Who Gains from Charitable Tax Credit Programs? The Arizona Model

• Published date: 01 January 2005
• DOI: http://doi.org/10.1111/j.1540-6210.2005.00430.x
• Date: 01 January 2005
• Author: Carol J. Vita,Eric C. Twombly

Who Gains from Charitable Tax Credit Programs? 57

Carol J. De Vita

Eric C. Twombly

The Urban Institute

Who Gains from Charitable Tax Credit Programs?

The Arizona Model

The Bush administration and some states have promoted charitable tax credits as a way to in-

crease private charitable giving, to support antipoverty programs, and to allow taxpayers to

directly determine the utility and effectiveness of nonprofit services. Looking at Arizona’s chari-

table tax credit program, this study assesses the strengths and limitations of this policy approach.

Although charitable giving increased during the first two years of the program (1998 and 1999),

tax returns from 2000 suggest it may be difficult to sustain these gains in a weak economy. Larger

and better-known nonprofits and taxpayers who itemize their returns are the primary beneficia-

ries of the program. The program may put small but well-run organizations at a competitive

disadvantage, weaken accountability in the sector, and pose administrative challenges to state

departments of revenue. This analysis suggests that tax credits are not a panacea for the funding

needs of nonprofits.

During the 2000 presidential campaign and at the start

of his administration, President George W. Bush called for

an increase in support to faith-based and community orga-

nizations that fight poverty and assist needy families and

individuals. He proposed extending the Charitable Choice

provision of the 1996 welfare reform legislation to other

federal programs and introduced a series of tax incentives

aimed at encouraging private donations to organizations

that serve the poor and fight poverty (De Vita and Wilson

2001). Although the extension of the Charitable Choice

provision has generated heated debate, proposals designed

to stimulate charitable giving, such as charitable tax cred-

its, may have far broader implications for how we direct

our nation’s resources to alleviate and overcome poverty.

The idea of a charitable tax credit has been promoted

since the mid-1990s by several conservative think tanks

and members of Congress. Like the charitable tax deduc-

tion, the charitable tax credit is an incentive to stimulate

giving (see appendix 1, “Charitable Tax Deductions ver-

sus Charitable Tax Credits”). Almost all of the charitable

tax credit proposals rest on the assumption that individual

taxpayers—rather than government bureaucrats—should

have a stronger voice in determining how the needs of low-

income families and communities are addressed (Waller

2001). In general, these proposals share three common

goals: (1) to increase private charitable giving, (2) to allow

taxpayers to directly determine the utility or effectiveness

of charitable services, and (3) to support antipoverty pro-

grams. The proposals assume that individual donors know

the needs of their local communities, can assess the capac-

ity and quality of local service providers, and will respond

favorably to the tax incentive.

These assumptions raise important policy and adminis-

trative questions: How will program eligibility be defined?

Will taxpayers respond to the incentive? Which organiza-

tions will benefit? And finally, what are the implications

for nonprofit fundraising and program accountability? A

handful of states (Arizona, Colorado, Michigan, and North

Carolina) have enacted state charity tax credits to stimu-

late giving, but very little research on these programs has

been conducted. Because the Arizona charitable tax credit

Carol J. De Vita is a senior research associate in the Urban Institute’s Center

on Nonprofits and Philanthropy, where she studies the role, financial capac-

ity, and networks of nonprofit organizations in local communities. Her work

focuses on faith-based groups and their ability to provide services in low-

income neighborhoods. E-mail: Cdevita@ui.urban.org.

Eric C. Twombly is a research associate at the Urban Institute. His research

focuses on community-based social service provision, and he is currently

directing a project of community-based organizations that serve children

and youth in the Washington, DC, metropolitan area. E-mail: Etwombly@

ui.urban.org.