Want to help the needy? Tax credits, not government grants, work best

What if a taxpayer could take his or her tax dollar, turn it into 10 dollars ... and then use it to help their most vulnerable neighbors — including those who are hungry, those who are experiencing homelessness, those who are in the grip of addiction and those who are navigating the foster-care system? 

That multiplicative one-dollar-becomes-10 magic is essentially what Arizona’s charitable and foster care tax credits perform.

The only problem? Until now, no one knew how powerful these credits truly are. 

A new study by Common Sense Institute Arizona reveals the massive positive impact these tax credits have for Arizona’s neediest citizens, nonprofit sector and economy.

The insights from this study point a clear path forward for any other state to reap similar benefits in providing for its disadvantaged. 

State government isn't nearly as efficient

Arizona first created a Working Poor Tax Credit in 1998. Various hurdles limited this credit’s popularity until a 2009 reform significantly increased its taxpayer use.

Then, in 2016, the so-called Qualifying Charitable Organization program was split into two parts via the creation of a separate credit for qualifying foster-care organizations.  

Today, Arizona taxpayers may avail themselves of both the charitable and foster-care credits, now indexed to inflation. (For joint filers, the current caps are $841 and $1,051, respectively.)

In 2020, more than 200,000 Arizona taxpayers used these credits to the tune of $109 million. That’s $109 million less in taxes owed to the State of Arizona, and $109 million more for Arizona’s charities and nonprofits.

Some folks might think that it would be better for the state government to get those funds. But consider: Up to 70% of incoming taxpayer dollars are swallowed up by state bureaucracy before emerging on the other side as state-directed grants or state-provided services.

That means $109 million of taxpayer funds results in only about $33 million worth of services — many of which are ultimately provided by private charities.

Tax credits can provide more services

What happens when taxpayers themselves direct that $109 million straight to qualified charities? First, the overhead percentage is dramatically lower. The qualified charities who responded to Common Sense Institute’s survey reported an average of just 12% in overhead costs.  

Second, Arizona’s tax credits induce the state’s citizens to give more than they otherwise would, and more than what they can claim as a credit on their taxes.

Common Sense Institute estimates that in 2020 the increase in charitable giving traceable to the tax credits was not $109 million, but rather between $335 and $486 million.

Gov. Hobbs sticks it to GOP:By claiming credit for tax rebate

Qualified charities received far more, in additional gifts and reputational effects, from tax-credit donors than just the capped tax-credit amount. 

Back to that tax-credit magic.

Whereas in the absence of the credits, $109 million would flow through the state government and result in $33 million of services, with the tax credits the institute estimates that Arizona’s citizens provide over $335 million of services directly to those in need. 

Tax credits are a great deal for Arizona

Arizona’s tax credits are therefore an incredible deal — and an incredible accomplishment for public policy. But there are at least two more reasons to feel good about this legislative program. 

• The first reason is an economic one: The tax credits are a boon to Arizona’s nonprofit sector and overall economy, resulting in the creation of 14,000 to 40,000 jobs and an increase to Arizona’s annual Gross Domestic Product of between $700 million and $2.5 billion. 
• The second reason is philosophical: The tax credits are profoundly democratic.

They allow citizens to decide for themselves which public charities deserve their support.

That not only helps create robust competition for donor dollars; it also means that the charities supported represent a truly wide range of perspectives, methodologies and regional emphases. (As an aside, Common Sense Institute notes that rural Arizonans are disproportionately helped by the tax credits).

At the same time, public charities must meet meaningful criteria in order to be eligible for the program, which ensures that the state’s most needy and vulnerable citizens are the ultimate winners. 

As we enter what nonprofits everywhere call “the giving season” — on average, nonprofits receive one-quarter of their private funding in December alone — Arizonans can be grateful for the ways in which their state’s tax credits inspire and multiply generosity.

Few legislative initiatives work as well as this one. Other states should take note of this Arizona success story.

We hope more Arizona taxpayers will utilize this opportunity to directly invest in their communities by using the program.

Jeremy Beer is co-founder and CEO of AmPhil, a consulting firm for nonprofits. César Chávez is a Community Steward Fellow at the Common Sense Institute Arizona and was a state representative from 2017 to 2023. Reach them at jbeer@amphil.com and cesar@oraclestrategies.net.