The idea behind a block grant is that spending on its entitlements programs will be bundled and given as a lump sum to each state. Implicitly, the idea suggests that the states will have a great deal of discretion over how the funds are spent. To be most effective, block grants should be based on five principles.

1. Include all means-tested spending programs. Some in Congress who favor block grants would restrict them to certain categories. Others suggest a federal takeover of some programs in return for block-granting others.

However, the welfare-poverty crisis does not fit into neat compartments such as food, housing, health, etc. For example, some of the most serious health problems of the poor are related to lifestyle - eating habits, living quarters, etc. The key to changing behavior in ways that improve health, therefore, is to allow the givers of aid to package all forms of relief into a program that takes account of the way in which the effects of eating, housing, health care and the management of a family budget are interrelated.

Further, failure to block grant all means-tested programs would create perverse incentives for a state to skimp on benefits under programs it paid for and expand programs for which the federal government paid.

2. Attach no strings other than a general matching requirement and a requirement that funds be spent on low-income beneficiaries. States should have maximum flexibility to design and implement their own welfare systems. Otherwise, special-interest constituencies will try to separate types of spending and impose requirements that health care block grants be spent only on health, housing block grants only on housing, etc. In addition, those wedded to the idea of entitlements will try to force state governments to continue running them. This attitude is evident in proposals to impose work requirements on AFDC and Food Stamps recipients - mandates dictating who must work and who can't be forced to work. Such mandates would defeat the entire purpose of block grants.

3. Base the initial allocation among the states on the current distribution of poverty. A reasonable approach is to base each state's share on its share of the nation's impoverished. The downside is that in future years such states as Arizona and Florida may attract more elderly residents who use such services as Medicaid. These states could, therefore, be shortchanged by an inflexible formula.

A much less desirable approach, currently favored by the Republican leadership in Congress, would be to block grant funds based on current federal spending. But this would reward the states that currently spend the most, instead of assisting those with the greatest needs.

4. Let future block grants be unaffected by changes in a state's poverty population. Under current entitlement programs, the federal government's share varies from 20 percent to 80 percent, depending on the state and the program. This structure punishes states that reduce poverty and rewards states that do not. Assuming a 50-50 match, a state gets to keep only 50 cents out of a dollar of waste it curtails. Conversely, if a state generates a dollar of waste, it pays only 50 cents. To eliminate these perverse incentives, future block grant amounts should be independent of changes in poverty population (except, perhaps, those caused by immigration). Thus a state that succeeded in reducing poverty would be able to keep 100 percent of the resultant savings.

5. Cap the total amount of federal block grants and let them grow no faster than the rate of inflation. If radical reform produces the desired results, the percent of the population living in poverty and the number of people who qualify for relief should steadily fall. The structure of block grants should anticipate that success by limiting their growth to the rate of inflation.

Capping the growth of block grants would send an unmistakable signal to the states that they cannot engage in business as usual. It would strongly encourage them to solve their welfare-poverty problems by making them pay the full cost of failing to do so.

Source: John C. Goodman, "Taxpayer Choice: A Radical Solution to the Crisis of the Welfare State," forthcoming study, Goldwater Institute, 201 N. Central Avenue, Phoenix, AZ 85004, (602) 256-7018.

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