Cropped BHI

Tax credits: The key to effective compassion

 

BHI and the Compassion Tax Credit

The federal government launched its war on poverty with great expectations. Thirty years later and despite massive government spending, 38 million Americans still live in poverty. Illegitimacy rates and poverty rates for children and for female heads-of-household have soared.

The inner cities are dispirited and discarded, susceptible to crime and social pathologies.Even the staunchest defenders of the welfare state now believe we must end welfare as we know it. For some, the solution lies in increased federal efforts to provide more of the same. For others, it lies in devolution and funding cutbacks.

When President Clinton signed into law Republican-sponsored welfare-reform legislation in August 1996, he was reflecting a philosophical sea change on the part of Congress and the American public that welfare no longer be viewed as an "entitlement," but rather a program in which recipients are required to work in exchange for benefits.While there is much to be said in favor of this sentiment, there is another option, one that links the taxpayer more closely to the poor, that provides assistance and at the same time lessens dependency. This alternative is the compassion tax credit, which offers tax incentives to taxpayers to increase their support of qualified private charities.

In December 1995, the Beacon Hill Institute took a leadership role in the national debate over welfare reform when it offered a proposal whereby taxpayers would be able to deduct 100 percent of their contributions to eligible nonprofit organizations to up to 25 percent of their federal tax liability. Senator Dan Coats (R-IN) has introduced a bill that proposes a tax credit for contributions of up to $500 for single taxpayers and up to $1,000 for taxpayers filing jointly.

In March 1996, the Beacon Hill Institute published Tax Credits for Charitable Contributions: Alternatives, Projections and Comparisons at the request of Senator Coats to answer questions raised about the tax credits.The central argument for the compassion tax credit is that it addresses the root cause of poverty, which is the breakdown of the family and the loss of self-discipline and individual responsibility that the family is intended to instill. In addition to giving the taxpayer control over where his dollar is spent, the compassion tax credit injects much-needed competition into the currently monopolized welfare market. Competition leads to economic efficiency.While much of the earlier research has focused on the feasibility of compassion tax credits at the federal level, devolution argues for application of the same concept at the state level. Many states already have innovative programs that offer tax incentives for donations to private charities. As a continuation of its research, the Beacon Hill Institute is studying several of these state "laboratories" to see what light they shed on the federal tax credit.We have strong evidence that donors will respond positively to tax incentives for charitable contributions and that nonprofit organizations will be able to operate more efficiently and effectively in providing services. Questions remain, however, concerning how the tax credit will bring about the expected behavioral responses by donors, recipients and charitable organizations.

A Pilot Program

In order to address these questions, the Beacon Hill Institute drafted The Compassion Tax Credit: A Family Advocate Pilot Program, to test the feasibility of the compassion tax credit. In designing the plan, we sought the input of public management professors, private charitable organization directors, Department of Social Services officials and licensed social workers. Crucial components of the program are family advocates. These individuals, who are affiliated with charitable organizations, have a demonstrated vocation for assisting the poor, and work closely with recipients to help them effect behavioral changes needed to lead them from poverty.

The pilot program will use a participating state as a laboratory in which to determine how implementation of the tax credit will affect donors, recipients, nonprofit charitable organizations and family advocates. Under the pilot program, the state will identify a group of private charities and a group of welfare recipients to determine how both charities and recipients adjust to the implementation of the tax credit over time. The pilot program will allow us to measure both the response of taxpayer/donors and the ability of private charitable organizations to assume broader responsibility for assisting the poor and ending dependency.

This December, BHI will co-sponsor what we believe is the first forum to examine the compassion tax credit. Compassionate Welfare Reform: Empowering Charities and Private Citizens will bring together some of the country's leading experts along with individuals who are succeeding in changing lives through private charities.