In 2016, Arizona enhanced a tax credit program to allow taxpayers to make donations to foster care-related charities in lieu of paying taxes to the state, providing often cash-strapped nonprofits with a new mechanism to boost their bottom lines.
The move has yielded direct benefits to dozens of nonprofits that qualified under the program. Casa de los Niños, for example, saw $1.6 million in tax credit donations in 2016, according to a Department of Revenue report.
But some government watchdogs say the use of charitable tax credits has contributed to broader shortfalls in human services spending. Despite the boon for individual nonprofits, the state has taken a considerable hit – $4 billion in lost revenue over the years – because of tax credits and tax cuts, and those are hard to roll back, according to David Lujan, director of the Arizona Center for Economic Progress.
David Lujan, director of the Arizona Center for Economic Progress. Photo: Arizona Center for Economic Progress
“We oppose all new tax credits and all new tax cuts. A better fiscal policy is to invest revenue in priorities that will benefit all across the state,” Lujan said.
The original tax credit program was established in 1997, and two years ago a new law increased the limit on the credit and created a new category for foster care-related charities under the program. The foster care tax credit is now capped at $1,000 for married joint filers and $500 for individuals; before 2016 the ceilings were $800 and $400, respectively.
The augmented credit and foster care designation clearly boosted revenue going to some of the 43 nonprofits that qualified as foster care charities.
“It definitely helps organizations like ours a great deal, there’s no question,” said Lisa Webster, director of development and community relations for Casa de los Niños. Once her organization made the switch from a “qualified charitable organization” to one with the special foster care designation, tax credit donations jumped by about $1 million, she said.
Based on the caps for the foster care credit, somewhere between 1,500 and 3,100 donors gave to Casa de los Niños through the tax credit in 2016. Over 22,000 individuals took advantage of the program and contributed to foster care organizations that year.
Two organizations, Child Crisis Arizona and Christian Family Care, both saw more than $2 million in contributions through the program. Eight of the 43 qualifying foster care organizations saw contributions of more than $500,000, including Arizona Friends of Foster Children Foundation which pulled in $774,945.
The tax credit donations help ensure that the families who depend on organizations like Casa de los Niños continue to get the services they need, regardless of who sits at the governor’s desk. But it may also be a mechanism that rends holes in the social services safety net for those families.
Lujan used schools as an example.
“You have to look at who benefits,” Lujan said. “In schools with more than 75 percent of their students who are low income, you only see somewhere in the range of $13 to $19 per student in tax credit revenues. But in schools with less than 25 percent of low-income students, you see closer to $90 per student in tax credits. It increases inequity in schools.”
The Great Recession also contributed to Arizona’s financial struggles. Since 2008, almost $276 million has been cut from programs that help children and families, according to data from the Joint Legislative Committee and Children’s Action Alliance.
“Our organization, just like many, took a pretty large hit at that time, and that was at the same time that we started seeing the numbers of kids in out-of-home care really escalate,” Webster said.
At the time, Casa de los Niños operated a shelter for children who had been removed from their families, which it closed about a year ago. But the organization also provides parenting classes and other services for families who need help, and in the future, it plans to offer on-site childcare.
Whether it can count on the state to subsidize the cost of those childcare services remains to be determined.
With the exception of 2003, Arizona has passed new tax credits or tax cuts every year since 1990, according to the Arizona Center for Economic Progress. All that’s required to pass a tax credit is a simple majority, Lujan said, but ending a credit is more complicated. Any legislation that would increase state revenues must be approved by a two-thirds majority.
Most corporations get away with paying a $50 minimum income tax, according to Arizona Department of Revenue data for 2014, and Governor Ducey has said his goal is zero income tax for the state’s working population.
Lujan points to Kansas as a cautionary tale where, in 2012, the legislature passed a tax cut bill that reduced income tax revenue by 25 percent in the first year.
Duane Goossen, who ran the Kansas state budget office for 12 years, told the Arizona Republic last year: “The moral of our story is ‘Don’t do what Kansas did.'”
The result of eliminating the income tax on small business and chopping down the income-tax rate for individuals has been disastrous, Goossen said. To make up the difference, legislators have increased sales tax, leaving Kansas with one of the highest grocery taxes in the country.
In the same story, Ducey told the Republic that comparing Arizona to Kansas was “apples and oranges” because he believes the changes he’s made will produce a different result than Kansas, citing states like Florida and Texas as better analogs.
