THE COMPASSION TAX CREDIT A Family Advocate Pilot Program

David G. Tuerck
William F. O'Brien, Jr.

Table of Contents

The Compassion Tax Credit Concept
Designing a Tax Credit Pilot Program
Participants
Funding
Incentives
Criteria for Qualifying Charitable Organizations
Family Advocates
How Will a Family Advocate Program Work?
Program Specifics
Monitoring Behavior
Conclusion

________________________________________________

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 believe we must end welfare as we know it. For some, the solution lies in increased federal efforts to provide more of the same: day care, education and jobs. For others, it lies in devolution and funding cutbacks.

Reflecting these concerns, in August 1996, President Clinton signed into law Republican-sponsored welfare-reform legislation, the Personal Responsibility and Work Opportunity Reconciliation Act of 1996. This legislation represents a philosophical change in that welfare is no longer viewed as an "entitlement," but a program in which recipients will be required to work in exchange for benefits. The reform will limit lifetime welfare benefits to five years, require welfare recipients to work and reduce federal welfare spending by about $55 billion over six years.

Under this new system, federal and state government will continue to share the cost, but the federal program, Aid to Families with Dependent Children, will be eliminated. Instead, states will receive block grants to run their own systems. States will be responsible for setting their own welfare rules, for managing their own programs and for finding additional funds if necessary.

The key elements of this sweeping legislation are:

• AFDC: eliminates this program;

• Self Management:

• allows states to create and manage their own welfare programs;

• Block Grants: mandates that block grants be sent from the federal government to the states; requires states to maintain welfare spending at no less than 80% of earlier levelsspend at least 80% of what they previously spent on welfare;

• Additional Payment: provides extra money to states with high unemployment and rapidly growing populations;

• Work Requirement: requires approximately half of all single mothers on welfare to be working or in "work related activities" by 2002 or lose some federal funds; requires states to reduce benefits to individuals who refuse to work;

• Five-Year Limitation: ends aid to most recipients after five years, although, states can, at their own expense, give recipients benefits;

• Bonus Payments: provides federal bonuses to those states that reduce illegitimacy rates, permits states to deny welfare payments to unwed mothers under age 18;

• Food Stamps: cuts federal spending by $23 billion over the next six years;

• Immigrants: makes them ineligible for most federal benefits, including Supplemental Security Income for the disabled and food stamps, until they become U.S. citizens or work in the United States for at least ten years; allows legal immigrants to participate in Head Start and some job training and educational programs; allows states to deny Medicaid to future legal immigrants;

• Disabled Children: toughens qualification for receiving aid; and

• Child-Support Enforcement: creates federal and state registers to track "deadbeat parents" and requires states to suspend driver's licenses of those who owe unpaid child support.

The unanswered question is whether this new welfare system will be effective in reducing welfare rolls. Success will depend on whether the states continue with the failed status quo or, like Wisconsin, implement new and innovative programs. The risk is that reform will result in 50 state bureaucracies in place ofsimply shift responsibility from the existing federal welfare bureaucracy and result in 50 state bureaucracies.

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 consists of redirecting funds that now go to government to private charitable nonprofit organizations.

The present welfare system rests on the assumption that a large, impersonal government bureaucracy can best dispenseis best-suited for dispensing taxpayer dollars to worthy recipients. This is a myth.

Far worse is the isolation in which benefits are distributed. A family receiving a Section 8 housing voucher or food stamps has no obligation to learn and acculturate into a neighborhood. There is no responsibility on the part of recipients to modify behavior, nor is there obligation on the part of providers to assist in changing patterns that encourage dependency.

This will change only if we are able to reconnect at the neighborhood level the kinship that makes America strong. The only solution is to make welfare taxpayer funded and taxpayer controlled.

The Compassion Tax Credit

The present welfare system largely ignores a vast network: the private charity or nonprofit sector. It also overlooks the reservoir of voluntarism to be found in communities as manifested through local charities.

A new, promising idea points to a solution - one that employs the resources, creativity and commitment of private charities. This is the "compassion tax credit" - offering tax incentives to taxpayers to increase their support of qualified private charities.

Senator Dan Coats has offered a set of tax incentives, called the Comprehensive Charity Reform Act (S-1079), that allows a federal income tax credit of up to $500 for single taxpayers or $1,000 for married taxpayers filing jointly. The Beacon Hill Institute (BHI) has offered a proposal whereby taxpayers would be able to deduct 100% of their contributions to eligible nonprofit organizations to up to 25% of their federal tax liability. (for more information see Giving Credit Where Credit Is Due: A New Approach to Welfare Funding.)

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 will inject much-needed competition into the currently monopolized welfare market. Competition will lead to economic efficiency. Organizations that consistently underperform will be eliminated; new organizations will enter the market.

Competition will offer choice. It will encourage welfare recipients to shop around and seek out charitable organizations that are responsive to their needs and that help them out of poverty. Recipients will continue to receive at least existing levels of support, provided that they make good-faith efforts to acquire jobs and living skills and to pull themselves out of poverty.

Designing a Tax Credit Pilot Program

A state tax credit pilot program can assess the viability of the compassion tax credit. It can also provide a laboratory in which to determine how implementation of the tax credit will affect donors, recipients, nonprofit charitable organizations and family advocates.

The pilot program described here will take place over a period of four years. This time frame will give selected nonprofit organizations the opportunity to develop, market and implement the program. The first year will be devoted to fundraising by the nonprofit organizations. Implementation will take place during the remaining three years, which will provide sufficient time for participating donors, recipients and nonprofit organizations to demonstrate measurable behavioral changes.

BHI, in conjunction with a sponsor state, will administer and monitor the pilot program and be responsible for research and for auditing the program. Periodically, throughout the program, BHI will prepare, distribute and publicize reports on its findings. The observed results of the pilot program will make it possible to compare the performance of the existing welfare system with that of a full-fledged compassion tax credit implemented at the federal or state level.

Participants

There are six types of participants in the pilot program:


• The funding source provides the funds needed to run the pilot program, covering administrative and program costs and providing tax credits to contributors.

• The oversight organization administers and studies the pilot program.

• Donors are individual taxpayers who contribute to the program and whose contributions receive a special tax credit.

• Recipients are AFDC mothers and children who elect to participate in the program.

• Nonprofit organizations receive funds from donors and employ or contract with family advocates.

• Family advocates are specialists in managing cases and in helping recipients acquire the skills and personal habits necessary to leave welfare and become productive citizens.

In the pilot program, certified nonprofit organizations will focus on the delivery of basic services to eligible welfare and at-risk families. They will do so using the family advocacy model described below. To participate in an effective manner, the prospective nonprofit organization's principal tax-exempt purpose must be the provision of food, shelter, clothing, housing, job training and ancillary services directed to present day welfare recipients. Since participants in the program will continue to receive Medicaid benefits, if eligible, donations for the provision of medical care will not be eligible for the tax credit.

Welfare recipients eligible to participate in the program will be selected from a group of AFDC families who currently receive basic care and who volunteer to forgo existing benefits as a condition for participation. Participating recipients must agree to receive support only through the pilot program to remain eligible for assistance from the private nonprofit organizations.

Under the pilot program, we expect that approximately 25 participating nonprofit organizations will represent, representing a cross section of nonprofit organizations for a selected metropolitan area, will participate. Each nonprofit organization will, on the average, handle 50 families, for a total caseload of 1,250 families or about 3,750 recipients.

Funding

We expect the pilot program will be funded by the state in which the program is conducted. The state must be one that imposes a personal income tax that it can amend to provide for a special tax credit. Program Funding will flow from two sources:

• (1) a new tax credit offered by the state for the purpose of inducing individual donors to give to participating nonprofit organizations and,

• (2) matching state appropriations made for the purpose of nonprofit organization program expenses and administrative costs not covered by contributions.

Total nonprofit organization annual expenses will be approximately $27,187,500 or $1,087,500 per nonprofit organization. In order to qualify for participation, the nonprofit organization must raise one-half of this amount or $543,750 in donations, to be applied to annual expenses. It will then receive reimbursemea grant directly from the state for its remaining expenses for the same amount of $543,750.

The pilot program will impose little additional cost on the state because recipients who receive assistance under it would have received assistance, anyway, under existing programs. Thus most of the funds provided to the nonprofit organizations through donations or appropriations will not represent any new cost to the state. The only new cost will be for state administration and oversight and BHI research, each estimated to be approximately $1,500,000 per year.

The state will fund the program in part by offering a 50% tax credit for contributions to qualified nonprofit organizations, up to 50% of state tax liabilitysome limit. This maximum will be set at a level consistent with the goal of generating $13,593,750 (= $543,750 X 25) in new donations. The remaining $13.56 million will come from appropriated general revenues. Both the tax expenditure and the appropriation will be paid for by a reduction in state welfare spending.

Incentives

The pilot program will create a new source of funds for participating nonprofit organizations. Because they are expected to operate more efficiently than government, nonprofit organizations will deliver care at existing levels at a cost of less than $7,250 per recipient. Thus, by participating in the program, the nonprofit organizations will be able to offer increased services to existing as well as new clients.

Given the changing political climate and the trend toward "devolution," nonprofit organizations - steeped in a tradition of innovation and efficiency - will recognize the new opportunities to serve a larger clientele in the market area covered by the pilot program. Moreover, nonprofit organizations, by their nature, must be responsive to donors. Donors, through the tax credit, will be empowered to make more market-oriented decisions.

The state, particularly its welfare departments, will be responsible for informing recipients about the opportunity to participate in the pilot program. The program will offer recipients an opportunity to obtain benefits from a private nongovernmental source, to "shop" for benefits from alternative providers and to take advantage of the improved services that these providers will offer.

Criteria for Qualifying Charitable Organizations

Only those nonprofit organizations that meet specific criteria will be allowed to participate. A nonprofit organization must: be a section 501(c)(3) IRC, tax-exempt organization; have raised at least $543,750 in donations needed to fund Year-1 operations; and provide food, shelter, clothing, housing, job training and ancillary services directly to the poor. As explained below, the state will augment direct charitable contributions with appropriations for program expenses and administrative costs imposed on the nonprofit organizations by the reporting requirements of the pilot program. Nonprofit organization expenditures on recipient services must constitute at least 80% of a nonprofit organization's budget. That is, no more than 20% of its budget may be for marketing, administration or other purposes not directly related to the provision of recipient services.

Family Advocates

The fulcrum of the pilot program is the family advocate, who is similar in function to a guardian ad litum. The family advocate is an employee of or a contractor to the nonprofit organization. Family advocates are individuals who have a demonstrated vocation for assisting the poor. Under the pilot program, they will receive compensation and have the independence and resources to assure that recipients can climb out of poverty.

The family advocate is the agent of the nonprofit organization in providing assistance to the recipient. A principal responsibility of the family advocate is to work with recipients to formulate a plan for achieving self-sufficiency within the program time frame. This includes monitoring progress toward the aimed-for self-sufficiency and communicating to the recipient the link between progress and continued support from the nonprofit organization that the family advocate represents.

The family advocate represents the nonprofit organization in the distribution of assistance and in the achievement of results, as measured by progress toward self- sufficiency. The family advocate carries out this responsibility by helping recipients assimilate into community life and into the labor force.

The concept of a family advocate will have currency with qualified nonprofit organizations. By their nature, private charities are independent of many of the constraints that bind government agencies. Private charities are thus in a better position to instill values and be effective in providing assistance in the form of a hand-up rather than a hand-out. The family advocate will perform a key role in this process.

Under the pilot program, there is no welfare entitlement. Family advocates will have the authority to withhold funds from recipients who do not make a good-faith effort to achieve self-sufficiency. Family advocate decisions to withhold benefits will be subject to peer review to assure impartiality.

How Will a Family Advocate Program Work?

Family advocates will often be recruited from local communities. They will include small business owners, parish priests and other clergy, teachers, and professional social workers. They must have empathy and enthusiasm. They must be exceptional role models. In all of their work, family advocates must be resolute, firm and committed to sound judgment.

Family advocates will be trained and given the resources and authority to perform their work. to the needs of recipients who are dependent and at-risk. BHI, in coordination with the nonprofit organizations, will provide training.

Family advocates will provide recipients with transitional assistance and with the resources needed to end dependency. They will refer parents to family counseling, find tutorial assistance and computer resources for children struggling in school and seek out recreational opportunities for adolescents. Where the family is intact, the family advocate will act to strengthen bonds between father, mother and children. If the family advocate is entrusted with a single-parent household, he or she will check up on child-support payments.

Since the pilot program is predicated upon choice, recipients who are not satisfied with a family advocate will be free to request a new one from the nonprofit organization or seek another nonprofit organization. The pilot program intentionally encourages competition for recipients between nonprofit organizations. Of course, if the recipient expresses dissatisfaction because the recipient has failed to follow a family advocate's reasonable suggestions, the requests may fall on deaf ears as the recipient attempts to pit one nonprofit organization (and family advocate) against another.

Program Specifics

How will a family advocate serve a typical single mother with two children, where the father is not providing child support? In keeping with the mission of the nonprofit organization, the family advocate will provide the family with rent subsidies, food vouchers and entry into a job training program. The family advocate will outline the rules of the benefits programs and, in consultation with the recipient, devise a set of objectives to be met, including a work plan.

The family advocate will assist in constructing a family budget. The family advocate will identify food pantries in the neighborhood and check on the children's medical needs (i.e. immunization, etc.).

The family advocate will also make sure that children are attending school and that a good relationship with teachers is established. In some situations, the family advocate will help a mother choose the appropriate public school. The family advocate could pay the fees required for Little League, Girl Scouts, Girls or Boys Clubs or other organized sports and youth-development activities.

Single mothers have special needs. The family advocate, using the resources of an nonprofit organization, will, for example:

• teach daily living skills;

• teach job interview skills;

• teach home economics, show recipients how to be "smart consumers," how to do minor car repairs, etc.;

• provide for courses in parenting;

• introduce recipients to family learning programs in English and other fields;

• show recipients how to plant an urban garden;

• plan trips to the local library;

• fund courses in literacy, typing and computer skills; or

• explore the possibilities of microenterprises, including collective day care, housekeeping services, and performance of computer work "outsourced" to the recipient. (A private nonprofit organization, already familiar with business practices, is in a better position than government to craft such a program.)

Monitoring Behavior

BHI will closely monitor the pilot program from inception to conclusion. To this end, nonprofit organizations and family advocates will issue quarterly confidential reports to BHI on their progress. The additional administrative burden caused by reporting requirements of the program will be met by state government matching contributions.

The nonprofit organizations will report the results of their efforts to BHI, including the effectiveness of family advocates in helping recipients become self-sufficient. These reports will describe the programs into which recipients have enrolled, including job training and parenting courses. The nonprofit organizations will also report the types of in-kind and cash payments rendered to clients.

The nonprofit organizations will issue business reports to BHI including information on the types of services offered and their effectiveness. They will also include information on amounts spent on clients for both services and cash payments, administrative overhead, salaries paid to employees and contractors, and their effectiveness in enlisting and using volunteers.

The nonprofit organizations will issue reports to their donors on how their money was spent and how much progress recipients have made. They will track, and report to BHI on, the inquiries and other expressions of interest that they receive from donors.

Since nonprofit organizations will have to compete for donor support, they will have to convince prospective donors that their programs are worthy of support. Nonprofit organizations' performance will be measured according to four criteria:

• (1) their cost-effectiveness in attracting donations;

• (2) the efficiency with which they provide services;

• (3) their minimization of administrative costs given program expensesuccess in holding down administrative costs; and,

• (4) their effectiveness at helping recipients emerge from poverty.

One purpose of the pilot program is to measure the willingness of donors to give to qualified nonprofit organizations. BHI will select and track the activities of a sample of donors to determine whether

• (1) the tax credit causes them to increase giving to the participating nonprofit organizations in amounts required to fund the program;

• (2) their giving to participating nonprofit organizations is "new" or diverted from other charities;

• (3) the tax credit causes an increase in the number of volunteers, and the number of hours volunteered to participating nonprofit organizations; and

• (4) the tax credit increases donor awareness of and interest in the nonprofit organizations' work and performance. Information collected from donors will be anonymous and aggregated in such a way as to protect their identity.

Family advocates will issue reports on the progress of recipients to their respective nonprofit organizations and to BHI. These reports will review recipients' progress toward acquiring job skills, interview skills and self-sufficiency.

BHI will issue its own semi-annual reports, tracking the behavioral changes of donors, charitable organizations and recipients under the program. It will issue a final report at the conclusion of the program.

Conclusion

The argument for a pilot program rests upon a desire to identify new solutions to old problems. The reform impulse that drives the idea of a compassion tax credit should appeal to Americans troubled by the failure of the current welfare system. The American taxpayer has long sought a delivery system that balances compassion, cost effectiveness and individual responsibility. The compassion tax credit, boldly implemented, promises to fulfill that aspiration.

There is strong evidence supporting the idea that donors will respond positively to tax incentives for charitable contributions and that nonprofit organizations will have the benefit of increased voluntarism by donors in providing services. Questions remain, nevertheless, concerning how a full-fledged, federally-funded compassion tax credit will bring about the expected behavioral responses by donors, recipients and charitable organizations. The state enacted pilot program proposed here is intended to provide answers to these questions.

________________________

David G. Tuerck is Executive Director of the Beacon Hill Institute for Public Policy Research at Suffolk University, Boston, Massachusetts, where he serves as Chairman and Professor, Department of Economics. He holds a PhD in Economics from the University of Virginia.

William F. O'Brien, Jr. is Associate Professor of Economics at Suffolk University. He holds a PhD in Economics from Northeastern University.

To obtain a copy of the full study, contact the Beacon Hill Institute at (617) 573-8750 or by e-mail at: bhi@beaconhill.org. This and other documents may be viewed on the Internet: http://www.beaconhill.org

Related Links:

Giving Credit Where Credit Is Due: A New Approach to Welfare Funding.

Tax Credits For Charitable Contributions: Alternatives, Projections and Comparisons .

The Project for American Renewal

---

Last update 12/18/96

Copyright (C) 1996 - 2007, Beacon Hill Institute.
All rights reserved.

---