The Arizona Charitable Credit

For the past two decades, residents of Arizona have had the unique opportunity to redirect some of their tax dollars to their favorite qualifying nonprofits.

When the Arizona Charitable Tax Credit (ACTC) was first introduced in 1997, only 2,894 filers — or less than 1 percent of all eligible taxpayers in the state — claimed the credit. By 2015, that figure had risen to over 130,000 filers, who used it to direct more than $36 million to 811 state-approved charities across Arizona in that year.

How It Works

The ACTC is a nonrefundable credit for voluntary cash contributions to two types of eligible nonprofits: a qualifying charitable organization (QCO) and a qualified foster care charitable organization (QFCO). This differs from the charitable tax deductions that most taxpayers are familiar with at the federal level. A tax deduction is a reduction in the amount of taxable income a taxpayer reports to the government, while a tax credit is a dollar-for-dollar reduction in a taxpayer’s tax liability.

In Arizona, for instance, married-filing-joint filers can take a QCO credit of up to $800, while all other filers can take a credit of no more than $400. This means that if a single individual owes $1000 in taxes but voluntarily gave at least $400 to a qualifying nonprofit, his net tax liability is reduced to $600. The dollar-for-dollar reduction allows taxpayers to give to their preferred charities at virtually no additional cost to themselves, which may in part account for the ACTC’s growing popularity. By comparison, a charitable deduction reduces a filer’s tax bill by only 25 cents for every dollar on average.

According to the Arizona Department of Revenue, a qualifying charitable organization is “a 501(c)(3) that spends at least 50% of its budget on services to Arizona residents who receive TANF [Temporary Assistance for Needy Families] benefits or low-income residents of this state and their households. Low-income individuals means persons whose household income is less than 150% of the federal poverty level.”

Arizonans also have the option to give to a qualified foster care charitable organization (QFCO). A QFCO must meet all the requirements of a QCO and in addition “must provide ongoing services to at least 200 foster children in Arizona and spend at least 50% of its budget on ongoing services to foster children in Arizona.”

For those donating to the foster program, a $500 credit is available to those filing individually and a $1000 credit is available to married couples that file jointly. Arizonans have the option to utilize both of these credits, among others available in the state, so long as the credit amount is not more than the total tax owed. While the credit is not refundable, taxpayers are able to carry forward unused amounts for up to five years.

History

The Arizona Charitable Tax Credit has gone through several iterations over the years since the state government first approved it in 1997. All the while, however, there persists a steady trend: greater access to the tax credit for both taxpayers and charitable organizations.

Initially, the tax credit came with a “baseline year requirement,” meaning that the credit would only apply to contributions made to qualifying nonprofits that exceeded “the total amount deducted on the taxpayer’s Schedule A in the taxpayer’s baseline year.” This meant that the credit was only available to taxpayers that had charitable contributions as itemized deductions on their Schedule A in either 1996 or the first taxable year after 1996 in which this condition was met.

Beginning in 2009, however, the “baseline year requirement” was eliminated and replaced with a provision that the taxpayer merely itemizes his or her deductions in the tax year for which the credit is claimed. As would be expected, the expanded access to the Charitable Tax Credit resulted in a sharp rise in the number of Arizonans who claimed it — from roughly 50,000 filers to nearly 62,000.

In 2012, the need to itemize deductions was phased out altogether and individuals who opt for a standard deduction on their taxes became eligible to receive the credit. In addition, the credit was broadened to include qualifying foster care organizations. This allowed tens of thousands more Arizonans to begin redirecting their tax dollars to the qualifying charity of their choice.

From 2011 to 2015, the number of taxpayers in Arizona who claimed the credit nearly doubled, and the contributions sent to qualified charities rose by more than $14 million.

The evident success of the Charitable Tax Credit combined with the lobbying efforts of faith-based organizations in the state, like the Arizona Catholic Conference, prompted lawmakers to double the credit in 2016. Arizona Senate Bill 1216 increased the original credit amount of $400/$200 to $800/$400 for married-filing-jointly filers/others. It also augmented the QFCO credit from $800/$400 to $1,000/$500 and made it possible for taxpayers to take separate credits for their contributions to QCOs and QFCOs.

Impacts and Benefits of the ACTC

The effects of the Charitable Tax Credit on the state of Arizona have been remarkable. Since the credit’s inception in 1997, taxpayers have redirected more than $209 million to charities across Arizona that work to help the poor.

As of 2017, the Arizona’s Department of Revenue indicate there are now 811 qualifying charitable organizations and 36 qualifying foster care organizations in the state, among which Arizonans can select the most deserving of their tax dollars.

As previously noted, the number of taxpayers who claim the credit, and therefore the total number of tax dollars that are being diverted to charitable organizations, continues to climb year after year. In fact, the trend has persisted despite any changes — either up or down — in the broader economy. For example, in just the first three years of the Charitable Tax Credit’s existence, total contributions to charity via the credit in Arizona more than tripled, from $476,691 to $1,792,123. The upward trend continued throughout the 2000s, reaching approximately $37 million in 2015.

The most recent data available (2009) indicate that the largest beneficiaries of the credit have been the United Way, St. Mary’s Food Bank, the St. Vincent De Paul Society, the Community Food Bank of Southern Arizona, and the Salvation Army.

This suggests that in the early years of the tax credit, larger, better-known nonprofits reaped most of the benefits of this influx of cash to the voluntary sector, while smaller charities with less name recognition seemingly remained at a competitive disadvantage. In recent years, however, there has been a growing movement to “keep tax-credit dollars local” with the rise of community coalitions and the support of local mayors and city government. For example, the Arizona Charitable Tax Credit Coalition (formed in 2013), the Flagstaff Tax Credit Coalition (2013), and the Verde Valley Tax Credit Coalition (2015) are each dedicated to raising local awareness about the ACTC and encouraging contributions to qualifying nonprofits in their own communities. In fact, the Flagstaff Credit Coalition has successfully managed to keep tax-credit dollars local to the tune of $258,530 in 2013, $496,018 in 2014, $527,557 in 2015, and a whopping $701,910 in 2016.

Local First Arizona sums up its support for the ACTC and the need for local coalitions in this way: “As Americans, a percentage of our earned income is taxed by our federal and state governments. If left alone, we have little control over where this money goes and often surrender it to programs outside our local communities. Utilizing tax credits is a tangible way to ensure our hard-earned money is returned directly to organizations and programs that make an impact in our local economy.”

Giving taxpayers a choice in where their tax dollars do the most good not only strengthens communities, it also provides citizens with a direct check on their government. After all, individuals who make use of the tax credit are in effect sending the message that the charity of their choice provides a certain service more effectively or efficiently than their government. This, in turn, compels government agencies and departments to compete with their counterparts in the nonprofit sector for Arizonan’s tax dollars. Meanwhile, as awareness of the tax credit grows and competition between state agencies and charities large and small for those dollars increases, these entities become incentivized to improve their services across the board.

The Resilience of the ACTC

One of the most fascinating aspects of the Arizona Charitable Tax Credit is how resilient it has remained to political winds.

In short, taxpayers love them. The nonprofits who provide services to the poor that are not provided by the government also love them. The ACTC lives on because the genie is out of the bottle and a better way of serving local communities has been exposed for all to see.

While some Arizonan politicians have decried tax credits for “robbing” the state’s general fund of tax money they believe it needs, those who feel that way clearly cannot get enough support to repeal them. In fact, not only has the ACTC not been repealed but — as previously noted — it was just recently doubled in 2016. For these reasons, the ACTC represents not only positive change for Arizona — and indeed a model for the rest of the country — but change that can be permanent. Individuals’ regaining control and responsibility over how their tax money is spent is a powerful thing. So often, the People lead their politicians, and this is a development that politicians and state agencies outside of Arizona may well become increasingly well disposed toward, as compassionate Americans all over the country welcome it with open arms for the benefit of their own communities.

Get the Charitable Credit for your state.