TITLE: tax credit; charitable organizations; eligibility
STATUS: Senate Engrossed
PREPARED BY: Sam Beres
The bill would expand the eligibility criteria for the state charitable tax credit to include organizations that serve both children and adults with chronic illness or disability rather than solely children. The bill is retroactively effective for tax year 2019.
The JLBC Staff estimates that the bill would result in an annual General Fund revenue loss of between $(1.2) million and $(6.5) million in FY 2020. The low end of this range is based on a JLBC staff analysis, while the high end of the range reflects a projection by the Department of Revenue (DOR). The high end of this range would grow in FY 2021, so that the estimated impact of the bill would be between $(1.2) million and $(8.5) million in FY 2021 and beyond. These estimates, however, are highly speculative.
DOR also anticipates administrative costs of between $6,500 and $37,000 in the first year and annual ongoing costs of between $2,000 and $12,000 thereafter.
In FY 2018, 165,143 taxpayers claimed the state charitable tax credit, reducing General Fund revenue by $(68.3} million at an average credit of $413 per filing. To qualify for credit-eligible Qualifying Charitable Organizations (QCO) contributions under current law, the charity must be either a tax-exempt 501(c}(3} charitable organization or a designated community action agency that receives community services block grant monies. Additionally, the organization is required to spend at least 50% of its budget on services to Arizona residents who are either: (1) Temporary Assistance for Needy Families (TANF) benefit recipients, (2) low income persons, or (3) chronically ill or disabled children. The maximum general QCO tax credit is $800 for married couples filing joint returns and $400 for all other filers.
The proposed change would expand the chronically ill and disabled children category to include chronically ill and disabled adults.
According to data provided by the Lodestar Center for Philanthropy and Nonprofit Innovation at Arizona State University, 8 of the 10 largest nonprofit organizations and charities that deal with adult services and care in 2012, the last year for which data was reported, were registered with the Arizona Department of Revenue (DOR) as QCOs in 2018. Total donations to the 2 nonprofit organizations that are not registered as QCOs (Dine BIi Association for Disabled Citizens and Hospice of the Valley) totaled $10.1 million in 2012.
According to the Urban Institute, the average annual charitable donation in Arizona, as reported on federal income tax filings, is $3,700. Using the total amount of charitable donations to the 2 organizations and the average donation per federal filer, we could estimate 2,945 donors. According to the Department of Revenue, the average claimed QCO tax credit is $413, with 2,945 donors, this yields a total cost of $(1.2) million annually.
There are several important caveats to this estimate that could both lessen and expand the cost of the change. Primarily, it assumes that the adult services nonprofit organizations and charities not listed as QCOs are only ineligible because they only serve adults with chronic illnesses, which means the proposed eligibility change would lead to those organizations
registering as QCOs. To the extent that other non-profit organizations beyond the 2 reviewed above may choose to become eligible, the cost could be higher. Finally, the estimate assumes that those donating to these newly qualified QCOs do not already claim the benefit for other eligible charitable giving. To the extent that they do claim the credit, the impact could be reduced.
In their analysis of the bill, DOR assumes that between 0% and 10% of the 70 existing non-profit hospitals could become QCOs under the bill. Furthermore, DOR estimated that there are currently 975 health related non-profits in Arizona that are not currently QCOs, and that between 10% and 30% of those organizations may end up qualifying. Under these assumptions, DOR projected that between 0 and 7 new hospitals and between 98 and 293 other nonprofit health organizations could be eligible to become QCOs under the bill. Based on this range, the department projects that there would be a General Fund revenue loss of between $(1.8) million and $(6.5) million in FY 2020; the high end of this range would increase to a $(8.5) million revenue loss in FY 2021 and beyond.
Because of the speculative nature of both the JLBC Staff and DOR estimates, we have elected to give a range for the potential fiscal impact of between $(1.2) million and $(6.5) million in FY 2020. The low end of this range is based on the JLBC Staff estimate. The high end of this range, which is based on the DOR estimate, would grow to $(8.5) million in FY 2021 and beyond.
Local Government Impact
Each year, incorporated cities and towns receive 15% of income tax collections from 2 years prior. The bill would reduce local government distribution by between $(180,000) and $(975,000) in FY 2020, and between $(180,000) and $(1.3) million in FY 2021 and beyond.