The Nonprofit Quaterly: Nonprofits and State Tax Systems – The Big Picture

On Washington, D.C.’s Capitol Hill, charities have been involved in an all-consuming debate over the future of the federal charitable tax deduction. But can nonprofits effectively participate in the national debate over taxes and expenditures if they don’t know what is happening at the state level? There are fifty states with budgets that are paid for by taxes—fifty different states with fifty different mixes of tax rates, tax deductions, and tax credits. Understanding the mix of state tax regimes is crucial to nonprofit public-policy literacy.

There is no one definitive reference source for nonprofits on the impact of state tax climates on the sector. Unlike at the federal level, at the state level there is a panoply of tax policies that both directly and indirectly affect donations to public charities. While there is one federal income tax rate, there are wide variations among the states regarding their marginal rates, with a handful of states having no income taxes at all. And some states offer individuals and corporations tax credits, not just tax deductions, to incentivize contributions to the nonprofit sector.

Overall, states differ in their willingness to use their tax powers to promote policy objectives for nonprofits and the communities they serve. Unlike the microscopic attention nonprofits pay to federal tax policy issues, there is much less understanding of the complexities of state tax policies. Are nonprofits conscious of the differing tax climates affecting citizens and communities in the various states? How can nonprofits better grasp state attitudes toward taxes in order to craft effective state tax advocacy strategies?

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