutions for risk management, enterprise asset management, AI automation, supply chain visibility, and OZ compliance reporting.
If it can be replicated, this model will change how defense capacity is built. The traditional approach relies on congressional appropriations, service contracts, and prime contractor expansion. The OZ model adds another layer: private capital invests in the infrastructure first, which is then leased or made available to suppliers that meet Navy needs. It turns defense demand into a regional industrial platform and ties defense rebuilding to local jobs, training, and port upgrades.
Tax Policy Can Mobilize Capital, but It Cannot Substitute for Governance
This model should not be romanticized. Opportunity Zones are tax incentives; they do not automatically resolve shipbuilding delays, cost overruns, or supply chain management problems.
A 2025 GAO report found that Navy shipbuilding has consistently suffered cost overruns and delays, and that the delay to the lead Columbia-class submarine could add hundreds of millions of dollars in costs. Another GAO report warned that without a ship industrial base strategy, the Navy will struggle to manage the industrial base for shipbuilding and repair effectively.
OZs also do nothing on their own to keep out adversarial capital. The tax code draws in long-term capital, but cybersecurity, foreign investment screening, and other national security safeguards depend on other instruments. The Department of the Treasury notes that the Committee on Foreign Investment in the United States (CFIUS) has the authority to review certain foreign investments in US businesses and certain real estate transactions by foreign persons to determine their effect on national security.
Place-based tax incentives also have a targeting problem. A 2025 NBER study found that both Opportunity Zones and the New Markets Tax Credit (NMTC) direct investment toward lower-income, higher-poverty areas with weaker labor markets, but OZs are less well targeted: census tracts in the lowest two income deciles received 65% of NMTC investment, compared with only 49% for OZs.
Without explicit government purchase commitments, local governance, and transparent data, tax-advantaged investment may flow to places that are easier to develop and offer clearer returns, rather than to the most critical defense gaps.
That is why the CapZone and Mobile Naval Yard case is worth watching. Its policy value lies not only in the tax break but in whether the break can be combined with Navy demand, local physical assets, operating capability, digital governance, and national security review into a coherent policy package.
The tax code buys the top two layers; the bottom two need other machinery
- Land and existing facilitiesCapital handles it directly
The United Submarine Alliance Qualified Opportunity Fund acquired the 355-acre Alabama Shipyard site, renamed it Mobile Naval Yard, and aims to develop an additional 75% of it for submarine production, training, and industrial capacity.
- Drydocks, deepwater port, surrounding infrastructureCapital handles it directly
Large, long-lived assets fixed to the land: exactly the profile that suits a holding structure with its tax benefit in year ten. NAVSEA notes the site’s deepwater port, existing facilities, skilled workforce, and proximity to an established Navy shipbuilding contractor.
- Module fabrication, additive manufacturing, equipmentCapital helps, but not enough
Capital buys equipment; it does not buy the process qualification that turns equipment into accepted output. Acceptance standards for submarine modules do not relax because a new building has opened.
- Skilled trades and trainingCapital helps, but not enough
NAVSEA noted in 2024 that the submarine manufacturing base had shrunk to a third of its size 30 years earlier, and that 3.5–4.5 million additional module fabrication and assembly hours are needed annually. Hours are filled by people, and people take years to train.
- Cost and schedule managementOutside the tax code’s reach
The GAO reported in 2025 that Navy shipbuilding faces persistent overruns and delays, that the lead Columbia-class boat’s slippage could add hundreds of millions of dollars in construction costs, and that without executing its shipbuilding industrial base strategy the Navy will struggle to manage construction and repair capacity.
- Adversary capital and investment screeningOutside the tax code’s reach
The tax code attracts long-dated capital; it does not ask where the capital came from. Excluding adversary money depends on other machinery, such as CFIUS, which reviews foreign investment in US businesses and certain real estate transactions by foreign persons.
Private capital handles it directlyCapital helps but cannot finish itBeyond the tax code; needs other institutions
Opportunity Zones package land, yards, buildings, and port infrastructure into long-dated investable assets: the top two layers. In the middle two, capital helps without finishing the job; equipment can be bought, but process qualification and skilled hours cannot. The bottom two lie entirely outside the tax code, and that is where overruns, delays, and screening of the capital’s origin sit.
There is also a targeting problem. NBER research published in 2025 found that 65% of New Markets Tax Credit investment went to census tracts in the lowest two income deciles, against 49% for Opportunity Zones, which are less well targeted. Without government demand, procurement commitments, and local governance alongside it, the money flows to whatever is easiest to develop and clearest to price, which need not be the most pressing defense gap. The tax code can provide leverage, but it cannot replace the rest.
Source: Impactful Creative, compiled from the 2024 NAVSEA notice, 2025 GAO reporting, 2025 NBER research, and the CapZone Mobile Naval Yard case described in this articleTax Policy as a Quiet Lever for Rebuilding the Defense Industry
The Mobile Naval Yard is an early test case. The United States is trying to link tax breaks, regional development, defense procurement, private equity, AI management systems, and supply chain rebuilding. The approach does not replace defense appropriations; it adds a layer of capital leverage on top of them.
The constraints on US military capability can no longer be solved by any single weapons program. Shipyard capacity, module fabrication hours, supply chain resilience, skilled workers, and patient capital are becoming part of military competition.
The arrival of Opportunity Zones in the defense sector shows that the United States has begun to use the tax code as a tool for building capacity. Beyond buying weapons, the government is shaping after-tax returns so that private capital moves into defense infrastructure early. This quiet piece of institutional engineering may become an important lever for rebuilding American shipbuilding and submarine capacity.
Sources
- U.S. Department of the Navy, U.S. Navy Shipbuilding Plan May 2026, 11 May 2026
- U.S. Department of the Treasury and Internal Revenue Service, Treasury, IRS provide guidance to States for nominating census tracts as qualified opportunity zones under the One, Big, Beautiful Bill (IR-2026-45), 6 Apr 2026
- Internal Revenue Service, Treasury, IRS provide guidance for Opportunity Zone investments in rural areas under the One, Big, Beautiful Bill (IR-2025-96), 30 Sep 2025
- The White House, Restoring America's Maritime Dominance, 9 Apr 2025
- Naval Sea Systems Command (NAVSEA), Navy Partners with Private Industry to Grow Submarine Industrial Base Capacity, 20 Sep 2024
- ServiceNow, ServiceNow and CapZone Announce a Strategic Partnership to Build a National Network of Next Generation Digital Solutions for Mission-Critical Manufacturing Facilities, 23 Jul 2025
- U.S. Government Accountability Office (GAO), Navy Shipbuilding: A Generational Imperative for Systemic Change (GAO-25-108136), 11 Mar 2025
- U.S. Government Accountability Office (GAO), Shipbuilding and Repair: Navy Needs a Strategic Approach for Private Sector Industrial Base Investments (GAO-25-106286), 27 Feb 2025
- National Bureau of Economic Research (NBER), The Targeting of Place-Based Policies: The New Markets Tax Credit Versus Opportunity Zones (Working Paper 33414), Jan 2025
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