State should offer 'Compassion Tax Credit'

David G. Tuerck

March 1997

Massachusetts, once known for its generous welfare benefits, has become a trend setter for its get-tough welfare policy. In February 1995, Governor William F. Weld signed legislation requiring able-bodied welfare recipients to work for benefits. The law imposes time limits and a family cap that denies additional benefits for children born to recipients.

Since then the caseload has dropped by 20,242 or by 19.6 percent. According to the Department of Transitional Assistance, the current level is the lowest since 1973. Other get-tough states, particularly Michigan and Wisconsin, have obtained similar results.

In August 1996, President Clinton signed the Personal Responsibility and Work Opportunity Reconciliation Act. The new law limits lifetime welfare benefits to five years, requires recipients to work and reduces federal welfare spending by about $55 billion over six years.

In light of this, some welfare reformers are declaring victory. Their celebration is premature. The battle to correct the damage done by 30 years and more than $5 trillion of Great Society welfare spending will not be won simply by reducing benefits and caseloads.

Make welfare taxpayer-funded and taxpayer-controlled through a 'compassion tax credit.'

More than 36.4 million Americans still live in poverty, 665,000 of them in Massachusetts. The poverty rate is 13.8 percent for the United States and 11.0 percent for Massachusetts. Despite an economic recovery, the Massachusetts poverty rate rose by 13.4 percent over the period 1994-95, an increase of 80,000 people.

The national statistics for poverty are even more disturbing:

The poverty rate for single, female heads-of-household is 32 percent, more than twice the overall rate; for black and Hispanic female householders, the poverty rate is over 45 percent ; children comprise 40 percent of the poor, but only 27 percent of the total population; the poverty rate for children rose from 14.9 percent in 1970 to 20.8 percent in 1995, a rate higher than any other age group.

The present welfare system rests on the assumption, unchallenged by the latest wave of welfare-reform legislation, that a large impersonal government bureaucracy provides the best method of dispensing benefits to recipient families.

There is a better way. Make welfare taxpayer-funded and taxpayer-controlled through a "compassion tax credit." It would work as follows.

A taxpayer would donate money directly to a food pantry, homeless shelter or private job training program. In return, the taxpayer would receive a tax credit on his federal and/or state taxes. Instead of "paying" the government to provide welfare benefits, with the money filtering down through the system, the taxpayer could provide direct assistance himself.

The current federal law provides for a charitable tax deduction for individuals who itemize their tax returns. A federal taxpayer in the 28 percent tax bracket taking the existing deduction pays 72 cents for every dollar contributed to charity. With a 100 percent tax credit, however, he would pay zero.

A tax credit could be given to both itemizers and nonitemizers, thus making it more democratic than a tax deduction: It would be worth the same to a low-income and a high-income filer. A tax deduction, in contrast, is worth more to those with high-incomes.

With a compassion tax credit, government could launch a bold new, "second generation" of welfare reform. In addition to giving the taxpayer control over where his dollar is spent, the tax credit would inject much-needed competition into the monopolized welfare market, leading to economic efficiency.

Charities that underperform would be eliminated; new charities would enter the market to take advantage of the new dollars. The compassion tax credit would provide an enormous incentive to the thousands of private charities in Massachusetts to expand and develop new programs.

There are a number of proposals to offer tax credits. The Coats-Kasich proposal would provide a 90 percent federal tax credit for contributions up to $500 for single taxpayers and $1,000 for joint filers. The Beacon Hill Institute has offered a proposal that would allow a 100 percent federal tax credit for cash contributions by individuals to qualified organizations to up to 25 percent of federal income tax liability.

Massachusetts could become a leader in the implementation of the compassion tax credit. Several states, including Michigan, Colorado and Missouri, already offer narrowly-based compassion tax credits.

Massachusetts has tax credits for lead paint removal and purchases of solar energy equipment and could offer one for contributions to qualified charities.

The tax credit should appeal to Americans troubled by the failure of the welfare state. As taxpayers, Americans have long sought a delivery system that balances compassion, cost-effectiveness and individual responsibility. The compassion tax credit, boldly implemented, promises to fulfill that aspiration.

David G. Tuerck is executive director of the Beacon Hill Institute for Public Policy Research at Suffolk University, where he also serves as chairman and professor of economics. This article first appeared in The Worcester Telegram & Gazette on March 27, 1997.

Format revised on August 18, 2004