Community Steward Fellowship – César Chávez
Author — Kamryn Brunner
Contents
Acknowledgments 5
Letter From Our Fellow. 6
Introduction. 7
Background & History. 8
The Relationship Between Taxpayers, Non-Profits, and Government 11
Taxpayer Impact 12
Economic Impact of the Non-Profit Sector 15
Community Impact 17
Bottom Line. 18
Appendix A. 21
Appendix B. 22
The authors are grateful to many foundations and non-profits in Arizona for the opportunity and independence to address this important topic. We sincerely appreciate the review and feedback from many individuals and organizations including:
American Philanthropic
Christian Family Care
Kevin Youngblood
Impact AZ
Midwest Food Bank
Phoenix Rescue Mission
Letter From Our Fellow
I am thrilled to present to you the findings of our recent study on the Arizona Qualified Charitable Organization (QCO) and Arizona Foster Charitable Organization (QFCO) tax credits. This comprehensive analysis sheds light on the remarkable impact these tax credits have on Arizona, its communities, and the individuals who benefit from the support of nonprofits.
Our study underscores the substantial influence of these tax credits in promoting philanthropy and strengthening the charitable sector in the state of Arizona. Here are some key highlights:
- Boosting Charitable Giving: The Arizona QCO and QFCO tax credits have encouraged substantial increases in charitable giving. Individuals and businesses alike have leveraged these incentives to make generous contributions to organizations that support causes they are passionate about.
- Community Empowerment: By directing funds towards organizations that serve our communities, these tax credits play a pivotal role in addressing critical issues such as education, healthcare, social services, and more. The ripple effect of this support extends far beyond the initial donation, benefiting Arizona’s most underserved populations.
- Nonprofit Sustainability: Nonprofit organizations in Arizona have experienced tremendous growth and have been able to expand their programs and services, thanks to the consistent financial support received through these tax credits.
- Improving Lives: Most importantly, the study reveals that the ultimate beneficiaries of this charitable giving are the individuals and families who rely on the services provided by nonprofits. From at-risk children to underserved populations, the impact of these tax credits on improving lives is immeasurable.
As you explore the details of this study, you will find compelling data that illustrate the profound effect these tax credits have on the fabric of our communities. The tangible impact on individuals and the collective betterment of society makes a compelling case for the continued support and utilization of the Arizona QCO and QFCO tax credits.
Thank you for your interest in this critical research. We hope this information serves as a catalyst for positive change in Arizona, where the power of giving can truly transform lives. Your ongoing support and dedication to our community make a world of difference.
Sincerely,
Honorable César N. Chávez
Common Sense Institute Fellow
Introduction
Non-profits are among the most trusted institutions in the United States. Over 50% of people say they have a high trust that non-profit institutions will do the right thing[i]. Part of this high level of trust is because they can provide direct services to people in need, they have familiarity within communities, and they are able to respond to immediate needs quickly when they arise. Additionally, their status as non-profits and reliance on volunteers and donations creates an aura of confidence. This is even more pronounced for certain organizations, like participants in Arizona’s QCO/QFCO program. In fact, CSI estimates that Qualified Charitable Organizations (QCO’s) and Qualified Foster Care Organizations (QFCO’s) only get about a quarter of their revenues from government sources (versus a third of revenue overall for non-profits generally) – the rest comes from private sources. Because of these organizations’ independence and because these programs do not depend on government, charitable non-profits can provide a nimble response and efficient relationship between individuals and charities directly. As a result of Arizona’s efforts to encourage the public support of these organizations, the targeted tax credits for QCO’s and QFCO’s appear to have induced increased giving to QCO’s specifically, and Arizona charities generally (beyond just the value of the credits themselves).
Recent revenue shortfalls and expected deficits may require policymakers to seek revenue and spending solutions. For example, earlier in 2023 state policy makers repealed the Results-Based Funding program and reallocated $143 million from the Long-Term Water Augmentation Fund to the General Fund. To provide context around this specific program during such future conversations, CSI provides this report.
Key Findings
- Arizona provides up to $891 per individual taxpayer in tax credits for contributions to Qualifying Charitable Organizations and Qualifying Foster Care Organizations; over 200,000 Arizona taxpayers today (between 5% and 7% of Arizona taxpayers) use the credit to directly contribute over $109 million/year to charities.
- According to CSI’s review of the research, survey of qualifying organizations, and analysis of patterns of giving, the tax credits attract additional investment in non-profits through reputational effects –CSI estimates qualifying organizations would lose (directly and indirectly) between $335 million and $486 million in annual donations but for the QCO/QFCO program.
- State and federal tax data show that credit-ineligible taxpayer giving to Arizona non-profits continued growing even in the period immediately after the QCO/QFCO program was dramatically increased in size. This suggests the program supports new-net giving, rather than supplanting existing charitable donations.
- Based on its review of survey response data and public financial records, CSI estimates that between $200 and $292 million in charitable activity is directed to the states rural areas by Qualifying Charitable Organizations and due at least in part to support from the tax credit program.
- The net economic impact of increased charitable activity provided by qualifying non-profits due to the tax credit program and other induced giving is between $0.7 billion and $2.5 billion increase in annual state Gross Domestic Product and between 14,000 and 40,000 jobs created or supported annually.
Background & History
Figure 1
The tax credits for contributions to Qualifying Charitable Organizations and Qualifying Foster Care Organizations (QCO/QFCO) provides a 100% (“dollar-for-dollar”) income tax credit of up to $500 for contributions to charitable organizations and a separate $500 for contributions to foster care organizations (combined limits of approximately $1,000 for single taxpayers or $2,000 for joint filers). In order to qualify to receive credit eligible donations, an organization must be a 501(c)(3) non-profit that spends at least 50% of its budget on services that meet immediate basic needs such as cash assistance, food, clothing, shelter, job training and placement, childcare for Arizona residents who receive temporary assistance for needy families (TANF), are low income residents with household income below 150% of the federal poverty level, or are physically disabled. An estimated 136,000 individuals receive TANF cash assistance[ii] and 21% of Arizona residents (1.5 million people) are below 150% of the federal poverty line[iii].
The tax credit for contributions to Qualifying Charitable Organizations was created in 1998 and intended to incentivize charitable giving. At the time, taxpayers could claim up to $200 in credits on their state income taxes. In 2013, qualifying foster care charitable organizations were added as eligible QCO’s for purposes of receiving credit-allowed donations[iv]; maximum credit-eligible donation amounts at the time were $400 for single filers ($800 for joint filers). In 2016, the credit was split into two parts, which effectively doubled the maximum amount taxpayers could donate to qualifying organizations. While a taxpayer’s contributions to any one charity were still limited by statutory caps, a taxpayer could effectively now claim two credits by donating to both a QCO and a QFCO[v]. Today, inflation adjustments have increased combined credit capacity to over $2,000 (joint filing) annually. While the credit is dollar-for-dollar on the taxpayer’s return and does not require the taxpayer to itemize, it is not refundable; the taxpayer cannot reduce their income tax liability below zero using the credit.
Figure 2
The original Working Poor Tax Credit (created in 1998) – a predecessor to the modern QCO/QFCO program – required taxpayers to establish a “base year” for their charitable contributions and then would give a credit for contributions above the amount given in the taxpayer’s base year. While this was intended to ensure the credit subsidized only additional giving beyond what a taxpayer might typically or already donate (perhaps using their itemized deductions), in practice this step added additional administrative hurdles for taxpayers attempting to qualify for the credit and potentially excluded any taxpayer that did not itemize their taxes. Today this would represent 90% of all state income taxpayers. To address these problems, the “base year” requirement was removed in 2009; over the following five years, the average number of donors under the credit program jumped 174%.
In 2016, when the tax credit was expanded to two separate credits for charitable organizations and foster care organizations and effective contribution limits doubled, corresponding contributions by Arizona taxpayers increased 103%; this suggests that taxpayer interest in the program is high and the credit limits are binding. Arizona donors to these charities appear to respond to changes in the credit program by changing the amount they donate.
Qualified Charitable and Foster Care Organizations provide similar services to government benefit agencies – including cash assistance, job placement, foster care, food, and shelter for low-income individuals and foster children. These organizations report demand is growing in part due to the rising of cost living since the pandemic, particularly for food, transportation and shelter in the Phoenix area. For example, due to the cumulative effects of inflation since the end of 2020, a typical household would have to spend nearly $23,769 more every year to buy the same things today as they were three years ago; for low-income households targeted by these programs, that simply is not feasible. The cost of rent for a 2-bedroom apartment has increased by over $600 since 2020[vi], and the cost of buying a home is more expensive than ever[vii].
As of 2023, a total of 1,200 organizations are certified Qualifying Charitable and Foster Care Organizations and between 190,000 and 231,000 taxpayers claimed one or both credits in 2020. As everyday items become more expensive, and the housing market becoming more difficult, the services provided by these organizations for the low-income populations in Arizona are increasingly important; CSI expects as more recent data becomes available, it will show that donor interest has continued to grow since 2020 as a result.
According to Philanthropy Roundtables 50-state Index of Charity Regulations, Arizona ranks 8th overall for ease-of-compliance with state and local regulation of non-profits. Arizona has made it relatively easy for non-profits to form and operate. In both paid solicitor regulations and audit requirements, Arizona ranks 1st among the 50 states as charitable organizations do not have to register with the state in order to solicit contributions and Arizona does not require an independent CPA audit. Arizona ranks 7th in overall start up regulations as the state has no top registration fee, does not require registration from charitable organizations, and non-profits do not have to apply for state tax exemption if they are already exempt from Federal income tax[viii]. This flexible regulatory environment cooperates with the state’s taxpayer-facing initiatives incentivizing giving (like the QCO/QFCO credit) to support an environment with both lots of choices and lots of giving, consistent with the findings of this study.
The CSI Nonprofit Survey
To help inform its understanding and analysis of the economic and social impacts of the tax credit program, CSI conducted a survey of Qualifying Charitable and Foster Care Organizations. The survey consisted of 20 questions about the organization’s revenue, people served, location of the organization, and how much the organization has received because of the tax credit. From the list of 1,200 total organizations published by the Arizona Department of Revenue, CSI randomly selected 500 non-profits to receive the survey inquiry. Of those, 51 organizations responded to the survey.
Using data in these responses and from other publicly available data sources, including from the Internal Revenue Service and Arizona Department of Revenue, CSI was able to estimate the revenue generated, the population served by and other characteristics of all Qualifying Charitable and Foster Care Organizations in Arizona.
The Relationship Between Taxpayers, Non-Profits, and Government
In many ways, non-profit charities and governments are both in the business of providing similar social services to their populations. Governments themselves often rely on non-profit partner to provide the “last mile” of services directly to a needy population, via grants to local charities. According to Urban Institute, one third of charity revenue in the United States comes from government grants[ix]. On the front-end – competing for scarce taxpayer dollars directly – there is a documented crowding-out effect that occurs when government taxes (required to fund increased spending, much of which ends up ultimately targeting the same needy populations as local charities and some of which is even passed onto these charities directly as grants) “crowd out” individual donations. One study estimated this effect at up to 38 cents in reduced charitable giving for every dollar in additional taxes.
Figure 3
This effective competition is all-the-more relevant in the context of public trust. In general, recent national survey data has revealed a troubling trend of declining public confidence in traditional institutions[x]. This trend has accelerated since 2020. Non-profits, however, have been consistently rated one of America’s most trustworthy institutions by the public[xi]. While trust in all institutions has been falling over the past four years, public trust in government has fallen by a third while trust in non-profits has declined only 12%. Today, over half of Americans have at least “high” trust in American charitable organizations, versus less than 16% for their government.
On the other hand, in the absence of a government mandate in the form of taxes (and corresponding social spending), it is possible there would not be enough voluntary giving to provide sufficient support and services for those who need it. This could be particularly true in lower-income jurisdictions with the greatest need.
Considering all of these competing findings, it is clear why programs like Arizona’s QCO/QFCO program are particularly valuable; they allow taxpayers some choice in where their state and local income tax dollars ultimately go (their government, or qualifying charities of their choice) based on their personal perception of need and value, while preserving the public’s interest in ensuring a certain amount of the state’s income is earmarked specifically to the provision of general social services. The taxpayer here is not simply allowed to retain their income to spend as they please; they are required by participation in this program to have substituted every dollar in income tax savings with donations of an equivalent amount to qualifying charities providing services to Arizonans.
An acute example of this disconnect between public perception and their government is homelessness; today nearly 80% of Arizonans believe homelessness is getting worse[xii]. According to state and federal headcount data, the number of homeless people in Arizona has increased 23% since 2020[xiii] while CSI estimates that state and local governments in Arizona have spent at least $152 million directly on homelessness since the pandemic (and passed another $640 million or more to other local entities and non-profits). Despite significant financial investment, local governments have been unable to respond to the growing homeless problem in a way consistent with the preferences of the public and taxpayers; Phoenix, for example, had to be compelled by court order to even begin clearing a large homeless encampment in the downtown area from the public rights of way[xiv] [xv].
This lack of visible results from increased funding likely contributes to declining public confidence in government. Arizona’s QCO/QFCO program allows taxpayers to instead divert resources to groups and organizations that they feel are better able to achieve needed results.
Taxpayer Impact
While our initial inclination may be to assume that a tax credit program’s primary value for taxpayers is tax savings, this is not always the case. While it is true that a tax credit provides for a dollar-for-dollar reduction in taxability, in the case of programs like this, to qualify a taxpayer is required to spend just as much (or more) as they would have paid in taxes on other qualifying services (charitable giving, in this case).
Figure 4
Why, then, do taxpayers choose to participate at all? It must be that they value the targeted good or service exceeds for them the value of the alternative (paying the taxes directly). Again, the intuition here is clear if the credit beneficiary is a good or service being provided directly to the taxpayer (like federal Energy Efficiency tax credits, for example, which reward taxpayers who replace their home air conditioning systems with income tax savings). But in this case, the QCO/QFCO is probably not providing services directly to the donating taxpayer. Instead, it appears that giving taxpayers believe the indirect social benefits provided by the qualifying non-profit are at least as valuable as those that would have been otherwise provided by their state government.
To increase charitable giving in Arizona and to benefit charities that provide necessary services for needy populations, policymakers in 1998 created the Working Poor Tax Credit. Since then, the program has undergone several changes making it easier to use and more valuable for Arizona taxpayers. Today, the tax credit provides a dollar-for-dollar income tax credit up to $500 for individuals contributing to QCO’s and up to another $500 for individuals contributing to QFCO’s. Only between 5% and 7% of Arizona taxpayers claimed the tax credit in 2020. While the average tax credit in 2020 for between 200,000 and 230,000 claimants was $458, individual taxpayers could earn up to a total $1,000 in tax credits if they contribute to both types of qualifying organizations. For reference, in 2020 the average filer in Arizona had a state individual income tax liability of $1,752[xvi].
It may be that the tax credit is an inefficient program because it simply allows taxpayers to claim dollar-for-dollar credits for charitable giving they were already making (and perhaps receiving a lesser tax benefit from via their itemized deductions). If this “cannibalization” theory were correct, and the credit program did not generate any new net-new giving, we might have expected to see itemized deductions for charitable giving fall following the large increase in aggregate credit caps in 2016 (from $500 to $1,000 annually). However, the 5-year annual average amount of charitable contributions deducted from gross income according to federal tax returns increased 11% after 2016 when the charitable tax credit was expanded. Also, the 4-year annual average amount of itemized deductions from gross income according to state tax returns increased 1% after 2016. At the same time, 5-year annual average credit-eligible contributions to QCO/QFCO’s increased from $26 million to $91 million during the 5 years after the credit expansion. These results suggest that the QCO/QFCO program complements – rather than substitutes for – other charitable giving, and likely induces a net increase in overall giving rather than a lateral movement of a fixed amount of giving between organizations.
The tax credit also allows taxpayers more control over where their tax dollars go. While Arizona state and local budget issues are political decisions that can be controversial[xvii] [xviii], the tax credit for contributions to qualifying charitable organizations and foster care organizations allows taxpayers to be more selective in who receives those donations, and how they are ultimately used, but subject to general statutory criteria. This system of choice and competition introduced market-mechanisms that should increase the efficiency of giving. For example, it is estimated that, on average, as much as 70% of money budgeted for government assistance programs ultimately goes towards administrative costs and other overhead while only about 30% ends up directly benefiting final social service recipients[xix]. This occurs because at each step in the process between a tax dollar and its ultimate beneficiary, there are administrative costs – first when the money is collected by a state or federal government, then by the agency that receives an appropriation, then by the non-profit or local government that receives a grant or transfer, etc. By removing some of the layers of bureaucratic overhead between the taxpayer and the final needy household, the QCO/QFCO program potentially allowed for lower administrative loss-rates on donated monies.
The Arizona legislature also incurred other positive (and potentially unintended) effects, such as having a larger impact for rural areas. 76% of the state’s population live in the state’s urban counties (Maricopa and Pima). However, Maricopa and Pima have the lowest poverty rates out of all Arizona counties[xx], and the average income in Maricopa County ($75,001/year) is more than twice that of Navajo County ($32,545).
While lawmakers and policymakers can and often do prioritize rural Arizona, it would be natural for their focus to principally be areas where there is the greatest concentration of voters, taxpayers, and economic activity. On the other hand, taxpayers have the flexibility to prioritize different needs, and charities in turn have the flexibility to move activity based on need and demand. For example, while over 80% of charities surveyed report being in Pima and Maricopa counties, 18% of organizations surveyed are located outside of Pima and Maricopa Counties (versus just 24% of the state’s overall population). And fully a third of qualifying QCO/QFCO organizations in Arizona provide substantial services to Arizona’s rural population, according to our research[1]. Suggesting, a substantial share of qualifying organizations located in the state’s urban areas are providing services in rural Arizona. Assuming our results are representative of Arizona’s QCO/QFCO population as whole this means that between $200 and $292 million (an estimated 33% of QCO/QFCO revenue) in charitable activity is directed to the states rural areas via this program.
Academic study also supports the conclusion that tax credit programs like this one provide for a net-increase in charitable giving beyond the value of the credits themselves. For example, a 2016 study of charitable tax credits by Teles found that a similar tax credit program for charitable giving in Iowa resulted in a 125% increase in per capita contributions to community foundations[xxi]. While Iowa’s tax credit program is similar to the QCO/QFCO program in that it directly targets charitable non-profits, it is also different in that the state provides a credit on only a portion of giving but with much higher caps; the Arizona program provides a dollar-for-dollar credit but with lower caps. However, the general finding by Gupta and Spreen that increasing caps or limits on state tax credits for giving to non-profits increases the number and amount donated by taxpayers is probably applicable to Arizona[xxii]. Assuming their results translate to our program, the absence of our states QCO/QFCO program would reduce per capita giving to QCO/QFCO’s specifically from between $82 and $119 to between $37 and $53 (a loss of between $335 million and $486 million annually in donations to qualifying organizations).
Another study of 46 tax credit programs between 2000 and 2016 at the Price School of Public Policy at the University of Southern California – conducted before Arizona expanded the Contributions to Qualifying Charitable Organizations Tax Credit to Foster Care organizations and increased the credit amount – found that a 100% tax credit like Arizona’s could increase the probability of charitable giving by 3.3 percentage points[xxiii]. Given 3.5 million Arizona taxpayers, the QCO/QFCO tax credit could induce as many as 92,500 more Arizona taxpayers to contribute annually than would have otherwise. For context, between 190,000 and 231,000 Arizona taxpayers in total use the QCO/QFCO program, meaning as much as half of them would not give at all but for the existence of the tax credit (according to this study).
The number of qualified non-profits and qualifying contributions by Arizona taxpayers has continued to grow over time, and particularly since the 2016 legislative reforms that significantly expanded the program. That growth has persisted despite the pandemic, rising inflation, and various rounds of tax reform that have lowered Arizonans state and overall income tax liabilities. This is strongly indicative not only that taxpayers and non-profits value the QCO/QFCO designation, but that if anything that value is increasing over time and independently of other tax law changes (like 2017’s Tax Cuts & Jobs Act and Arizona’s 2022 2.5% flat income tax).
Economic Impact of the Non-Profit Sector
While it is now clear that Arizona’s charitable giving tax credit programs creates subjective value for individual taxpayers and induces additional charitable giving beyond the programs direct cost, the tax credit provides some impact on the state’s economy – directly, by providing for increased revenue and employment by the non-profit sector, and indirectly through the social benefits these non-profits in turn provide to Arizonans in need. Research and evidence suggest that there are “multiplier effects” associated with economic activity, offset by opportunity costs. In this case, the QCO/QFCO program induced additional charitable giving to qualifying organizations, at the cost of slightly reduced public revenues. Because some of those revenue likely would have ended up going back to the same activities and even organizations through public grantmaking, though, the opportunity cost is likely even lower than the headline value of the credit program itself (approximately $109 million). Non-profit organizations in turn use resources induced by the tax credits to hire more staff, increase spending, and provide additional social services.
Figure 5
For example, based on its survey response data, CSI estimates that credit-qualifying organizations in Arizona employ between 2,000 and 9,000 people directly and indirectly attributable to money donated by people claiming the QCO/QFCO income tax credit.
To estimate the economic impact of the tax credit to the state’s non-profit or social assistance sector (and broader state economy), CSI used the Regional Economic Models, Inc. (REMI) Tax-PI model. This is a dynamic econometric program that estimates the impact of changes in regional economies using a representative sample of national and state-level macroeconomic data in an input-output model. The North American Industry Classification System (NAICS) defines “social assistance” as a sector that “comprises establishments providing social assistance for individuals. These services do not include residential or accommodation services, except on a short-stay basis.” The sector has its own category pre-defined within the REMI software and is composed of dozens of industries, ranging from “individual and family services” to “vocational rehabilitation services”.
To model the economic impact of the state’s QCO/QFCO tax credit program, we excluded the revenue collected by qualifying non-profits due to the tax credit from the social assistance industry output, and we reduced industry employment by the number of jobs our data suggests non-profits create and maintain only because of credit-eligible donations. Finally, we reduce overall private-sector Arizona employment across all sectors by the number of jobs that CSI estimates are created or support by job and vocational training, housing assistance, and other generalized economic assistance provided to needy low-income Arizonans. Our assumption is that but for this assistance these individuals would not be able to productively participate in the state’s private economy.
The resulting change in GDP, employment, income, and other measures of economic activity form our estimate of aggregate economic impacts of the QCO/QFCO program, or alternatively, the value of the economic activity that would be lost without the program. We use a low (more conservative) and high (more aggressive) estimate of the value of donations generated by the tax credit programs, and the number of jobs created or supported by social service activity to in turn generate high and low estimates of economic value; the mid-point between these two values forms our baseline point estimate. This approach allows us to separately consider the direct, indirect, induced, and dynamic effects of the health care sector on the overall economy.
Direct impacts are initial changes that occur specifically because of the definition of social assistance activities used – for example, the employment, wages, and salaries associated with all Arizona non-profits within the “social assistance” NAICS category. Indirect impacts reflect changes that occur in the supply chain for the directly impacted industries – for example, the suppliers that sell food, clothing, and other necessary supplies to the directly impacted non-profits. Induced impacts reflect changes that occur throughout the economy due to the loss (or gain) of wages and salaries in the directly and indirectly impacted industries – for example, retail spending by Arizona non-profit workers. And finally, dynamic effects are the geographic and compositional changes in the economy in response to the policy shock – like the movement of workers elsewhere when a large local employer closes. As a baseline, the REMI model assumes the Arizona economy employs 4.2 million people and has an annual (real, inflation-adjusted) Gross Domestic Product of $379.1 billion (in 2022).
CSI’s baseline estimates of the tax credits impact on the combined non-profit sector and overall Arizona economy are:
- The creation or support of 28,000 jobs (direct and indirect) for Arizonans,
- A $1.6 billion increase in state GDP
Figure 6
These impacts persist even after assuming government spending would rise by $109 million were this program repealed (due to increases in taxes paid).
To summarize: a $1,000 tax credit program induces $109 million in annual credit-eligible donations to 1,200 qualifying organizations; through halo and reputational effects, this induces between $335 and $486 million in total (credit-eligible and general) giving that would not have occurred otherwise; and finally, this spending and social-service provision by the non-profits generates $1.6 billion in new economic activity within Arizona.
Community Impact
Although the Contributions to Qualifying Charitable Organizations and Foster Care Organizations tax credits are beneficial for individual taxpayers and provides a boost to the state’s economy, the intended outcome of the tax credit is to encourage charitable giving and provide a benefit to charitable non-profits[xxiv]. The tax credit continues to serve Arizonans as they believe that non-profits are providing a valuable service made possible with their tax dollars. For example, CSI estimates that Qualifying Charitable and Foster Care Organizations in Arizona place 3,600 more people into jobs and find permanent housing for 4,400 more people than they would have been able to but for existence of the income tax credit.
Charities and other non-profits provide last-mile services that government is often least able to do. Because these groups rely on local staff and volunteers and direct interactions with the targeted communities, they can provide direct public interaction that government often cannot. On the other hand, the government often tries to act as facilitatory – directing resources to non-governmental organizations via various public programs. This is often because the public shows a strong preference for institutions that are locally operated, and surveys have shown that people see small, local non-profits as more agile, understanding of, and responsive to the communities they serve. This places charities such as Phoenix Rescue Mission and Manzanita Outreach in a unique position to help their communities relative to other alternatives (like government).
Phoenix Rescue Mission, for example, spends 75% or $18 million of their total expenses on program services according to their 990[xxv]. This includes things such as homeless outreach, food assistance, and vocational development. Their annual report says that they were able to distribute 78,800 boxes of food, help 198 people obtain jobs, and rescue 641 people from chronic homelessness in 2022[xxvi]. Manzanita Outreach, an organization that provides food assistance to people in Yavapai county, was able to serve 13,000 people and distribute 1.7 million pounds of food in 2022[xxvii]. 87% of their expenses go directly toward programs assisting people in Yavapai County[xxviii]. Taxpayers that contributed to these organizations and claimed the tax credit perceive the local non-profit as providing a more transparent and direct window into the tangible benefits their resources provide, versus the often indirect relationship created by government taxes and transfers.
It can be difficult to capture the value created by programs and services beyond the dollars and the numbers, especially for programs at (for example) non-profits and charities, where profit and revenue is not the institutional or social goal. CSI’s survey helped address hat difficulty and found that the charitable organizations efficiently use tax dollars to benefit needy populations, and in some cases are better suited to serve these populations than government welfare agencies. For example, based on survey answers CSI estimates that qualified charitable organizations on average spend 81% of their revenue directly on assisting needy populations and only an average of 12% of their donations goes towards administrative costs and operations.
Bottom Line
Arizona’s tax credit for Contributions to Qualifying Charitable and Foster Care Organizations provides a way for taxpayers to allocate money directly to institutions that provide a service they value. As rising inflation affects more and more households in Arizona, making food and necessities difficult to afford, organizations that aid low-income and needy populations are proving ever more valuable to Arizona residents. QCO’s and QFCO’s in Arizona contribute between $0.7 and $2.5 billion to state GDP and add between 14,000 and 40,000 jobs. Beyond this economic benefit, we estimated that the tax credit for contributions to QCO’s and QFCO’s, through halo and reputational effects, induces between $335 and $486 million in total giving that would not have occurred otherwise.
[1] For our purposes, “substantial” means any organization that provides more than 10% of their services to rural areas in Arizona.
[i] “Trust in Civil Society: Headwinds and Opportunities for American Nonprofits and Foundations”, Independent Sector, 2023.
[ii] Rodgers, Angie, “State Fiscal Year 2023 Annual Welfare Reform Report”, Department of Economic Security, 2023.
[iii] “Poverty Status In the Past 12 Months: 2022 ACS 1-Year Estimates Subject Tables” U.S. Census Bureau, 2023.
[iv] Olofsson, Hans, “2020 income Tax Credit Review”. Joint Legislative Income Tax Credit Review Committee. December 18, 2020.
[v] “Credit for Contributions to Qualifying Charitable Organizations & Qualifying Foster Care Charitable Organizations”. Arizona Dept of Revenue. November 2022.
[vi] Farley, Glenn and Brunner, Kamryn, “Housing Affordability in Arizona: September 2023 Update”, Common Sense Institute, October 10, 2023.
[vii] Brunner, Kamryn, “Inflation in Arizona: September 2023 Update”, Common Sense Institute, September 13, 2023.
[viii] Winegarden, Wayne, “The 50-State Index of Charity Regulations”, Philanthropy Roundtable, January 2023.
[ix] Pettijohn, Sarah, “Nonprofits and Governments: A Mutually Dependent Relationship”, Urban Institute, June 10, 2013.
[x] Halpert, Madeline, “Trust in U.S. Institutions Hits Record Low, Poll Finds”, Forbes, July 5, 2022.
[xi] “Trust in Civil Society: Headwinds and Opportunities for American Nonprofits and Foundations”, Independent Sector, 2023.
[xii] “New Survey Reveals Arizonans’ Deep Concern Over Rising Homelessness”, Gila Valley Central, August 3, 2023.
[xiii] “State of Homelessness: Homelessness in Arizona Annual Report 2022”, Arizona Department of Economic Security, December 31, 2022.
[xiv] Blasius, Melissa, “The Zone: Why Phoenix’s Biggest Homeless Camp is Growing” ABC15 Arizona, March 2, 2022.
[xv] Stapleton, Erica, “City of Phoenix Struggling to Clear ‘The Zone’ Before Deadline”, KPNX-TV Phoenix, October 10, 2023.
[xvi] “Annual Report FY 2022”, Arizona Department of Revenue, November 2022.
[xvii] Britschgi, Christian, “NIMBY Cities Are Using Your Tax Dollars to Lobby Against New Housing”, Reason, June 1, 2023.
[xviii] Sarbak, Marissa, “Arizona School Voucher Program Likely to Cost Tax Payers Much More Than Previously Thought”, Fox 10 Phoenix, May 31, 2023.
[xix] Edwards, James Rolph, “The Costs of Public Income Redistribution and Private Charity”. Journal of Libertarian Studies. 2007.
[xx]“Poverty Status In the Past 12 Months: 2022 ACS 1-Year Estimates Subject Tables” U.S. Census Bureau, 2023.
[xxi] Teles, Daniel, “Do tax Credits Increase Charitable Giving? Evidence from Arizona and Iowa”, Department of Economics, Tulane University, April 22, 2016.
[xxii] Gupta, Anubhav, and Spreen, Thomas, “Do Tax Credits Benefit Charities? Evidence From Two States”, Contemporary Economic Policy, July 31, 2023.
[xxiii] Duquette, Nicolas, Graddy-Reed, Alexandra, and Phillips, Mark, “The Effectiveness of Tax Credits for Charitable Giving”, Price School of Public Policy, University of Southern California, October 5, 2018.
[xxiv] Olofsson, Hans, “2020 income Tax Credit Review”. Joint Legislative Income Tax Credit Review Committee. December 18, 2020.
[xxv] “Form 990: Return of Organization Exempt From Income Tax Phoenix Gospel Mission”, Internal Revenue Service, 2022.
[xxvi] “Pheonix Rescue Mission Annual Report 2022”, Phoenix Rescue Mission, 2022.
[xxvii] “Manzanita Outreach, 2022 Annual Report”, Manzanita Outreach, 2022.
[xxviii] “Form 990: Return of Organization Exempt From Income Tax Manzanita Outreach”, Internal Revenue Service, 2022.