I think most people would agree that Michigan is on the rebound. In Detroit, where I live, new restaurants are popping up on a weekly basis, national retailers are moving in, and corporations are opening new offices. This hint of change in the Pure Michigan air is still polluted, however, by many of the same intractable issues -- homelessness, unequal access to education and food, and environmental degradation, to name a few. Much like the rest of our economy, these old problems require a new approach.
Traditionally, we have turned to government and non-profits for solutions to our society’s ills, yet neither has had enough resources to address these complex issues on their own. If they did, perhaps we would’ve ended homelessness by now. But what would you say if I told you that we already have the money to really make a go at solving some of these problems in Michigan? No, seriously, I’ve run the numbers and it’s there. Michigan residents donate $4.9 billion annually, yet our state’s households have a total of roughly $880 billion in investable assets. If we found a way to tap into just a fraction of this available capital to fill this so-called “philanthropic gap,” it would create tremendous social impact.
Organizations called “social enterprises” are emerging all across Michigan to do just that. Innovative leaders are using business strategies to create these new entities that focus on specific social and environmental needs in their communities. Social enterprises exist as for-profit businesses, in that they provide goods and services to paying customers. They also function as non-profits, with these same products and services also addressing key societal challenges. Some great examples include Urban Ashes, which employs ex-felons who make beautiful custom wood products out of salvaged urban wood. Local Orbit provides online tools that help small farmers better connect to their customers, and A2B provides a bike-sharing system in Lansing that promotes rider health, along with stimulating economic activity in our urban centers.
Having been both an investor and an entrepreneur, I am acutely aware that the way you finance your organization determines the way you operate it. Unfortunately, we tend to finance our for-profit companies with a very different mindset than we use to finance our non-profit organizations. With investments, we focus on the ability of the organization to pay the capital back with a financial return, rather than how it aligns with our values. When we donate, we tend to look at whether the organization’s mission aligns with our values, but not about whether the organization can deliver on the desired outcomes. This leads to companies that are so focused on delivering financial returns that they often produce unintended consequences such as environmental pollution. On the non-profit side, this pushes organizations more toward raising donations than delivering on measurable outcomes. In a new world where we combine our philanthropic and investment pockets, contributors would care about the total value their contributions create.
So what’s the Next Idea?
Why not make Michigan the social enterprise capital of the country? New social enterprises are often led by Millennials who want to align their work with their values. With our state’s abundance of colleges and universities, many of these people are already here and looking for a place to land, having been priced out of places like Brooklyn and San Francisco.
In order to become the nation’s premier laboratory for social enterprise, we must proactively create the conditions that will attract these young leaders. This involves nurturing a robust investment climate. When I think back to my time as an entrepreneur in New York, the thing that was most important to me was finding investment. So how can we create conditions here in Michigan that would promote investments in more social enterprises?
One strategy is emerging across the pond. Just this past April, the United Kingdom created a tax incentive to promote these types of investments, which are known as "impact investments." The Social Investment Tax Relief Act allows some investors to offset up to 30 percent of their impact investment against their income taxes. Currently, here in the U.S., investors are allowed to offset exactly zero dollars of impact investments.
The logic for the UK tax relief is similar to that for the Charitable Contribution Deduction we have here in the US, where individuals may deduct the value of a charitable contribution from their annual income when calculating their taxes. These contributors, the thinking goes, are delivering a social benefit to society, and they are not being compensated financially for it. In the case of social enterprises, the market-rate financial returns are diminished, often intentionally, in order to produce more substantial social benefits. Finding a way to account for this difference in the tax code could offer more incentive to invest.
One example of how this could work is in the form of a mortgage to a non-profit health clinic. Say an individual who believes in the clinic’s mission wants to provide, in lieu of a donation, a loan to the organization with a one percent interest rate to help them relocate to a better facility. If the market rate for a mortgage is six percent, the difference in interest collected over a 10-year period amounts to $63,000 per year. That’s a lot of money in savings that directly benefits the health clinic and allows them to provide more care to more people. Why not let that generous lender write off some of his investment? If we use the new UK law’s metrics for someone in the top tax bracket in the U.S., it would reduce their tax payment by $25,200 a year. Multiply these savings by thousands of people and you can see there is tremendous potential.
Michigan, and particularly Detroit, has a unique opportunity to position itself as the place to be if you want to solve real problems for real people while living in a vibrant, cultured community. There is no other place in the country where the needs are greater and where one can witness firsthand what works and what doesn’t. With a few bold steps, Michigan could become the world’s greatest laboratory for creative solutions to some of humanity’s most intractable problems.
Share Your Ideas:
- For those who make charitable donations, how do you decide what organizations receive your hard-earned money? What factors do you look at before donating?
Jamie Shea is the managing director of investments for Mission Throttle, an investment firm dedicated to supporting mission-driven organizations and entrepreneurs in Michigan.