|Learn how to use tax incentives to promote 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 would you use tax incentives?
Who should you use tax incentives to support community health and development?
How do you use tax incentives to support community health and development?
In downtown Seattle, Washington, the old Leamington Hotel and Apartments was turning into an eyesore in an already down-at-the-heels neighborhood. The 1912 building, somewhat of an architectural landmark, had originally housed both short- and long-term guests in hotel rooms and studio apartments. Unable to compete with newer and fancier places to stay, it closed in the 1980’s and remained empty for the next ten years, as the surrounding area gave way to drug dealers and people experiencing homelessness.
Eventually, a homeless advocacy organization started using the empty building to house people who would otherwise be on the streets. When the hotel was slated to be sold for offices, the organization and its participants staged a protest that eventually resulted in the redevelopment of the property as a combination of low-income permanent housing (through renovation and restructuring of the original studios into one-bedroom apartments) and single-room occupancy units for the homeless (the old hotel rooms).
The transformation of the hotel, now named the Pacific, came about largely because of the existence of two federal programs that allowed major tax incentives for the developers. One was the Low Income Housing Tax Credit (LIHTC), and the other was the Historic Preservation Tax Credit offered by the National Park Service, which involved getting the building listed on the National Register of Historic Places. The combined tax credits accounted for about 40% of the $8.5 million rehabilitation cost, and made the project financially possible.
Tax incentives are one way to encourage developers, businesses, and private citizens to make investments that benefit the community. By helping people to get part of their money back, in the form of tax relief of various kinds, they make it easier to spend money on or contribute to socially responsible projects. In this section, we’ll explain what tax incentives are and how they work, and discuss how they can be used to improve the quality of life in your community.
What are tax incentives?
An incentive is a benefit given to someone in order to encourage him to do something specific. Tax incentives are ways of reducing taxes for businesses and individuals in exchange for specific desirable actions or investments on their parts. Their purpose is to encourage those businesses and individuals to engage in behavior that is socially responsible and/or benefits the community. Perhaps the most familiar tax incentive to tax-paying Americans is the deduction for charitable contributions: when figuring your taxes, you can deduct the amount you gave to charitable, tax-exempt organizations from your taxable income. The deduction exists to help persuade people to contribute to charity.
Tax incentives can be offered by any level of government that levies taxes: federal, state or province, county, or municipality. They can be aimed at businesses, organizations, individuals – any entity that pays taxes. In general, they take one of three forms:
Tax deductions allow you to subtract some or all of your expenses for certain things from your taxable income (the amount that you pay taxes on). Your taxes are lower because you’re taxed on a smaller amount.
Your business had income of $200,000.00 last year. You spent $20,000.00 on equipment to clean the industrial waste from your operation. Since your state offers a 100% tax deduction to businesses on spending for environmental improvements, you can deduct that $20,000.00 from your income when you figure your taxes. Thus, you’ll only pay taxes on $180,000.00. In practice, that would save you up to about $8,000.00.
A tax credit allows you to subtract some or all of your expenses for certain things from the amount of taxes you have to pay. Your taxes are lower because you’re actually paying less, even though you’re taxed on the full amount of your income.
Let’s take the same example we’ve just used. With an income of $200,000.00, your business has spent $20,000.00 on anti-pollution equipment. The state allows you a 100% tax credit on spending for environmental improvement. As a result, you can subtract $20,000.00 from your total tax bill.
Business tax rates vary, depending on the nature of the business and its amount of income. The highest rate approaches 40%. Therefore, a tax credit of more than 40% of the amount you spend will usually be more valuable than a tax deduction. (We use “usually” here because tax law is so complex that there are almost always exceptions to any rule.)
Tax reduction or forgiveness.
In return for particular actions or investments, you don’t have to pay part or all of your taxes – usually for a given amount of time. Your taxes are lower because they simply don’t have to be paid. The example below concerns state business taxes, but municipalities might also forgive property taxes (which, for an industrial facility, can represent a great deal of money) on a similar schedule for similar reasons.
You build a factory in a designated enterprise zone (low-income area marked for economic development), and provide 75 jobs for area residents. As a result, the state forgives your state taxes for the first three years of operation, and then taxes you at 33.33% for the next three years, 66.66% for the next four, and only then – after ten years – at 100%. An arrangement like this usually holds only if you continue to operate in the same place and maintain the number of jobs for area residents for those first ten years.
What do we mean by using tax incentives to support community health and development?
Federal, state, and local governments all use tax incentives for various purposes. Many states and communities employ tax incentives simply to attract businesses. That use can have many positive consequences for the public good, depending on the business: more local jobs, more tax revenue (leading to the possibility of more funding for schools and services), an injection of energy into the community, etc. However, it’s directly aimed at purely economic concerns, rather than the building of a healthy community in all its aspects.
In this section, we’ll focus as well on the use of tax incentives to encourage activities that lead specifically toward the development of a healthy community. The nine elements of a healthy community, as defined by the World Health Organization (WHO) at the 1986 Ottawa conference, are:
- A stable ecosystem
- Sustainable resources
- Social justice
Economic development is certainly a contributor to most of these elements, but it’s hardly the only one. Tax incentives can be used to stimulate action in a broad range of categories, such as housing, the environment, health, and employment.
We’ll discuss the uses of tax incentives in detail later in the section. They can contribute to almost all of the WHO’s nine elements (although peace has proven difficult to achieve for any length of time over the past several thousand years).
Tax incentives can be aimed at a variety of results. They can persuade businesses and individuals to take positive action, and they may also, at least occasionally, be used to persuade them to stop doing something harmful. The ways they can be used are limited only by the creativity of those who devise them. We’ll explore some creative uses of tax incentives when we discuss how to employ them.
Tax incentives can be viewed in two ways. By providing an incentive for taking a particular action or operating in a particular way, governments also provide a disincentive for doing the opposite. The people who take advantage of the incentive are receiving a benefit that others aren’t. This could just as easily be done by penalizing those who don’t follow the recommended path – i.e., by making them pay more taxes, rather than offering others the opportunity to pay less. By couching the difference in positive terms, however – offering a reward for taking positive steps, rather than threatening punishment for not taking them – governments make taking those positive steps easier to swallow, and create willing partners rather than resentful adversaries. For that reason, this section focuses on incentives, rather than disincentives. Keep in mind, however, that there may be times when using tax disincentives is appropriate.
Why use tax incentives to support community health and development?
There are many reasons why tax incentives can be a particularly good way to encourage the development of healthy communities, but they really boil down to one: they offer what for many people is the most desirable reward for desirable behavior.
- Tax incentives speak to businesses’ and individuals’ self-interest. Virtually all businesses and most individuals respond readily to offers that advance their own interests, and most particularly to offers of money. Our whole social structure is based on this assumption: how many of us would work if we weren’t paid? Some form of payment, therefore, is usually the most effective way to convince businesses and individuals to do something they are unsure about or might otherwise be reluctant to do.
- Tax incentives make allies rather than adversaries. They’re the policy equivalent of the old proverb “You can catch more flies with honey than you can with vinegar.” By using tax incentives rather than (or along with) regulation to achieve your goals, you make the businesses or individuals receiving the incentives your partners. It’s much easier, for instance, to work with a developer who wants to make sure that his project meets environmental standards so that he can get a significant amount of his investment back than with one who considers environmental regulations an unnecessary barrier, and looks for ways to get around them.
- Tax incentives can show businesses that community-building projects can be both feasible and profitable, thus leading to more of them. In a Sioux Falls, Iowa project similar to the redevelopment of the Pacific Hotel, tax incentives convinced a developer to turn an old library into affordable housing. That project, the first of its kind in the area, worked out so well that it stimulated the developer to embark on other, similar projects elsewhere in the state.
- Tax incentives can be an efficient use of taxpayer money. They can bring in far more in cash (private investment) and social benefits than they cost in lost revenue. Providing tax incentives to employers to help them provide health insurance for their employees, for instance, is usually far less expensive for the public than the consequences of those employees having no insurance – the cost of providing free or reduced-fee care, overuse of hospital emergency rooms, more and more serious illness because of lack of regular medical care, lost taxes because of lost work time, etc.
If the Pacific Hotel had been renovated and run by a government agency, the whole cost of restoring it, as well as the cost of running it – finding and serving tenants, maintaining the building, coordinating homeless services, etc. – would be borne by taxpayers, rather than by a combination of public and private sources. By the same token, government subsidies for businesses that provide health care plans for employees may be a lot cheaper than dealing with the consequences of those employees being uninsured.
- Tax incentives can be directed exactly where they’re needed. They can be targeted broadly or narrowly, to individuals or to businesses, to a particular time period, etc. Policymakers can fine-tune incentives to try to achieve a very specific result.
Consumer tax credits for the purchase of hybrid or alternative-fuel vehicles, for instance, are graded according to the fuel efficiency of the model, and are set to run out for each model when it reaches the 60,000 sales mark. The assumption is that, at that point, the model has enough sales momentum that consumers will buy it whether or not there is a tax incentive attached to the purchase. The tax incentives are meant to encourage car buyers to become innovation leaders – the people who show others that something new is feasible and desirable.
The Health Savings Account program provides a tax deduction on money that workers set aside and/or their employers provide for health care (if they meet eligibility requirements). Governments can also provide incentives to companies to offer certain types or a certain level of health insurance, or to offer wellness or prevention programs or opportunities (an on-site gym or pool, for example, or health club memberships).
When would you use tax incentives?
Since tax incentives can be aimed specifically, there are a great number of possible uses for them. How do you decide when their use is most appropriate? The general answer is that they can be used almost anytime, often in combination with regulation and other types of incentives. Some times when they come in particularly handy:
- When you’re trying to encourage, limit, or manage growth. Tax incentives can be used to encourage building and development in already-built-up areas, and thus to prevent sprawl. They can influence the size of developments, invite the preservation of open space, spur the redevelopment of abandoned sites, or foster the rehabilitation of empty buildings into affordable housing. Whatever your community’s comprehensive growth plan, tax incentives can almost always play a role in carrying it forward.
- When you’re revitalizing neighborhoods, communities, or rural areas. Here, tax incentives might be used to try to attract industry or commerce (and local jobs), to develop mixed-income housing, or to bring in or rehabilitate an “anchor” institution (a theater, a museum, a sports facility) to attract residents and businesses. In a rural area, you might employ tax incentives to create environmentally friendly tourism (bicycle touring, farm stays, etc.), to encourage farming, or to attract clean industrial operations.
- When you’re trying to meet community needs. Tax incentives are often used to assist in the development of affordable housing, but can also contribute to meeting needs in education (business involvement in school systems), employment (job creation), livability (the creation of pedestrian streets and walkable neighborhoods), health (the development of walking and bike paths, subsidies for businesses’ health insurance plans), and transportation (support for needed routes).
- When you’re trying to prevent or fix environmental problems. Green building (using environmentally friendly techniques and materials), the purchase and installation of anti-pollution equipment, the use of alternative energy, energy conservation, environmentally sensitive development, research into environmentally friendly industrial processes – all of these and more can be made more attractive and feasible for businesses and individuals through the offer of tax incentives.
- When tax incentives can be part of a coordinated strategy. Often, a well-thought-out combination of tax and other incentives, careful regulation and enforcement, and participatory planning can yield the best results for a community-building effort.
Who should use tax incentives to support community health and development?
Government at any level – any government that has the authority to levy taxes – can use tax incentives to accomplish short- and long-term goals. For governments, the questions are not who should use tax incentives, but whether to use them and when. The real “Who...?” question here is “Who should support and advocate for tax incentives?” The answer to that question is much broader, and has to do with who can benefit from them.
Governments only benefit from tax incentives in the sense that incentives encourage actions that work toward the public interest. Maintaining and enhancing the public good is the job of government, and it therefore has a stake in doing so. The direct benefits of tax incentives, however, usually go to others. It makes sense for those who benefit to advocate with policymakers to institute appropriate tax incentives, to support government action in doing so, and to advocate for public support as well.
Nearly anyone might benefit from tax incentives, but here’s a short list of people and groups that you might see supporting them:
- Direct beneficiaries of tax incentives. These may include low-income citizens, people without health insurance, the homeless, etc.
- Human service providers and advocates for the poor. Since tax incentives can be aimed at improving life for low-income citizens, the agencies and individuals that work with that group may find themselves advocating for or suggesting them to policymakers.
- Economic developers and community planners. These folks are sometimes the policymakers themselves, and are in a position to see that tax incentives are offered for particular investments or types of development. If that’s not the case, they may still be strong advocates for incentives that further their work.
- Local officials, especially those in economically depressed areas, or areas with other problems that might be addressed through incentives. Local taxes may not present an opportunity to offer appropriate incentives, in which case these officials might lobby state legislators, the governor, or even the federal government, for incentives that would be appropriate to carry their goals forward.
- Businesses, corporations, real estate developers, etc. Since these are on the receiving end of tax incentives, it’s in their interest to advocate for them. Some corporations have a civic conscience, and want to help the communities they do business in, but also have to be accountable to shareholders. Tax incentives can help them satisfy both these needs.
- Environmental activists. Tax incentives can be particularly useful in furthering such environmental ends as pollution control, energy conservation, and alternative energy use.
- Farmers. Tax incentives for sustainable agriculture equipment and practices, as well as for keeping farmland in production, can help farmers stay on the land and preserve open space in rural areas.
How do you use tax incentives to support community health and development?
There are really two questions to consider here:
- Where and how can you apply tax incentives to get the results you want?
- How do you convince policymakers to put particular tax incentives in place?
We’ll try to answer each of these questions separately.
Where and how can you apply tax incentives to get the results you want?
Tax incentives can be used in just about any situation where there are taxes to be paid. Some of the ways they can be applied:
Tax incentives to stimulate the building not only of affordable housing, but of particular kinds of affordable housing (mixed-income, mixed-use, cooperative, etc.), have existed for decades. They can include total or partial forgiveness of property taxes for a period, the Low Income Housing Tax Credit mentioned in the introduction, and specific deductions or credits for other aspects of affordable development.
Among the outcomes that tax incentives might help bring about in this area are the preservation of historic buildings as affordable housing; the development of affordable housing on a specific site; the redevelopment of abandoned industrial sites as housing, with a certain percentage set aside as affordable; adherence to certain construction restrictions (use of particular materials, techniques, or design features) – in other words, almost any configuration that seems desirable in a given circumstance.
Incentives, combined with zoning changes and other mechanisms, can result in rehabilitation of abandoned or substandard buildings, cleanup and reuse of industrial sites, the development of pedestrian malls and other walkable gathering spaces, targeted commercial development and neighborhood job creation – the list goes on and on. Neighborhood development is a particularly fertile area for the use of tax incentives, because there are so many possibilities.
Some less obvious possibilities for tax incentives in this area might be deductions for businesses for expenses related to on-street plantings and patios; incentives for new buildings to mirror existing neighborhood building styles; incentives for the use of vacant lots; incentives to hide, screen, or bury parking; etc.
Historic buildings and neighborhoods, because of their age and because of changing demographics and land use, often deteriorate, and are torn down to make way for newer structures. Communities, in order to preserve both their cultural and architectural heritage, often offer tax incentives to developers who will restore or adapt historic buildings for current uses, or invest in the restoration and revitalization of historic neighborhoods.
These kinds of projects are often public/private partnerships, with the community providing incentives and other economic or logistical support to a private developer, who then shares revenues or otherwise continues to partner when the project is completed. The opening anecdote of this section, about the restoration of the Pacific Hotel, is an example of this use of incentives.
Enterprise zones are financially distressed areas that have been targeted by states or the federal government for economic development. In cities, they may comprise a single neighborhood or group of neighborhoods. In rural areas, they may include whole towns, or even entire counties. Even in non-rural areas – one-industry towns that have lost their industry, for instance – whole towns or cities may be designated as enterprise zones. States and the federal government use tax incentives to encourage investment in these zones – i.e., starting businesses or moving operations into them, investing in already-existing businesses, training local people to start their own businesses, etc.
The U.S. Department of Housing and Urban Development has designated parts or all of 70 communities around the country as either Renewal Communities (RCs) or Empowerment Zones (EZs). Businesses in these zones can receive several kinds of tax incentives to open or expand and to hire local residents:
- Tax credits. Businesses can receive up to a $1,500.00 per year tax credit for each employee who lives and works for the business in a Renewal Community, and up to $3,000.00 per year for an employee who lives and works in an Empowerment Zone. Businesses can receive up to a $2,400.00 tax credit (the Work Opportunity Tax Credit, or WOTC) for the first year of employment of a new employee between the ages of 18 and 39 who lives and works in either an RC or an EZ. The WOTC also applied to any employee who lived in the Gulf Opportunity (GO) Zone when Hurricane Katrina hit, and who was employed in that zone through Aug. 27, 2007.
- Tax deductions. Businesses can take an increase in deduction up to $35,000.00 of the cost of certain equipment in the first year of its service in both RCs and EZs. There are also deductions to help defray the cost of new building in RCs.
- Other incentives. These include forgiveness of some or all capital gains taxes (taxes paid on the increase in value on shares of stock held in a business from the time they were bought until they were sold) on stock in RC or EZ businesses held for five years or more, and tax credits for the purchase of certain bonds to support education or EZ business construction costs.
Tax incentives can attract hospitals and clinics to a community, or help employers provide health insurance to workers. They can convince employers and businesses to adopt healthier workplace practices: incentives can be offered to businesses that provide smoking cessation groups for employees, for example, or that declare their workplaces smoke-free. They can also be used to sweeten the consequences of health regulations that could cost businesses some customers (an incentive to help offset any loss of business from a ban on smoking in bars, for instance.) A fairly common wellness promotion incentive is the use of tax credits or deductions to encourage developers to create walking and biking paths when they design large developments.
This covers a huge area, and overlaps with such other uses of tax incentives as affordable housing, energy conservation, health and safety, sustainable economic development, etc. Activities that affect the environment that might be managed to some extent with tax incentives include:
- Residential, commercial, and industrial development site selection and preparation. Incentives could be used to steer developers toward sites in built-up areas, or toward particular sites that the community wants occupied. They could also help to persuade developers to alter sites as little as possible (sparing most of the trees, leaving watercourses undisturbed, and preserving the natural contours of the land).
- Open space preservation. Tax incentives might result in a business or developer setting aside a certain amount of a large site as open space (anything from a small wild area to an urban plaza), often space accessible to the public.
This sort of set-aside can be good business as well. People are likely to think well of the owner of the area where they can birdwatch, or of the pleasant, landscaped plaza with comfortable seating where they and their friends eat lunch in good weather. When it comes time to buy a computer, or insurance, or the services that owner sells, they may find it easy to patronize a company that they already see as a good neighbor.
Brownfields reclamation is a prime example of the overlap of economic development, environmental responsibility, and community health. A brownfield is a former industrial site that has been polluted by previous activities. Tax incentives can persuade a potential developer to clean up and use such a site, either by removing and replacing polluted soil or other material, or by capping the site so that the pollution is permanently contained. This can be a big and expensive job, but the financial burden can be eased by incentives, and the sites themselves are often desirable enough – close to downtown, or large pieces of valuable open land in an area where there is little developable space left – that the cost is worth it. In addition, the results for the developer include both a good site and a reputation as a responsible citizen, which may make the development easier to market.
The U.S. Environmental Protection Agency encourages the cleanup and redevelopment of brownfields sites by allowing the owner to deduct the costs of cleanup as a direct expense in the year they’re incurred, rather than having to count them as a capital expense and take the deduction for them over a period of years. That gives the owner an influx of cash in the year of the expense, often making a huge difference in cash flow and in obtaining bank loans and other funding for the cleanup itself.
- Water conservation. Tax incentives here might persuade a developer to both preserve water features on a site – streams, ponds, etc. – and find ways to use less water in a building, industrial plant, development, or agricultural operation. The latter might include recycling of gray water (water from sinks, tubs, and washing machines, but not toilets) for cooling or irrigation; landscaping with native plants that need little or no watering; installing low-flow faucets and showerheads; and changing industrial and other processes to use less water.
Water conservation can be seen as not only a health issue, but as a survival issue. Many scientists believe that the real challenge facing humanity over the next hundred years or so is not finding alternatives to diminishing fossil fuels, but rather providing an ever-growing world population with dependable sources of clean, drinkable water. Huge cities – Phoenix, Arizona and Las Vegas, Nevada, in the southwestern U.S. come to mind – exist in arid areas where the great underground sources of water are running out. In the undeveloped world, billions of people have no access to clean water. Water is already a source of conflict in many regions of the world. Without conservation, the water situation could become a worldwide crisis before the end of the 21st century.
- Green building. Incentives can be used to encourage developers to “build green.” This often means meeting LEED (Leaders in Energy and Environmental Design) standards, the environmental standards of the U.S. Green Building Council (USGBC), but many states and municipalities have developed their own standards as well. Some aspects of green building include the use of recycled and/or environmentally friendly building materials (no dangerous chemicals, no unnecessary use of limited resources, etc.), energy conservation and/or generation (see below), site considerations (positioning buildings to use the sun for heating, for instance), and building design. (For more information on LEED standards, see the website of the USGBC, http://www.usgbc.org.)
- Waste management and pollution control. One of the most familiar environmental concerns is the prevention or elimination of pollution from industrial, residential, and agricultural sources. Many pollutants can cause serious medical conditions and even death. Others may not affect humans directly, but can throw off the balance in local – or not-so-local – ecosystems, disrupt the life cycles or habitats of wildlife, or contribute to global warming.
Industrial pollution – usually from the release of waste products from industrial processes into the air, water, or soil – is perhaps what most of us think of when we hear the word “pollution,” but there are actually numerous, often unexpected sources. Farms – particularly large agribusiness operations – are a major source of water pollution, from both animal manure and chemical fertilizers and pesticides. Landfills can leach toxic substances into soil and water. And, of course, the exhaust from millions of cars, trucks, and buses causes serious air quality problems.
Global warming is the gradual warming of the planet as a result of carbon dioxide in the upper atmosphere – much of it from industrial and automotive sources – trapping the sun’s heat. It may not be reversible, but we may be able to keep it from getting worse by controlling certain kinds of emissions.
- Sustainable agriculture. Tax incentives are offered in many states to farmers to encourage the use of methods that don’t deplete the soil or damage the environment. They might also be offered to businesses for the development of products or equipment that contribute to the same goals.
- Farmland/open space/wildlife habitat preservation. Farming in areas of encroaching development is difficult to maintain because farmland is taxed at its worth as houselots. Even if the farmer has no desire to sell, he may have to, just to pay his taxes. Tax incentives, particularly continuing to tax the farmer at agricultural rates in return for a promise to keep the land in agricultural use, can keep farmland in production. Some states provide similar incentives for allowing land to go wild or to be only minimally maintained in order to create wildlife habitat.
Energy conservation has already been mentioned above, but is an important enough topic to deserve its own discussion. It has effects on pollution control, global warming, green building, and housing affordability, among other areas.
Some methods of energy conservation include:
- The purchase of alternative-fuel or hybrid vehicles. We’ve already remarked on the use of tax credits – which apply both to individuals and businesses – to encourage such purchases. They do double duty, in that hybrids and alternative-fuel vehicles both use less energy than conventional ones, and also, as a result, produce less pollution.
- Recycling. Most people are familiar with the recycling of newspapers, plastic bottles, and other household trash, but a great deal of industrial waste can be recycled as well. Many dangerous and not-so-dangerous substances from industrial waste, metals, plastics of various kinds – much of what the developed world throws away, as a matter of fact – can be recycled and/or reused. Some of this material can be sold outright. (Scrap metal is the prime example; while prices go up and down, copper, for instance, is sometimes so valuable that thieves will steal the copper water pipes from partially-constructed buildings.) When that’s not the case, tax incentives can help to convince businesses to recycle as much as possible.
An important type of recycling – again, mentioned briefly above – is that of water. In large industrial, commercial, or residential buildings, gray water (dirty but not contaminated water from sinks, washing operations, etc.) can be used in heating and cooling systems, irrigation of plantings (or crops, in farm operations), and other ways.
- On-site power generation. Buildings, and even whole developments, can generate all or part of their own hot water, heating, and electricity needs through the use of solar panels and other alternative-power devices. Tax incentives can make the installation of those devices more attractive, as can the opportunity to sell excess electric power back to the power company.
Energy production, in the form of generating electricity, accounts for a good deal of the energy used in the U.S. Furthermore, of the total energy used for electricity generation, only 1/3 is actually translated into available electricity: the rest is lost to the environment in the form of waste heat. On-site power generation through alternative sources, therefore, can actually save more than just the energy it produces.
- Energy conservation. The installation of low-energy EnergyStar-rated appliances, double- or triple-glazed windows, proper insulation, heat-absorbing or -reflecting surfaces (depending on the climate), can cut the amount of energy needed to heat, cool, and power activities within a building by 50% or more. Not only does such conservation preserve resources, but it also cuts costs for businesses, organizations and institutions, and homeowners.
- The development and/or use of renewable energy and sustainable technology. Incentives can help persuade businesses and industries to look for alternative solutions to energy needs, and to develop processes that use less energy or renewable energy sources (sun, wind, water, etc.) Again, in addition to the immediate benefit provided by tax incentives, such processes usually can save businesses money over the long term.
Tax incentives here don’t necessarily apply only to businesses or developers. In many states, individual homeowners can receive incentives for installing solar hot water and heat, for instance, or for generating power through alternative sources.
Employment and workforce development.
There are several ways that tax incentives can be used here:
- Job creation. Depending on where the incentives are coming from, employers might receive incentives for each new job created, for each new job taken by a member of a particular community or disadvantaged group, or for creating a certain number of new jobs.
- Job training. In return for tax incentives, an employer might provide training to members of the community, who might be hired at the successful completion of the training. Alternatively, tax incentives might help an employer develop a training program for at-risk youth, or for its own low-level workers to help them advance.
- Workplace education. Employers might be encouraged by incentives to provide basic education or ESOL (English as a Second or Other Language) for its employees who lack basic skills or facility in English.
- Workforce development. A single employer or a group might receive incentives in return for offering pre-employment courses (workplace and job interview behavior, getting along with supervisors and co-workers, resume writing, workplace expectations, etc.) to the homeless or chronically unemployed. Some of the programs suggested in the job training category might also fit here.
- Hiring people from disadvantaged groups. Incentives might be offered for hiring a certain number of people with disabilities, people from minority groups that have been the targets of discrimination, welfare recipients, or recently released ex-convicts.
Any business, organization, or institution that serves the public is subject to the regulations of the Americans with Disabilities Act (ADA), which provide for accessibility for persons with disabilities to the same services and products as everyone else. Meeting these regulations often requires changing the physical setup of a business (building ramps, redoing bathrooms, etc.), and businesses are only required to make “reasonable accommodations,” i.e., changes that won’t negatively affect them financially. In order to make changes more feasible, the federal government offers tax credits to small businesses and tax deductions to all businesses for alterations that improve accessibility for people with disabilities.
The tax credit is available to businesses that have total revenues of $1,000,000 or less in the previous tax year or 30 or fewer full-time employees. This credit can cover 50% of the eligible access expenditures in a year up to $10,250 (maximum credit of $5000). The tax credit can be used to offset the cost of undertaking barrier removal and alterations to improve accessibility; providing accessible formats such as Braille, large print and audio recording; making available a sign language interpreter or a reader for customers or employees, and for purchasing certain adaptive equipment. The tax deduction is available to all businesses with a maximum deduction of $15,000 per year. The tax deduction can be claimed for expenses incurred in barrier removal and alterations. (From the pamphlet “ADA Guide for Small Businesses,” available from the ADA.
As mentioned above, one of the most familiar tax incentives, because it’s offered to all individuals in the U.S., is the charitable deduction. You can deduct any contribution to a non-profit 501(c)(3) organization, as long as it isn’t payment for goods or services. (When you pay to go to a charitable event that includes dinner, for instance, you can only deduct the amount that doesn’t pay for the food. The organization sponsoring the event can tell you what the correct deduction would be.)
Deductible as charitable contributions
Money or property you give to:
- Churches, synagogues, temples, mosques and other religious organizations
- Federal, state, and local governments – if your contribution is solely for public purposes (for a gift to reduce the public debt)
- Nonprofit schools and hospitals
- Public parks and recreation facilities
- Salvation Army, Red Cross, CARE, Goodwill Industries, United Way, Boy Scouts, Girl Scouts, Boys and Girls Clubs of America, etc.
Not deductible as charitable contributions
Money or property you give to:
- Civic leagues, social and sports clubs, labor unions, and chambers of commerce
- Foreign organizations (except certain charities)
- Groups run for personal profit
- Homeowners’ associations
- Political groups or candidates for public office
- Dues, fees or bills
- Raffle, bingo or lottery tickets
- Value of your time and services
From IRS Publication 526, “Charitable Contributions”.
The above represent only some examples of how tax incentives can be used. Especially on a local level, governments can and should be creative in designing particular incentives that will work most effectively in their particular situation.
How do you convince policymakers to put particular tax incentives in place?
As we discussed in the “Who...?” portion of this section, unless you’re a policy maker yourself, you’ll need to convince policymakers to offer the particular tax incentives that target the goals you’re aiming for. As with so many other community-building efforts, this requires advocacy. The general guidelines for advocacy range across five chapters (30-34) of the Tool Box. Rather than try to summarize all that material, we’ll suggest some specifics here, and include references to specific sections that might be helpful.
There are two major groups with whom you might need to advocate: legislators and policymakers, who make the final decisions on tax policy; and the public, who can be enlisted to put pressure on elected officials when they resist taking action.
- Advocate with legislators and policymakers. The first step in advocating for anything with officials is to get to know them. Establishing relationships with legislators and other policymakers means that you’ll have easier access to them, and that they’ll be more likely to listen to what you have to say.
You have to establish a certain level of credibility as well. Make sure that you always have your facts straight, and that you always tell the truth, without exaggeration or embroidery. If these folks know they can trust your information, you’re in a far better position than if you’re just one of many vying for their attention.
In general, the arguments that legislators and other policymakers respond to are economic. Even when they are personally concerned with the social implications of an issue, or with its fairness, they often feel that economic arguments are the only ones they can sell to fellow legislators and the public. For that reason, it’s important to bring economic arguments to the discussion. Research the actual costs of offering tax incentives (be realistic: don’t downplay costs if they’re considerable – it will only hurt your argument in the long run), as well as the benefits you expect. Those benefits are often economic – the generation of private funds, long-term tax revenue, community development that will attract more business and population, etc.
It helps any advocacy effort if you can find a legislative champion – someone who will sponsor a bill, work with her colleagues and constituents to convince them to support the incentives in question, and generally take on your cause as her own. Often, the task here is not to convince a legislator to be concerned about the issue, but to find one who is already concerned about it, and eager to take it on. Once you’ve found that person, advocacy becomes much easier, because she can give you access to her colleagues.
Finally, marshal your forces. If yours is a statewide effort, it’s important to get people from all over the state involved, so that legislators can see that this is a broad-based need. Legislators respond most readily to people who live or work in their own districts, so the more widely spread your advocacy effort is, the more clout you’ll have. Whether you need to bombard elected officials with letters and phone calls on an issue, or to simply contact a number of them through people they know and trust, a well-organized state-wide effort will serve you well.
There are some particular advantages in this area when you’re advocating for tax incentives. You can often enlist businesses and business organizations in your advocacy effort. Their voices count with legislators (there’s that economic argument again), and they’re usually well-organized and able to provide logistical support (copying, mailing, phone banks, etc.) Make sure to include them when you start gathering support.
- Advocate with the public. Often, legislative advocacy is enough to get the job done. When it isn’t, it might be necessary to apply public pressure. The best way to influence public opinion is through the media. You’ll want to try to get your ideas out in stories that make both cost-benefit (the same research you did for legislators and policymakers) and emotional arguments. Calling attention to how the tax incentives you’re in favor of will positively affect the health of children and the elderly, protect the environment, and/or better the quality of community life will help to get public opinion on your side.
- Evaluate the effectiveness of tax incentives so that you can continue to make the case for them. It’s important to know whether the incentives that you’re working to institute or maintain actually work to accomplish their purposes. You need to evaluate their effectiveness, either in your own community, if you’re trying to maintain an incentive already on the books, or in a community where they’re currently in use. If they’re not working, then there’s no reason to advocate for them. If an evaluation shows that they’re successful, that’s powerful ammunition for an advocacy campaign.
In addition to monitoring the success or failure of tax incentives, an evaluation can also show you where to tweak a successful incentive to make it even more effective, and where else to apply incentives to gain the results you want. It may even be able to suggest how to turn an unproductive incentive into a productive one. Don’t neglect evaluating tax incentives – it can improve your whole effort.
- Keep at it indefinitely. As with any advocacy effort, you have to view this as a long-term commitment. Legislative and public priorities change. Tax incentives are often time-limited, and have to be renewed – or not – every few years. It’s important to maintain contact with legislators, particularly your champion, and to keep placing stories in the media about how well incentives are working for the community. If your attention drifts away, those tax incentives you worked so hard to put in place may drift away, too.
Tax incentives – tax credits, deductions, or reduction or forgiveness – can be used by communities, states, or the federal government to obtain desirable economic, aesthetic, and social ends. They can help convince developers to build affordable housing or restore historic buildings for new uses, persuade corporations to move operations into depressed areas, or encourage businesses and individuals to conserve energy and protect the environment.
Tax incentives can accomplish more than the specific purposes they’re aimed at. By being the carrot that’s used instead of, or in addition to, the stick of regulation, they make recipients into partners in trying to reach community goals, rather than adversaries. They can change the whole way developers or corporations look at doing certain kinds of business, and leave them willing to continue in directions that benefit the community as well as themselves.
Assuming you’re not a policy maker yourself, you’ll have to advocate with legislators, other policymakers, and the public for the incentives you want. That means establishing relationships with legislators and policymakers and with the media, doing your homework, and sticking with the issue for as long as the incentives continue to be useful.
ADA Tax Incentives Packet.Tax incentives for ADA compliance (businesses).
DSIRE– Database of State Incentives for Renewable Energy. Tax incentives for wind, solar, hydro, biomass, etc., as well as conservation. State-by-state and federal credits and deductions.
Federal Tax Credits for Energy Effeciency: ENERGY STAR. EnergyStar listing of federal tax credits for consumers, along with standards for each, and some listings of actual products that qualify.
Federal Tax Credits for Hybrids.Tax incentives for hybrid vehicle purchase.
National Biodiesel Board. Tax incentives for use of biodiesel (diesel fuel made from vegetable oil, including restaurant and food-processing waste oil).
New York State Department of Enviornmental Conservation. The New York State Green Building Initiative. Green building tax credits.
State of Connecticut, Dept. of Economic and Community Development. Major tax incentives for businesses that invest and create jobs in Connecticut, particularly in enterprise zones.
State of Delaware Economic Development Office. State of Delaware allows corporate income tax credits for job creation, green building, brownfields cleanup, waste management and recycling, and investment/job creation in designated, largely low-income, areas.
“Tax Incentives for Health Insurance.” Paper by Leonard E. Burman, Cori E. Uccello, Laura L. Wheaton, and Deborah Kobes, Urban Institute.
Tax Incentives for Recycling. List of possible recycling incentives.
TPS Tax Incentives.NPS case studies in affordable housing using combination of historic preservation and low income tax credits. Pacific Hotel (Seattle), Carnegie Place (Sioux Falls, IA), Shelly School (York, PA)
TPS Tax Incentives: Historic Preservation. Information from the National Park Service on the Historic Preservation Tax Credit.
US EPA Brownfields. Brownfields Tax incentives.
Vermont Department of Economic Development: Economic Advancement Tax Incentive Program. Vermont tax credits for workforce development and sustainable technology.