The Next Step Toward
Welfare Reform:
A Manual for Enacting
Tax Credits
for Charitable Contributions
March 1998
4. Implications for Nonprofit Organizations
4.1. Which types of organizations would qualify for
the credit?
- Ideally, most secular and nonsecular nonprofit organizations
that offer services to the poor would qualify for a charitable tax credit
program. Specific qualifications would be determined by the welfare service
or services that the tax credit would fund in each state. The amount of the
welfare system to be privatized would also influence the types of organizations
that would qualify.
4.2. What types of services must the organization
offer to be eligible?
This depends on the extent of the state's welfare privatization.
State legislators and policymakers typically focus on means-tested programs
such as food stamps, cash aid, housing and related services. Since many nonprofit
organizations already provide these services to the poor, with added financing,
they could easily move to an expanded role in the provision of services.
- Under a fully privatized welfare system, nonprofit
charitable organizations would have to offer services that are normally provided
by state government. Most nonprofit charitable organizations currently lack
the capacity and the resources to operate in a fully privatized welfare system.
Given sufficient time, however, nonprofits could effectively and efficiently
service recipients in a privatized system.
- Under a partially privatized welfare system, the state
would decide which means-tested welfare programs would be privatized. States
that have proposed or enacted a tax credit legislation typically list specific
programs that qualified organizations could provide. For example, a charitable
tax credit proposal by Rep. David Peters of Massachusetts limits services
to the provision of food, shelter, fuel assistance and child care for needy
individuals and families. A tax credit proposal in Oklahoma defined assistance
to the poor as food, shelter, health care, clothing, housing, job training
and substance abuse treatment. In Arizona, the Charitable Tax Credit Act allowssss
taxpayers to contribute to any nonprofit organizations offering any assistance
to the working poor.
States could require qualifying charitable organizations
to offer some or all of the following means-tested programs:
- clothing;
- foster-care and guardianship organizations;
- emergency shelter for psychiatric emergencies;
- housing and employment for the elderly;
- employment and job training services, placement and
counseling, but not through schools or colleges;
- public food assistance (food stamps and in kind),
food pantries, and soup kitchens;
- fuel assistance;
- housing subsidies, housing in kind, and housing counseling
and mediation;
- emergency shelters and emergency housing;
- cash aid such as AFDC and SSI;
- child care;
- alcohol and substance abuse counseling and care;
- child abuse and neglect; and
- youth development for the disadvantaged.
- This list is not intended to be exhaustive, but merely
illustrative of the types of services offered by qualified nonprofit organizations.
4.3. Who certifies that the organizations are eligible
to receive contributions?
- The state could delegate the responsibility of certifying
nonprofit charitable organizations to a state agency, such as a department
of revenue; to a private nonprofit organization, such as the United Way; or
to a private nonprofit watchdog organization. States who choose to certify
nonprofit charitable organizations themselves could absorb the administrative
cost or recoup their cost by charging nonprofit organizations a small registration
fee.
- In practice, states that have proposed or enacted
tax credit legislation have chosen either a government agency or a nonprofit
organization to certify and oversee qualifying nonprofit charitable organizations.
North Carolina's charitable tax credit proposal, for example, would place
the responsibility of certifying eligible organizations with the Secretary
of Human Resources. Nonprofit organizations seeking to be certified there
would pay a $75 application fee. Arizona, on the other hand, has designated
the United Way as being responsible for certification.
4.4. Can churches, religious groups or mixed-used
organizations qualify to receive eligible contributions?
- Under most proposals, churches and mixed-use organizations
would qualify if they spent a certain percentage of their funds providing
services to designated recipients or if they partitioned qualified services
from the remainder of their budgets with no cross spending. For example, a
tax credit proposal in Oklahoma restricted charitable donations made to churches
or charitable organizations to the specific division offering qualified services
to the poor.
- State legislators and religious leaders may worry
that church parishioners would substitute giving to the church in exchange
for giving to the part of the church that services the poor or receives contributions.
States could stipulate that tax credits would be offered only for contributions
over and above those made in the previous year. Many parishioners would give
to the church as well as to the section of the church that provides services
to the poor.
4.5. Is there any limit to the amount a qualified
organization can spend on advocacy or legal services, marketing and administrative
services?
- Usually some percentage of funds, for example 70%,
must be spent on primary services to recipients. This limit is established
to ensure that tax credit dollars are spent directly on recipients, not used
for other purposes.
- In most cases, tax credit legislation limits nonprofit
charitable organizations' administrative expenditures to 30% of their total
budget. Some legislation and some proposals allow nonprofits to include the
salaries of staff members who provide services to the poor in their calculation
of the 70% threshold.
- Some legislation allows nonprofit organizations to
dedicate part of their administrative budget for other expenditures. For example,
in North Carolina, a tax credit proposal would allow nonprofit organizations
to spend part of their administrative budget on advocacy for the poor and
on legal services. Oklahoma's tax credit proposal requires that no more than
30% of a nonprofit organization's expenditures be for administrative and fundraising
purposes.
4.6. What is the appropriate role of solicitation
organizations in delivering welfare benefits?
BHI does not recommend offering credits for donations
to solicitation organizations (such as the United Way) because such entities
represent an administrative “filter” that absorbs funds better spent
directly on the poor. Admittedly, reasonable arguments can be made in support
of solicitation organizations, such as those based on economies of scale and
better quality control. We believe, however, that organizations would develop
their own funding networks and arrangement for quality-control without the need
for solicitation intermediaries. The question is, however, open to further research.
Table of Contents
Implications
for Policymakers (FAQ)
Appendix I: BHI Nonprofit
Organization Survey Results
The Beacon Hill Institute for
Public Policy Research focuses on federal, state and local economic policies
as they affect Massachusetts citizens and businesses. The institute conducts
research and educational programs to provide timely, concise and readable analyses
that help voters, policy makers and opinion leaders understand today's leading
public policy issues.
© March 1998 Beacon Hill Institute
at Suffolk University
ISBN 1-886320-04-7
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