For the 21st Century, a Network of Beneficial Philanthropy and Corporate Citizenship
The United States is experiencing an evolution in its
expectations of corporations and their responsibilities in society.
Regulatory pressures have failed to guarantee ethical behavior and
social responsibility in corporate America, and efforts at
self-management have fallen short time and again. The government usually
turns either to regulation or to tax credits to spur responsibility,
but to make these programs work, we need a combination of incentives
(usually through tax breaks or tax credits) and government involvement
to create new kinds of social systems.
There is one avenue that holds promise for revitalizing corporate social responsibility in a time of distrust and doubt: the creation of networks of stakeholders where responsibility is shared and the benefits accrue to all of the parties. In this construction, the three legs of the social compact – government, nonprofit organizations and corporations – come together to harvest capital, remake policy and employ strategies for the public good.
In recent columns I have discussed the importance of corporate citizenship and corporate social responsibility, teasing out the differences and pointing the way for a new role for corporations in a new century. Critical in these discussions has been the underlying notion that corporations reach the bar of citizenship best when they are able to serve their shareholders while satisfying their community responsibilities.
This is a key characteristic. When looking for innovative solutions to out-size problems, such as developing renewable energy resources or resolving health care financing dilemmas, the answer can’t be a regime of tax credits, venture capital or corporate giving. They aren’t sufficient to finance and maintain the momentum for massive, long-term undertakings. Instead, what is needed is a mutually beneficial philanthropy where corporations work with government and nonprofit organizations to create intense networks of capital, policy and practice.
The networks among stakeholders are critical; tax credits alone do not usually solve problems, just as regulation alone does not solve issues, though legislators often seem to miss the importance of building dense networks of stakeholders. This is the main reason recent tax credit-driven solutions, such as the New Markets Tax Credit and the Renewable Energy Tax Credit have failed to stimulate the growth in the areas they have targeted.
The most successful example of this case in recent years is the Low-Income Housing Tax Credit (LIHTC), the 1986 provision to the federal tax code that sparked a revolution in urban redevelopment and resulted in an upsurge of new organizations and activities to promote the development of low-income housing. The 1970s and early 1980s were dark times for urban America, and few in Congress knew how to turn the ship around. Congress had seen its earlier efforts to incentivize the investment of corporate resources in the development of low-income housing, including the Community Reinvestment Act of 1977 (CRA) and the passive-loss provision in the Economic Recovery Act of 1981, fail. With the CRA, Congress pressed banks to invest in poor communities, but they were reluctant to do so and looked for ways, including traditional grant giving to local nonprofits, to avoid what was arguably a risky financial proposition. Meanwhile, congressional efforts to encourage wealthy individuals to purchase low-income housing through the passive-loss provision had proven problematic as investors allowed their properties to decline to capture a greater tax write-off.
By the mid-1980s, Congress knew that something new had to be done. The LIHTC, approved in 1986, was the legislative response to significant changes in government housing policies. First, it addressed the elimination of direct federal subsidies for low-income housing development. Known as the Section 8 New Construction Projects grants, the U.S. Department of Housing and Urban Development struck them as they became politically untenable.
With the LIHTC, the government would create incentives for powerful alliances of banks, nonprofit organizations and corporate investors to build low-income housing. In fact, the LIHTC became a catalyst for one of the most significant injections of corporate dollars into the inner city in the history of this country, providing tax abatements for corporations and giving rise to a host of community-based housing developers and the nonprofit, locally based organizations that lobbied for more housing for low-income individuals and families.
The process set in motion with the LIHTC saw corporations provide capital in exchange for federal tax credits. This capital was then used to leverage resources from banks and private developers, many of which were in partnership with nonprofit development organizations known as community development corporations, to build low-income housing. In effect, this limited the government’s involvement in public housing development and management yet resulted in a massive private investment that has few rivals in U.S. housing development history.
However, the building of networks of stakeholders did not end there. The passive-loss provision from 1981 worked in tandem with the LIHTC to allow corporations to double-dip when it came to applying federal tax incentives. “With large tax liabilities, the tax credit made sense for corporations, but on its own, it is basically an even tradeoff with paying taxes to the government (a dollar-for-dollar write-off of tax liabilities). However, by combining the credits with book value depreciation of the property meant that corporations could receive the double-dip Congress had explicitly argued against individual receiving: with the passive loss provision still in place for corporations, the opportunity existed to take the tax liability and turn it into an investment for corporations. Over a 10-year period, beyond the credit corporations could yield an additional graduated write-off against future taxes,” my co-author Michael McQuarrie and I wrote in “Privatization and the Social Contract: Corporate Welfare and Low-Income Housing in the United States since 1986” in Research and Political Sociology.
To help serve this complex structure, new organizational forms emerged to manage these investments (so the corporations could own the “asset” and thus qualify for the passive loss without becoming property managers) in the form of intermediaries such as the National Equity Fund (NEF) and the Enterprise Social Investment Corporation (ESIC), which emerged to facilitate these investments. Working with local community development corporations (CDCs), these organizations built relationships with banks and corporations to make these deals work. These relationships evolved into dense social networks that changed the game significantly.
For corporate America, this could easily become a model of social investment, eclipsing traditional corporate philanthropy in favor of a muscular social investment that is built on a complex and financially beneficial network of relationships between government, nonprofit organizations and corporations. These public-private partnerships are obviously built, in part, on tax incentives and government regulations, but they succeed in creating a new social compact by encouraging these dynamic and dense networks. By transforming the social structure through economic alliances, corporations and their partners in government and the nonprofit sector may be able to promote social change through aggressive corporate philanthropy and citizenship.
What is clear from this model is that this type of game-changing corporate philanthropic investment does not occur without substantially rewarding the corporate community through tax incentives. Even so, the urban revitalization that came about as a result of these networks and the catalyzing federal tax incentives offers an opportunity for corporate citizens and government leaders looking for new ideas to spark the next revolution, whether it’s in energy, health care or biotechnology.
As we demand that corporations take on the mantle of citizenship, we as a society must ask ourselves if we are willing to provide the financial incentives to not only woo corporations to an expanded social responsibility but also to ensure that they are successful.
There is one avenue that holds promise for revitalizing corporate social responsibility in a time of distrust and doubt: the creation of networks of stakeholders where responsibility is shared and the benefits accrue to all of the parties. In this construction, the three legs of the social compact – government, nonprofit organizations and corporations – come together to harvest capital, remake policy and employ strategies for the public good.
In recent columns I have discussed the importance of corporate citizenship and corporate social responsibility, teasing out the differences and pointing the way for a new role for corporations in a new century. Critical in these discussions has been the underlying notion that corporations reach the bar of citizenship best when they are able to serve their shareholders while satisfying their community responsibilities.
This is a key characteristic. When looking for innovative solutions to out-size problems, such as developing renewable energy resources or resolving health care financing dilemmas, the answer can’t be a regime of tax credits, venture capital or corporate giving. They aren’t sufficient to finance and maintain the momentum for massive, long-term undertakings. Instead, what is needed is a mutually beneficial philanthropy where corporations work with government and nonprofit organizations to create intense networks of capital, policy and practice.
The networks among stakeholders are critical; tax credits alone do not usually solve problems, just as regulation alone does not solve issues, though legislators often seem to miss the importance of building dense networks of stakeholders. This is the main reason recent tax credit-driven solutions, such as the New Markets Tax Credit and the Renewable Energy Tax Credit have failed to stimulate the growth in the areas they have targeted.
The most successful example of this case in recent years is the Low-Income Housing Tax Credit (LIHTC), the 1986 provision to the federal tax code that sparked a revolution in urban redevelopment and resulted in an upsurge of new organizations and activities to promote the development of low-income housing. The 1970s and early 1980s were dark times for urban America, and few in Congress knew how to turn the ship around. Congress had seen its earlier efforts to incentivize the investment of corporate resources in the development of low-income housing, including the Community Reinvestment Act of 1977 (CRA) and the passive-loss provision in the Economic Recovery Act of 1981, fail. With the CRA, Congress pressed banks to invest in poor communities, but they were reluctant to do so and looked for ways, including traditional grant giving to local nonprofits, to avoid what was arguably a risky financial proposition. Meanwhile, congressional efforts to encourage wealthy individuals to purchase low-income housing through the passive-loss provision had proven problematic as investors allowed their properties to decline to capture a greater tax write-off.
By the mid-1980s, Congress knew that something new had to be done. The LIHTC, approved in 1986, was the legislative response to significant changes in government housing policies. First, it addressed the elimination of direct federal subsidies for low-income housing development. Known as the Section 8 New Construction Projects grants, the U.S. Department of Housing and Urban Development struck them as they became politically untenable.
With the LIHTC, the government would create incentives for powerful alliances of banks, nonprofit organizations and corporate investors to build low-income housing. In fact, the LIHTC became a catalyst for one of the most significant injections of corporate dollars into the inner city in the history of this country, providing tax abatements for corporations and giving rise to a host of community-based housing developers and the nonprofit, locally based organizations that lobbied for more housing for low-income individuals and families.
The process set in motion with the LIHTC saw corporations provide capital in exchange for federal tax credits. This capital was then used to leverage resources from banks and private developers, many of which were in partnership with nonprofit development organizations known as community development corporations, to build low-income housing. In effect, this limited the government’s involvement in public housing development and management yet resulted in a massive private investment that has few rivals in U.S. housing development history.
However, the building of networks of stakeholders did not end there. The passive-loss provision from 1981 worked in tandem with the LIHTC to allow corporations to double-dip when it came to applying federal tax incentives. “With large tax liabilities, the tax credit made sense for corporations, but on its own, it is basically an even tradeoff with paying taxes to the government (a dollar-for-dollar write-off of tax liabilities). However, by combining the credits with book value depreciation of the property meant that corporations could receive the double-dip Congress had explicitly argued against individual receiving: with the passive loss provision still in place for corporations, the opportunity existed to take the tax liability and turn it into an investment for corporations. Over a 10-year period, beyond the credit corporations could yield an additional graduated write-off against future taxes,” my co-author Michael McQuarrie and I wrote in “Privatization and the Social Contract: Corporate Welfare and Low-Income Housing in the United States since 1986” in Research and Political Sociology.
To help serve this complex structure, new organizational forms emerged to manage these investments (so the corporations could own the “asset” and thus qualify for the passive loss without becoming property managers) in the form of intermediaries such as the National Equity Fund (NEF) and the Enterprise Social Investment Corporation (ESIC), which emerged to facilitate these investments. Working with local community development corporations (CDCs), these organizations built relationships with banks and corporations to make these deals work. These relationships evolved into dense social networks that changed the game significantly.
For corporate America, this could easily become a model of social investment, eclipsing traditional corporate philanthropy in favor of a muscular social investment that is built on a complex and financially beneficial network of relationships between government, nonprofit organizations and corporations. These public-private partnerships are obviously built, in part, on tax incentives and government regulations, but they succeed in creating a new social compact by encouraging these dynamic and dense networks. By transforming the social structure through economic alliances, corporations and their partners in government and the nonprofit sector may be able to promote social change through aggressive corporate philanthropy and citizenship.
What is clear from this model is that this type of game-changing corporate philanthropic investment does not occur without substantially rewarding the corporate community through tax incentives. Even so, the urban revitalization that came about as a result of these networks and the catalyzing federal tax incentives offers an opportunity for corporate citizens and government leaders looking for new ideas to spark the next revolution, whether it’s in energy, health care or biotechnology.
As we demand that corporations take on the mantle of citizenship, we as a society must ask ourselves if we are willing to provide the financial incentives to not only woo corporations to an expanded social responsibility but also to ensure that they are successful.
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