Establishing a Charitable State Tax Credit to Finance Regional Wellness Funds
At ReThink Health, we have been exploring if and how state policymakers could use tax credits to fund population health initiatives. Whatever your view of the tax reform legislation, we believe that well-constructed tax policy can benefit society, including taxpayers. Two weeks ago on this blog, Stacy Becker provided an introduction and overview to our research and development, which has evolved from creative brainstorming sessions back in June into two tangible prototypes for how a population health tax credit might work. I am excited to share one of them with you today, and my colleague Nina Burke will share the second in the new year. Earlier this month, our team presented these ideas at the National Academies of Sciences, Engineering and Medicine (NASEM) Roundtable on Population Health workshop, Exploring Tax Policy to Advance Population Health.
The first prototype addresses how state policymakers could introduce the opportunity to finance wellness funds through charitable tax credits. Wellness funds are an increasingly popular financing model for regional leaders working together to improve population health, and are part of a shift from top-down mandates toward more locally controlled and informed approaches. Governed by local multisector partnerships and accountable communities for health (ACHs), the purpose of wellness funds is to serve as catchments for funds invested in population health interventions. The idea is promising. In addition to distributing funds for population health interventions, we believe wellness funds could also sustainably support the critical integrating/coordinating and governance functions necessary when regional leaders undertake upstream solutions for advancing population health.
However, the field is still figuring out where the funds will come from in the first place. Some of our colleagues have offered logical and interesting ideas for financing wellness funds. Building off of their ideas, we decided to look into tax credits. In particular, charitable tax credits have piqued our interest as a means of financing wellness funds because they could conceivably offer both individual and corporate taxpayers a powerful incentive to donate to a particular cause—in this case, population health.
Generally speaking, states have the ability to specify the types of organizations that donors can give to, in order to be eligible for a charitable tax credit. Wellness funds, if structured properly, offer states a compelling new possibility. If wellness fund advocates could effectively demonstrate and market their own value, and the value of population health, to donors, then offering potential donors the additional incentive of a charitable tax credit could jumpstart donations to the wellness funds.
A Tax Credit is Different from a Tax Deduction
But aren’t folks already getting deductions for their donations? Well, yes. Tax credits, however, have more potential to incentivize investment.
There are several existing charitable tax credit programs, and they are designed to incentivize either individual or corporate philanthropic giving to state-approved, non-profit organizations that serve distressed or disadvantaged communities. Charitable tax credits differ from charitable deductions in that they provide dollar-for-dollar relief, subject to the value of the credit (up to a cap), on taxes owed whereas deductions only lower the amount of your taxable income. Existing state programs include:
- Endow Iowa: This tax credit program is available to individuals, businesses, and financial institutions, and is sharply targeted to drive contributions into community foundations across the state. Donors are eligible for a 25% tax credit that is capped at $300,000 in annual contributions. The program leverages $24 million per year in Iowa for community foundations operating in the state.
- Arizona Charitable Tax Credit: Since 1997, individual taxpayers in Arizona have been eligible to receive a 100% tax credit capped at $200 for contributing to agencies that spend at least 50% of their budgets on anti-poverty initiatives. This program, originally named the Working Poor Tax Credit (WPTC), allows Arizona donors to contribute to charitable organizations that provide a broad range of services to victims of domestic violence, people in recovery, the working poor, and the homeless. In 2016, the cap was increased to $400 per individual and $800 for joint filers. This state program has generated $20 million annually in donations to anti-poverty agencies in Arizona.
State policymakers may find charitable tax credits like these attractive because the nonprofit sector, armed with more money from donors who might not otherwise give so generously, could supplement government investment in efforts to achieve or maintain the well-being of constituents. This would also allow policymakers to take advantage of an undeniably robust donor market and appetite to give right now. Over $350 billion in charitable giving was generated in 2014. Research indicates the donor market is set to expand with the inevitable transference of generational wealth onto “millennial 1%ers” who are willing to invest their dollars in harm reduction and “addressing the economic divides between the haves and the have-nots” as individuals and, perhaps, through inherited corporations.
The People’s Choice Health Investment Credit: A Prototype for Supporting Wellness Funds
After researching existing tax credit programs and identifying some key principles for design, our team drafted model legislation to show policymakers and state leaders what this would look like in practice. The example legislation, An Illustrative Act Establishing a Tax Credit to Support Wellness Funds: The People’s Choice Health Investment Credit (PCHIC), intends to specifically incentivize charitable giving into a network of regional wellness funds which support the activities of regional ACHs. [You might be more curious about what an ACH is at this point, and we won’t go into it here. If you want to learn more, look into what the California Accountable Communities for Health Initiative (CACHI) is up to.] The model legislation is for a hypothetical state called Ourlandia, which has high health care expenditures and poor health outcomes.
The illustrative tax credit program is designed as follows:
- PCHIC would be available to both individuals and corporations. Not all Ourlandia donors act alike (or have the means to); therefore, some state programs cater to one or the other. However, because we want this model to be inclusive and generate as much funding as possible, we designed a two-tiered scheme to appeal to the widest donor base.
- Individual donors tend to respond to a higher tax credit incentive, the actual percentage of their tax break combined with a lower cap. As mentioned above, Arizona’s anti-poverty tax credit program is capped at $400, but provides a 100% credit incentive. Tax credits for corporations, however, are typically designed with higher caps combined with more moderate incentives. Endow Iowa’s (rather successful) program offers a 25% credit on up to $300,000 in contributions. So, in order to not isolate any of Ourlandia’s potential donors, we stratified our approach as follows:
- Individual donors: 50% tax credit incentive, graduated increase of 3% each year that a continuous contribution is made (up to 5 years). Annual giving is capped at $5,000 (joint filers: $8,000).
- Corporate donors: 40% tax credit incentive, graduated increase of 3% each year that a continuous contribution is made (up to 5 years). Annual giving is capped at $200,000.
- This tax credit relies on donors’ behaviors and their collective ability to contribute within their own specific, geographic region. As in many states, regions vary in Ourlandia. It is highly likely that some regions will have a wealthier or more philanthropic population than others. Because of this variation, we recommend requiring that wellness fund budgets allocate a certain percentage of their income from tax credit donors into a pool for redistribution to less activated areas. (This is open to a states’ interpretation, though!)
- Individual and corporate donors would make charitable contributions to their regional wellness fund and submit this on their annual tax forms to claim the tax credit from the state. Each wellness fund would operate as part of an accountable community for health, which would determine how funds would be administered locally, choosing from a list of state-approved population health interventions with high return on investment (ROI) potential.
- To establish accountability, each wellness fund will be managed by a locally governed ACH, which will be certified by the state. The ACH will provide documentation that it is spending 75% of annual donations generated for the wellness fund on state-certified population health interventions. The remaining 25% of annually generated donations to the wellness funds will go toward sustaining the ACH, remittances for redistribution to less philanthropic areas of the state, and for marketing the value of the program to the public/taxpayers. Annual reports will be submitted and subsequent evaluation conducted by the state of Ourlandia.
Why “People’s Choice”? Local Control is Key in Directing Funding Where it is Needed Most
Health is locally produced; therefore, the argument for local control of funds generated by this kind of tax credit is strong. As approaches to population health continue to shift from reactionary interventions toward more strategic lever-pulling—with the goal of generating upstream effects—it is imperative that states explore how to creatively use any existing mechanisms that could sustainably finance high-impact, high-leverage opportunities to improve health.
Our “People’s Choice” example legislation was inspired by the Strafford Economic Development Corporation (SEDC) in southeastern New Hampshire. The organization found a way to use tax credits to generate donations that would fund its coordination of local population health interventions to decrease opioid use. Executive Director Dennis McCann’s role is to support the local business community, which includes “serving as a central point of contact for connecting businesses with municipal, state, and federal agencies, other non-profits, banks, and investors” as well as hearing their concerns. In recent years, Dennis began noticing business owners’ growing anxiety about the devastation within the region’s workforce—and potentially the region’s economic vitality—as a result of the opioid epidemic. He and his colleagues at SEDC felt compelled to find a way for the business community to address the issue.
Dennis learned that, under the 21st Century Cures Act (2016), New Hampshire stood to receive federal funding to address its opioid problem, but the amount the state would secure was going to be minuscule compared to the need—and it was anyone’s guess how local groups might access it. He would have to get creative. Due to his decades of experience in community development finance, he recalled that the Community Development Finance Authority (CDFA, a state instrumentality created by state legislation in 1983) had for years been offering the opportunity to use tax credits as a means to generate funding for local initiatives or governing bodies.
CDFA welcomed applications from organizations offering viable (and creative) approaches to improving community capacity and economic vitality. Dennis saw enough flexibility in the process, and SEDC proposed a plan to coordinate local distribution of funds generated through the tax credit to organizations offering the most effective, evidence-based treatment for addicted populations.
The CDFA approved Dennis’s plan in 2016 and allocated $75,000 in tax credits for him to “sell.” Businesses were given the opportunity to make charitable contributions to the SEDC in exchange for tax credits (which they can deduct in their state taxes). Business donors who claim this credit can also deduct the donation from their federal taxable income, further lowering the cost of the donation. The SEDC markets the opportunity to the small business owners in the southeastern New Hampshire region, whose hiring pool has become vastly limited by the epidemic. Because of the SEDC team’s unique connection to small businesses and to effective opioid treatment programs in the region, it was in an ideal position to know how to best market the opportunity and direct the funds generated by the tax credit. A full analysis of the results is yet to be reported, but the SEDC was able to sell the full amount of tax credits to businesses.
We were inspired by this example because it shows how a state can generate financial support for population health and distribute those funds to local groups with demonstrated success in addressing local priorities. Our hope is that this story and our prototype legislation get you thinking. Are you considering creating a wellness fund in your state? If so, how are you planning to fund it? Would tax credits be a viable option in your region? Would the average taxpayer see the value of establishing a locally controlled wellness fund, to which they could contribute via tax credits? We invite you to think with us further about how state policymakers and regional leaders could develop a donor base through a charitable tax credit. Please share your ideas in the comments below and be sure to stay tuned for reflections on the NASEM conference from Ella Auchincloss.