Changing Policies: Using Tax Incentives to Support Community Health and Development
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WHAT ARE TAX INCENTIVES?
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WHAT DO WE MEAN BY USING TAX INCENTIVES TO SUPPORT COMMUNITY HEALTH AND DEVELOPMENT?
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WHY USE TAX INCENTIVES TO SUPPORT COMMUNITY HEALTH AND DEVELOPMENT?
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WHEN WOULD YOU USE TAX INCENTIVES?
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WHO SHOULD YOU USE TAX INCENTIVES TO SUPPORT COMMUNITY HEALTH AND DEVELOPMENT?
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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 Tax Credit offered by the Department of Housing and Urban Development, 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.
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.
TAX CREDITS.
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.
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