Do Charitable Tax Credits Work?

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January 26, 2011; Source: Jersey Journal | New Jersey's neighborhood assistance tax credit program (distinct from its state allocation of federal Low Income Housing Tax Credits) just attracted a hefty investment from TD Bank. As a result of the program, the bank gave Women Rising of Jersey City $350,000 toward renovations of a mixed use building, as well as $397,500 for Housing and Neighborhood Development Services (HANDS) in Orange – see our coverage here – and $252,500 for Parkside Business & Community in Partnership in Camden.

Incentives like this one in New Jersey for charitable or philanthropic giving are always controversial. The implicit notion that charitable giving dollars are fungible, that somehow all charities benefit from increased charitable giving, is of course silly. Some public tax incentives attract giving to address particular kinds of issues.

Would TD Bank have made these "philanthropic" investments without the incentive of the tax credit? No one knows, but one might guess that the projects receiving the tax credit money aren't likely to generate a return to support a straight market investment, thus the importance of the incentive of the state's program.

Does TD Bank "need" a tax credit? The credit incentivizes TD Bank to make the philanthropic gift, in this case, $1 million, and to direct it toward higher risk kinds of projects in inner city locations than the bank might try without the credit. Tax credits, however, are a dangerous road, because they are dollar-for-dollar reductions from a (corporate) taxpayer's tax bill. Fortunately, these state neighborhood assistance tax credits are usually capped to limit how much credits corporate sector donors can take.

Several states such as Connecticut, Virginia, Indiana, and Missouri offer "neighborhood assistance tax credit" programs, modeled more or less on Pennsylvania's approach decades ago and other kinds of state corporate tax credits have also emerged over the years. Programs in states such as Arizona and Florida encourage corporations to donate to funds that provide assistance or scholarships to students who want to attend private schools on vouchers (circumventing direct public subsidization of school voucher programs).

But tax credits are subsidies and need to be examined for the content of the philanthropic or public policy target and the efficacy of the incentive itself – whether it encourages desired behavior or simply rewards corporations for what they would have done on their own without the incentive.—Rick Cohen