An Option for Nevada: Charitable Choice

By D. Dowd Muska, NPRI Research Analyst

 

The nation’s welfare bureaucracy wastes billions of dollars. Estimates vary, but there is little doubt that massive sums allocated to assist the poor are wasted through administrative costs. Even worse, individual taxpayers have no role to play in the current system. They have no way of knowing what portion of their tax dollars actually reaches the needy. Taxpayers also have no power to direct their "contributions" to the most effective public assistance programs. Professional bureaucrats wield all the power in a system long criticized, in the words of social policy analyst James C. Geoly, for "inefficiency, unresponsiveness, and corruption."

But in the ongoing debate over reforming welfare an ambitious and innovative idea has recently garnered national attention. Often referred to as "charitable choice," the measure proposes to make welfare not simply taxpayer funded, but taxpayer controlled through a system of tax credits for charitable donations.

A particularly bold version of the charitable choice concept has been offered by Beacon Hill Institute economists David G. Tuerck and William F. O’Brien, Jr. Their plan, called the "Compassion Tax Credit," calls for a 100 percent deduction for donations to qualified charities, up to 25 percent of total income tax liability.

Under such a tax credit system, taxpayers receive incentives to increase their donations to qualified charities in the private sector. Citizens play a direct role in assisting the poor rather than serving as passive participants in a broken system.

Gradually, the existing welfare bureaucracy would be replaced by private charities, which operate far more efficiently than bloated state and federal agencies—charity workers, after all, see their work not simply as a profession, but as a "calling." And not only would the tax credit system grant a taxpayer control over where his or her dollars are spent, it would "inject much-needed competition into the currently monopolized welfare market." Welfare recipients would be able to shop around for charities that are best able to address their individual needs.

As expected, the radical nature of charitable choice upsets many in the public welfare establishment. As Geoly recently wrote in the Wall Street Journal, "For a consortium of big-government types—welfare advocacy groups, public employees’ unions and the bureaucrats who administer welfare programs—privatization of welfare represents a threat to influence and power accumulated over the past 60 years. Thus, they do not support welfare reform to begin with, let alone such a revolutionary move."

But despite attacks from entrenched interests, charitable choice proposals have piqued the curiosity of many. The Beacon Hill Institute is currently negotiating with several states to implement its Compassion Tax Credit pilot program.

While implementation at the federal level is the ultimate goal, a state-based pilot program would be a useful test of the compassion tax credit’s effectiveness. A host state would fund the pilot program by offering a 50 percent tax credit for donations, up to 50 percent of an individual’s state tax liability. Additional revenue would come from the state’s general fund.

The Beacon Hill pilot program has six main participants:

The funding source provides money to run the pilot program;

The oversight organization administers and studies the program’s effectiveness;

Donors contribute to the program;

Recipients participate in the program;

Nonprofit charitable organizations receive funds and coordinate family advocates; and

Family advocates manage cases, help recipients leave welfare.

Charitable organizations must meet strict criteria to participate in the pilot program. For example, organizations must be classified 501(c)(3) (tax exempt), raise at least $543,750 in donations during the first year and provide clearly-specified services to the poor. "The pilot program will impose little additional costs on the state," say Tuerck and O’Brien, "because recipients who receive assistance under it would have received assistance anyway under existing programs." Family advocates—volunteers working for charitable organizations—would provide recipients with food vouchers, rent subsidies, worker training, and other traditional welfare benefits. Advocates would be recruited from the community and given extensive training.

Nevada Governor Bob Miller boasts of a drop in state welfare cases since 1995, but U.S. Department of Health and Human Services figures show that from January 1987 to September 1996, the number of Nevada families receiving Aid to Families with Dependent Children benefits rose 135.3 percent—the largest increase in the nation. Nevada state legislators should give charitable choice proposals a fair hearing. (Obviously, Nevada’s lack of a state income tax means a pilot program would need to derive revenue from shifting funds devoted to state welfare agencies to private charities.) By participating in a program designed to replace a bloated welfare bureaucracy with a multitude of efficient, highly-motivated private assistance agencies, Nevada could become a national leader in the effort to design a caring and cost-effective welfare system.

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