Section 3. Using Tax Incentives to Support Community Health and Development

• What are tax incentives?

• What do we mean by using tax incentives to support community health and development?

• Why use tax incentives to support community health and development?

• When might tax incentives be used?

• Who should be involved in decisions about tax incentives?

• How can tax incentives support community health and development?

In downtown Seattle, Washington, the historic Leamington Hotel and Apartments had stood vacant for years as the surrounding area experienced disinvestment and housing instability. The building had originally provided both hotel rooms and longer-term apartments, but it closed in the 1980s.

A housing advocacy organization later began using the property to provide housing for people who otherwise lacked stable housing. When the building was proposed for redevelopment as office space, residents and advocates organized around preserving housing at the site.

The property was eventually redeveloped as the Pacific, combining affordable permanent housing with single-room occupancy units. Federal housing and historic-preservation tax credits helped make the rehabilitation financially possible.

This historical example illustrates one way tax policy can influence private investment in projects that serve community goals. Tax incentives may be used to encourage investment in affordable housing, environmental improvements, employment and workforce development, historic preservation, accessibility, energy efficiency, and other community priorities.

Because tax programs, eligibility rules, and incentive amounts change over time and differ across jurisdictions, communities should consult current federal, state, and local guidance when considering a particular incentive.

What are tax incentives?

An incentive is a benefit intended to encourage a particular action. Tax incentives reduce or modify taxes in connection with activities, investments, or outcomes that a government has chosen to encourage.

Tax incentives may be offered by federal, state or provincial, county, or municipal governments that have authority over the relevant taxes. They may apply to businesses, organizations, property owners, or individuals.

Common forms include:

Tax deductions

A tax deduction reduces the amount of income or other value that is subject to taxation. The financial value of a deduction depends on the applicable tax rules and the taxpayer's circumstances.

For example, a government might allow qualifying businesses to deduct some of the cost of environmental improvements, accessibility upgrades, energy-efficient equipment, or another activity it wants to encourage.

Tax credits

A tax credit generally reduces the amount of tax owed rather than the amount of income subject to tax.

For example, a government might provide a credit for qualifying expenditures related to affordable housing, historic rehabilitation, accessibility, energy efficiency, workforce development, or another public purpose.

Tax reduction, abatement, or forgiveness

Governments may reduce or temporarily waive certain taxes in connection with qualifying investments or activities. Property-tax abatements associated with development projects are one example.

A community might offer a temporary tax reduction for a development that creates local employment, rehabilitates a vacant property, includes affordable housing, or meets other clearly defined community goals.

The details matter. Tax incentives differ in their eligibility rules, duration, value, reporting requirements, and public cost. Before adopting or using one, decision-makers should understand both the intended benefit and the revenue or resources being committed.

What do we mean by using tax incentives to support community health and development?

Governments use tax incentives for many purposes, including economic development. Business investment and job creation can contribute to community well-being, but a healthy community involves more than economic growth alone.

The 1986 Ottawa Charter for Health Promotion identified several fundamental conditions and resources for health:

• Peace
• Shelter
• Education
• Food
• Income
• A stable ecosystem
• Sustainable resources
• Social justice
• Equity

Tax incentives may contribute to some of these conditions by encouraging investments related to housing, environmental quality, employment, accessibility, transportation, energy, health-promoting environments, and other community priorities.

Tax incentives are one policy tool among many. Depending on the issue, communities may also use regulation, direct public investment, grants, procurement policies, technical assistance, public-private partnerships, zoning, or other strategies.

The effectiveness of a tax incentive depends on how well it is designed, who can access it, what behavior it actually changes, and whether the resulting benefits align with community priorities.

Why use tax incentives to support community health and development?

Tax incentives may be useful when reducing the cost of a socially beneficial activity makes businesses, organizations, property owners, or individuals more able or willing to undertake it.

• Tax incentives can improve the financial feasibility of community-serving investments. Projects such as affordable housing rehabilitation, environmental remediation, accessibility improvements, energy upgrades, or workforce training may involve significant upfront costs. An appropriately designed incentive can reduce some of that financial barrier.
• Tax incentives can complement standards and regulation. In some situations, incentives can help organizations go beyond minimum requirements or adopt beneficial practices more quickly.
• Tax incentives can demonstrate that community-serving projects are financially workable. A successful project may encourage additional investment, particularly when organizations can see that community benefit and financial sustainability do not have to be opposing goals.
• Tax incentives can leverage private or nonprofit investment. Public tax expenditures may help attract additional resources to projects that serve an identified community purpose.
• Tax incentives can be designed for particular purposes, places, or populations. Eligibility rules can focus incentives on specific types of investment, geographic areas, community priorities, or outcomes.

These potential benefits do not mean that every tax incentive is effective or equitable. An incentive represents public resources through reduced tax revenue, so its costs, benefits, eligibility requirements, and actual results should be examined.

A useful evaluation asks whether the activity would have occurred without the incentive, whether the intended community benefits actually resulted, who benefited, what public revenue was forgone, and whether another policy approach might have produced similar or better results.

When might tax incentives be used?

Tax incentives can be considered when financial barriers are limiting activities that support clearly identified community goals. They are often most useful as part of a broader strategy rather than as a stand-alone solution.

• When managing growth and development. Incentives may support redevelopment of already-developed areas, reuse of vacant buildings, preservation of open space, walkable development, affordable housing, or other goals included in community plans.
• When investing in communities that have experienced disinvestment. Incentives may support commercial investment, housing, local employment, cultural institutions, rural economic development, or other community-identified priorities.
• When addressing community priorities. Incentives may contribute to affordable housing, employment, education, transportation, accessibility, health-promoting environments, or other goals.
• When preventing or addressing environmental harm. Incentives may support energy efficiency, renewable energy, pollution control, brownfield cleanup, water conservation, sustainable agriculture, or environmentally responsible development.
• When incentives are part of a coordinated strategy. Tax policy may work best when combined with planning, public investment, community participation, appropriate standards, and evaluation.

Who should be involved in decisions about tax incentives?

Governments with authority over the relevant taxes ultimately establish public tax incentives. Decisions about whether to use them, however, can benefit from participation by people and organizations affected by the proposed policy.

Depending on the issue, participants may include:

• People and communities expected to experience the effects. This might include residents facing housing-cost barriers, people without adequate health coverage, people experiencing homelessness or housing instability, workers, or residents of areas where investment is proposed.
• Community-based and human service organizations. These organizations may understand how proposed incentives could affect access to housing, employment, health care, transportation, or other resources.
• Economic development and community planning professionals. They may provide information about development, land use, infrastructure, financing, and local economic conditions.
• Local and other public officials. Officials may help identify what forms of incentive are legally and financially available and how proposals relate to broader community plans.
• Businesses, employers, developers, and investors. Their input can help clarify whether a proposed incentive would actually affect investment decisions and what implementation challenges may arise.
• Environmental and public health organizations. These groups may contribute expertise related to pollution prevention, environmental health, conservation, climate resilience, and community well-being.
• Farmers and rural communities. Agricultural producers and rural residents can help assess incentives involving sustainable agriculture, land conservation, rural development, and preservation of working lands.
• Researchers, financial professionals, and other technical experts. They may help estimate fiscal costs, likely effects, implementation requirements, and evaluation methods.

Participation should be transparent about differences in interests and influence. Organizations that would receive a direct financial benefit from an incentive may have useful expertise, but their interests should be considered alongside community experience, public costs, and other evidence.

How can tax incentives support community health and development?

There are two broad questions:

• Where might tax incentives contribute to community goals?
• How can communities and decision-makers evaluate and consider proposed incentives?

Affordable housing

Tax incentives have long been used to help finance affordable housing and housing rehabilitation. They may support new construction, preservation of existing affordable units, rehabilitation of historic properties, adaptive reuse of vacant buildings, mixed-income development, or other locally identified housing goals.

The specific programs and eligibility requirements available to housing developers change over time. Communities considering an incentive should verify current federal, state, and local programs and examine affordability requirements, duration of affordability, accessibility, location, resident protections, and other community priorities.

Neighborhood and community development

Tax incentives may be combined with zoning, public infrastructure, grants, planning, and other tools to support rehabilitation of vacant or deteriorated properties, reuse of former industrial sites, neighborhood-serving businesses, public spaces, local employment, and other community-development goals.

Projects should be planned with attention to existing residents and businesses. Increased investment can create opportunities, but communities should also consider housing affordability, displacement, accessibility, local ownership, and whether residents have meaningful influence over development decisions.

Historic preservation

Tax incentives may help make restoration or adaptive reuse of historic buildings financially feasible. Historic preservation can maintain architectural and cultural resources while allowing buildings to serve current community needs.

Preservation projects may also be combined with affordable housing, community facilities, small businesses, arts and cultural spaces, or other uses identified through community planning.

Place-based economic development

Governments sometimes create geographically targeted incentives intended to encourage investment, employment, business development, or property rehabilitation in areas experiencing economic disinvestment.

The names, rules, and availability of these programs change over time and differ by jurisdiction. Rather than relying on historical program names or tax amounts, consult current government sources when examining place-based incentives.

When evaluating them, consider:

• Whether investment reaches existing residents and locally owned businesses
• Whether jobs provide adequate pay, stability, and opportunities for advancement
• Whether development contributes to displacement or rising housing costs
• Whether the incentive produces benefits beyond what would have occurred without it
• Whether community members have meaningful roles in determining priorities

Health and healthy environments

Tax incentives may support investments that improve access to health-promoting resources or reduce environmental and workplace health risks.

Examples may include:

• Development of health care facilities in areas with limited access
• Employer investments in health-related benefits or services
• Walking, bicycling, and other active transportation infrastructure
• Improvements that reduce exposure to environmental hazards
• Accessible recreational or wellness facilities

Incentives should complement rather than substitute for appropriate health, safety, accessibility, and employment standards.

Environmental responsibility

Tax incentives may encourage environmentally responsible investment in areas such as:

• Development and site planning. Incentives may encourage reuse of already-developed land, protection of sensitive environmental areas, or development patterns that reduce unnecessary land disturbance.
• Open-space preservation. Incentives can support conservation of natural areas, parks, farmland, wildlife habitat, and other community environmental resources.
• Brownfield cleanup and reuse. Financial incentives can help address the cost of assessing, cleaning, and safely reusing properties affected by previous industrial or commercial activity.
• Water conservation. Incentives may support efficient fixtures, water reuse, drought-resilient landscaping, improved industrial processes, and other conservation strategies.
• Green building. Incentives may encourage energy-efficient, resource-efficient, healthy, accessible, and environmentally responsible construction and renovation.
• Waste reduction and pollution prevention. Incentives may support cleaner industrial processes, recycling, reuse, pollution-control equipment, and reductions in hazardous emissions or waste.
• Sustainable agriculture. Incentives may support agricultural practices that protect soil, water, biodiversity, and the long-term productivity of working lands.
• Farmland, open-space, and habitat preservation. Tax policy may help reduce financial pressures that otherwise encourage conversion of agricultural or conservation land to other uses.

Energy efficiency and renewable energy

Tax incentives may reduce the cost of technologies and improvements that lower energy use or support renewable energy.

Examples include:

• Energy-efficient building improvements
• Efficient heating, cooling, lighting, and appliances
• Solar and other renewable-energy systems
• Energy storage or related infrastructure
• Energy-efficient transportation
• Research and development related to cleaner or more efficient technologies

Programs and eligibility change over time. Use current government guidance before describing a particular credit, deduction, technology, or qualifying expenditure.

Employment and workforce development

Tax incentives may also support employment and workforce goals.

• Job creation. Incentives may be connected to creation or retention of jobs, local hiring, job quality, or other employment outcomes.
• Job training. Employers may receive incentives for providing apprenticeships, technical training, credentialing, career development, or other opportunities that expand workers' skills.
• Workplace education. Programs may support English-language learning, digital literacy, foundational academic skills, professional development, or other education connected to workers' goals.
• Workforce development. Incentives may support career preparation, work-based learning, transportation, childcare, credentialing, or partnerships among employers, educational institutions, workforce organizations, and community groups.
• Expanding employment opportunity. Incentives may be structured to reduce barriers to employment for people who have historically faced discrimination or limited access to employment, including people with disabilities, people returning to the community after incarceration, and others facing documented employment barriers.

Incentives should be evaluated not only by the number of jobs created, but also by job quality, wages, benefits, accessibility, worker retention, career pathways, and whether opportunities reach the communities the program was intended to support.

Accessibility

Tax policy can help businesses and organizations offset some of the cost of improving accessibility for people with disabilities.

Accessibility improvements may include physical modifications, accessible communication, qualified interpreters, accessible digital technology, adaptive equipment, or other changes that remove barriers.

Because eligibility requirements, definitions, and tax amounts can change, organizations should consult current government and tax guidance before relying on a particular accessibility credit or deduction.

Financial incentives should support accessibility efforts, not replace legal responsibilities to provide access when those responsibilities apply.

Charitable contributions

Tax policy may also encourage charitable giving by allowing qualifying contributions to eligible organizations to receive favorable tax treatment.

The rules governing charitable deductions depend on current tax law, the donor's circumstances, the status of the receiving organization, the type of contribution, and whether the donor receives goods or services in return.

Rather than relying on a static list of what is or is not deductible, organizations and donors should consult current tax guidance when making decisions about charitable contributions.

Tax treatment can influence charitable giving, but communities should also consider broader approaches to sustaining organizations, including public funding, foundation grants, individual giving, earned income, partnerships, and other sources.

How do you bring a tax-incentive proposal into the policy process?

Unless your organization has direct authority over the relevant taxes, establishing or changing a tax incentive will involve a public policy process.

The goal should be to provide decision-makers and community members with enough reliable information to evaluate the proposal, its alternatives, and its likely consequences.

Understand the policy and decision-making process

Identify:

• Which level of government has authority over the relevant tax
• Which agency, legislative body, or other institution makes the decision
• What legal or budget process applies
• When public hearings, comment periods, budget discussions, or other opportunities for participation occur
• What information decision-makers need in order to evaluate the proposal

Build a strong evidence base

Examine both potential benefits and costs. Useful questions include:

• What community goal is the incentive intended to support?
• What evidence suggests the incentive could influence the desired activity?
• How much public revenue might be forgone?
• Who is eligible to receive the incentive?
• Who is expected to benefit from the resulting investment or activity?
• What unintended effects could occur?
• What requirements or accountability measures should accompany the incentive?
• What other policy options are available?

Be transparent about uncertainty. Do not minimize costs or overstate expected benefits.

Include community and stakeholder perspectives

People who may experience the effects of a proposed incentive should have opportunities to contribute to the discussion.

Depending on the proposal, this may include residents, workers, small businesses, community organizations, developers, environmental groups, people with lived experience related to the issue, public agencies, and other stakeholders.

Community engagement should help shape the proposal rather than simply being used to build support for a plan that has already been finalized.

Communicate with policymakers and the public

Provide decision-makers with clear information about the proposal, including the goal, expected costs and benefits, evidence, implementation requirements, and evaluation plan.

Public communication should likewise distinguish facts, estimates, assumptions, and recommendations. Use accessible language and provide opportunities for questions and feedback.

Different participants may value different kinds of evidence. Economic effects can be important, but community health, accessibility, housing stability, environmental quality, equity, worker well-being, and other outcomes may also be relevant depending on the proposal.

Evaluate the incentive

Tax incentives should be evaluated after implementation rather than assumed to be effective because businesses or individuals use them.

Evaluation may examine:

• Participation in the incentive
• Public revenue committed through the incentive
• Private or nonprofit investment generated
• Housing, employment, environmental, accessibility, or other outcomes connected to the program
• Who benefits and whether intended communities are being reached
• Unintended consequences
• Whether requirements are being followed
• Whether the incentive remains necessary

Evaluation may show that an incentive should continue, change, expand, be better targeted, or end. A time-limited incentive can provide an opportunity for review before public resources are committed for a longer period.

In Summary

Tax incentives -- including deductions, credits, abatements, and other forms of tax relief -- can be used to encourage investments or activities connected with community goals.

Depending on how they are designed, tax incentives may support affordable housing, historic preservation, community development, employment and workforce opportunities, accessibility, environmental protection, energy efficiency, health-promoting environments, and other priorities.

Tax incentives are not automatically the best approach simply because they attract private investment. They use public resources through reduced tax revenue and should therefore be evaluated for cost, effectiveness, accessibility, community benefit, and unintended consequences.

Strong tax-incentive policy begins with a clearly defined community goal, reliable information, transparent decision-making, meaningful participation from people affected by the proposal, and a plan for evaluating whether the incentive produces the outcomes it was intended to support.

Because tax laws and incentive programs change over time and vary across jurisdictions, always verify current requirements before relying on a particular program, dollar amount, eligibility rule, or tax benefit.