POLICY RECOMMENDATIONS

the optimist seems to feel that their reliability enables them to receive funding through the one percent system.

Part II of the survey exposes two noteworthy issues. Only 10 respondents were not concerned with generating some form of reserve capital, which could financially stabilize their organization. This reveals the need for organizations to move towards financial self-sufficiency. On the other hand, if an organization has a financial surplus, it is being managed in a very conservative way. The most obvious explanation would be the complex legal and tax policies that discourage organizations from more active forms of asset management. The lack of asset management know-how is also likely a contributing factor.

beneficial to the state than the one percent system. The public budget provides only a portion of what is required, thus encouraging citizens to engage in philanthropic activi-ties. This is a preferred solution, given that decisions made by taxpayers regarding their own money are usually more thoughtfully considered than the manner in which public money is spent. It is also more beneficial for civil society in the long term, because it fosters a much stronger relationship between taxpayers and the organizations within the nonprofit sector.

Relationships between the state and civil society should be based on real partner-ships, meaning that the nonprofit sector cannot be reduced to a low-cost subcontractor that assumes the responsibilities of the state. One of the main strengths of this sector is its independence and its handling of social capital. If the one percent system is taken as a temporary solution for the post-donor era, and a means by which to re-establish a philanthropic culture in CEE, it cannot be treated as a substitute for other measures used by the state to support civil society. In order to help NGOs survive the withdrawal of foreign donors, the government must first deal with following issues:

1. creating favorable social and legal conditions to develop other forms of support for NGO’s;

2. creating an effective infrastructure;

3. providing sustainable and longer-term solutions for the nonprofit sector.

6.1 Building a Friendly Environment

The one percent system is only partly responsible for building relationships between government and civil society. In order for it to be effective, it must first be embedded in the existing legal and economic infrastructure. The implementation of the one percent system should not exacerbate the situation of those nonprofit organizations that do not wish to participate. Yet the introduction of this system in Poland was accompanied by a decrease in tax deductions, and, on the proposal of the Ministry of Finance, it was made accessible only to legally approved public benefit organizations.²⁷

By stipulating a tax deduction of €80 per taxpayer per year in 2004, rather than 15 percent of income before taxation, the Polish government not only reduced the financial provisions for NGOs but it also replaced a socio-economically sound system with a much more problematic alternative. Similar approaches might be integrated into the one percent system of other countries, in lieu of tax deduction. This suggests that countries within CEE still lack sufficiently developed policies regarding bilateral relations between governments and NGOs. Current budgetary constraints dominate the long-term perception of NGO’s role in the socio-economic life of Poland. As stated in previous chapters, the financial diversification of NGOs cannot be solely dependent on public money, regardless of which coffers it’s taken from. One percent of personal

income tax is public money, much like that which is meted out by the government.

The state should therefore encourage its citizens to participate in financing civil society activities with their own money, using different tax deduction incentives. The one percent system should be used as a supplement rather than a substitute. Although it would be difficult to maintain a harmonious relationship between the one percent system and tax deduction methods for any length of time, the one percent system may serve as a provisional means to develop other ways of financing civil society. This will be explored further in the following sections.

6.2 From Opportunity to Reality

Hungarian figures revealed that only one third of taxpayers participated in the one percent system. Consequently, organizations from countries where the system was introduced at a later date need to determine how to match that level of participation, how to make the procedure of designation more appealing to those who are eligible, and how to increase the effectiveness of promotional and informational campaigns. Appendix II briefly outlines the different procedures of the one percent designation. Key factors, which may affect the success of the procedure, are as follows:

6.2.1 Decision on eligibility

The maximum transparency in acquiring, maintaining, and in some cases losing, public benefit organization status is of the utmost importance in preserving a taxpayer’s trust in the system. In this regard, one must first assume that decisions made in granting or denying funds through the one percent system are not preferentially biased. These cases must therefore, be assigned to an independent court rather than a governmental body, as is fortunately the practice in Poland. The activities of public benefit organiza-tions must be under the permanent supervision of the court, but, more importantly, they should be supervised by civil society—not only by public benefit organizations but also by organizations that are ineligible or do not wish to acquire public benefit organization status. In other words, there must be a mechanism of self-control, which is acceptable and can be implemented by a majority of the organizations. There must also be an efficient mechanism for suspending a public benefit organization’s status, as well as a clearly defined process by which a public benefit organization may appeal the court’s decision. The entire system must be transparent, unbiased, and efficient, while taking into account the potential for errors.

6.2.2 Information on eligibility

The cost of researching information and the cost of mistakes made by the taxpayer are issues of vital importance. If the eligibility criteria are self-evident and easy to under-stand, and the amount of information required for proper designation is concise, it will reduce the time spent, and thereby the cost to the taxpayer. In the Hungarian system, the taxpayer only has access to the tax number of the eligible organization. Whereas, in the Polish system, the taxpayer has access to the name, address and bank account number. The former is more simplified, as the tax number is usually fixed for a particular organization whereas the bank account may change from year to year. It is also less likely for errors to occur in the Hungarian system, since the tax number distinguishes eligible from non-eligible organizations. More important is the fundamental difference between the two systems: In the Polish system, the taxpayer is responsible for the entire proce-dure, which means that any mistakes, such as designating one percent to an ineligible organization, will burden them personally. The taxpayer must designate one percent before submitting an annual tax return. If an ineligible organization is designated the taxpayer will not receive his refund. The taxpayer must therefore take into account the risk of error, the value of time involved in the transfer and the value of money over time.

In Poland, refunds are usually received three months after filing. Bearing all of this in mind it would easy to see why Polish taxpayers would be less likely to participate in the system than Hungarian taxpayers.

6.2.3 Procedure of designation

The complexity of the procedure mentioned above is justified by Polish officials with the rationale that decisions made by taxpayers are more deliberate because they require considerably more personal involvement. This logic is not only questionable, but it also defies the fundamental logic of the entire system. If the one percent system is part of a national strategy for the redistribution of funds, it would be more practical to use tax offices as agents in this case. The tax offices are responsible for administering taxes and should also be responsible for sending the one percent to eligible organizations accord-ing to the wishes of the taxpayer. There is not yet any data on the number of taxpayers participating in the one percent system in Poland, but it is likely much lower than in Hungary, largely due to differences in the procedure of designation. In the Polish system, the cost of errors in designations made to ineligible organization should be assumed by the tax offices rather than the individual taxpayer.

6.2.4 Minimum amount of designation

The fiscal threshold in the Polish system is the cost of money transferred. If, as suggested above, the tax offices were to take responsibility for distributing the one percent tax, it would be reasonable to establish a minimum amount, which could be designated, thus increasing the cost-benefit ratio. This threshold should be set quite low, so that several small payments could be made—though the Hungarian model illustrates that wealthier taxpayers have a much larger impact on the system.

6.2.5 Divisibility of one percent

There are two possibilities in this case: either the entire one percent can be designated to one organization or be split between more than one organization. However, the former would be more effective, and would present less of an administrative burden.

6.2.6 Anonymity

In the Hungarian system, the taxpayer maintains their anonymity from the beneficiar-ies. In the Polish system the tax authorities believe that, since the one percent is sent directly to the eligible organizations, the designation should be built on a relationship between the donor and the beneficiary, and anonymity will inhibit feedback from the organization.²⁸ The taxpayer, however, may prefer that their choice of beneficiary remain anonymous.

Both arguments are difficult to defend. Charity should be based on personal relation-ships, but the one percent system is not actually a form of charity, rather the granting of personal choice in the designation of public money. Still, an organization may feel obliged to acknowledge the gift in the form of a letter or specific services to the taxpayer.

The former is kind yet unexpected, the latter borders on corruption, as a form of public money being used for private purposes. For this reason, the taxpayer should remain anonymous, and an agent or tax office should act as an intermediary.

6.3 From One Percent to Endowment

Elements of NGO funding in CEE are quite underdeveloped as compared with West-ern Europe or USA, particularly in the area of private endowment-based foundations.

Such grant-giving foundations are essential to the NGO sector and play a crucial role in building civil society, and securing the development and success of nongovernmental

organizations. Endowments allow NGOs not only to take on strategic planning but also relieve them of some, if not all, of the challenges associated with raising funds. The development of civil society in CEE is difficult to envision without the development of independent foundations, which could facilitate a financial, logistic and strategic foundation for nongovernmental organizations.

An endowment can be defined as a fund that maintains economic sustainability and ensures the kind of financial stability an institution needs to make long-term goals.²⁹ In CEE there are a limited number of philanthropists who have sufficient resources as well as a desire to fund such endeavors, and this situation is not likely to improve in the near future.³⁰ The one percent system may therefore be used as a tool in creating endowment-based foundations in each country where it has been implemented. If the one percent system is treated as a temporary solution for approximately 10 years, endowments could become financially self-sustaining. There are, however challenges associated with building such funds. These include: persuading taxpayers to support activities that do not offer a direct “pay-back,” raising enough funds to establish endow-ments, and choosing the appropriate organizations to manage these endowments. A similar system to the one mentioned above already exists in Hungary, where a portion of the one percent designation is assigned to the National Fund.³¹ Such a system also has its weaknesses in that there is only one fund for the entire country, and therefore no diversification of scope or objectives, such as would exist if there were a number of foundations. There are also insufficient endowment-based funds, so the National Fund would be primarily supported by the one percent system, and its fate would be in the hands of the government’s representatives. This could raise issues of a politically sensi-tive nature. Moreover, its connection with the taxpayers is rather ambiguous, because they may only be indirectly responsible for the amount of money being transferred to the Fund.

In Poland, there are no restrictions on using the revenue from the one percent to build endowments. However, there are both financial and administrative challenges associated with accumulating enough revenue to build an endowment. Previous experi-ence illustrates that revenue derived from the one percent system is too dispersed among organizations to make such an endowment feasible.

The process of building endowments through the one percent system may be ap-proached in the following stages:

1. Choosing potential candidates as endowment managers: The competition should be open only to grant giving foundations that have been operating for at least three years in their respective countries, have maintained a high profile, are politically independent, and are engaged in least five public benefit activities throughout the entire country. The foundation must have significant financial resources of its own, which are earmarked for future endowments.

2. Public voting: Any nongovernmental organization in Poland, public benefit organization, or other organization eligible to participate in the one percent system could vote for their preferred foundation as per stage 1.³² Foundations that acquire the most votes are promoted to stage 3.

3. Foundations from stage 2 should be listed on the annual personal income tax form. Taxpayer should be able to designate one percent of their taxes to any eligible organization or one of the six to seven existing foundations. They may also have the option of dividing one percent of their income tax between any two organizations.

4. If the one percent designations are carried out for at least 10 years, income generated by these designations in the first five years should only be used by foun-dations to build endowments. After five years, founfoun-dations that have collected the least amount of funds should redistribute them among other foundations.

This method will provide the necessary incentives for organizations to compete with one another and thereby raise the profile of the scheme. After the first five years, foundations will be able to disburse grants from revenue generated by endowments.

5. The minimum endowment should exceed USD 5 million. If the return on investment was five percent, the endowment would generate USD 500,000 annually, which is the minimum threshold for providing grant-giving services on a national level. Foundations that were unable to build such endowments from the one percent system, or other sources, within 10 years, would create a jointly administrated endowment with other foundations.

6. There are also certain obligations, such as transparency and the proper manage-ment of endowmanage-ments, which should be carried out by foundations participating in the process.

6.3.1 Difficulties during the transition period

In order to support the building of endowments, funds from the one percent system must be supplemented by foreign donors, as well as government contributions. Firstly, the government should create a legal framework to encourage foundations to build endowments and persuade taxpayers to take part in the process. The Polish government may also use the Czech example, whereby funds from privatization were used to build endowments.

The participation of foreign donors in endowment building is key to stepping up the process and encouraging other stakeholders—public and private—to take part.

Foreign donors could also assist in bridging the gap from the inception of an endow-ment to the first pay-out. Even though the process of building endowendow-ments will take

at least five years, the grant-giving activities of foundations must continue. The most vulnerable civil society organizations, which cannot rely on financial support from other sources, should be identified throughout the process. However, endowment building and grant disbursements must occur simultaneously. Foreign or private donors could be asked to provide low-interest or no-interest loans as a temporary measure to fund any shortages that may occur. Such loans could be paid back from income generated by the one percent system, or from returns on investment. The remainder could be used for grant giving. This would be a risk-free solution, in which loaned capital would remain untouched and costs would be limited to the value of profits from lost capital.³³ If loans are paid back in installments, the revenue gathered by the donor each year could again be used to provide endowment loans. It is a more economically viable approach than disbursing grants, which are not paid back, however it could not be used to secure an organization’s financial stability in the long-term.