Welfare

A State-Level Tax Credit for Charitable Giving

The ultimate goal of welfare reform, says researcher Peter Barwick, should be to shift more responsibility and resources from the welfare state to privately funded, local charities. A charity tax credit is the best way to expand the role of these organizations.

A state-level charity tax credit program is consistent with federalism, says Barwick, and it is easier to achieve short-range policy change at the state level than in Washington, D.C.

  • A tax credit would allow individual taxpayers to reduce what they owe in state taxes by contributing to in-state charitable organizations providing direct assistance to the poor.

  • One option is a 50 percent credit against one's state income tax liability on money donated to qualifying charities, up to a ceiling of 25 percent of the liability.

  • Only tax-exempt organizations providing direct assistance to the poor would qualify to receive contributions.

  • At least 75 percent of a qualifying organization's overall budget should fund programs providing direct assistance to the poor; no more than 5 percent of its budget could be used for politically-oriented activities; and less than 50 percent of its budget should come from government sources.

To shift responsibility and resources from the public to the private sector, says Barwick, there should be a dollar-for-dollar reduction in government spending to offset the cost of a charity tax credit. But to minimize the effects of spending cuts, a portion of annual increases in state tax revenue could be used to help fund the credit, and officials could seek permission to use federal welfare funds for this purpose.

Barwick concludes that a charity tax credit would encourage an increase in volunteerism, help restore a sense of civic responsibility, reduce the crowd-out of private charity from government welfare spending, spur increased charitable giving at all income levels, and promote competition and innovation in the provision of assistance to the poor.

Source: Peter S. Barwick, "State-Level Charity Tax Credits: The Next Step in Welfare Reform," Alternatives in Philanthropy, December 1997, Capital Research Center, 1513 Sixteenth Street, N.W., Washington, D.C. 20036, (202) 483-6900.

For a Commonwealth Foundation summary of a charity tax credit proposal for Pennsylvania http://www.commonwealthpa.org/isbrief/taxcred.html

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