Israel’s Hidden Philanthropy Tax

In the age of the modern welfare state, addressing society’s basic needs is the government’s responsibility. Taxation comes with the expectation that the government will use public funds to provide social services that maintain citizens’ quality of life at an acceptable level.

Why, then, does the Government of Israel (GOI), which is undisputedly a welfare state, systematically underfund the NGOs to which it outsources the provision of social services?

Today, services outsourced to NGOs via government tenders account for NIS 10 billion - 80 percent of the Israeli Ministry of Social Welfare’s budget of NIS 12.6 billion. Yet the Ministry underfunds these NGOs’ operational costs by 30 percent. Meaning, the actual cost of social welfare is 14.3 billion. Hence, NGOs and philanthropy are covering 4.3 billion shekels of underfunded operational costs.

Additionally, NGOs running governmental tenders must raise money in advance to cover operational expenses for at least one financial quarter, since the Ministry makes no advance payments – only refunds. NGOs must submit expense reports and then wait patiently for the government to process payments, which can take months.

There is nothing rational or ethical about this system, which forces NGOs to devote a large portion of their limited resources to fund-raising. It impacts their ability to most effectively carry out their primary function as providers of professional public services. The real victims of this circumstance are the intended beneficiaries of these services.

The need for extra funds, garnered from fickle donors, to operate under these circumstances can lead to organizational instability. Workers can be laid off and programs closed as a result of even a temporary decline in fund-raising revenues. It then becomes difficult for NGOs to recruit and retain qualified, talented staff.

Does the State of Israel simply lack the funds necessary to cover the costs of providing essential social services? Absolutely not. Year after year, the Ministry’s budget is underutilized, and funds  earmarked for social services are untouched.

Transparency - or the lack of - is also a problem: donations raised by NGOs to cover their operational deficits are not recorded in the Ministry’s budget. Essentially, it is underreporting its expenses. This distorts measures of efficiency, keeping cost-per-beneficiary results artificially low. And as there are no regulations dictating the rules of underfunding, otherwise well-meaning civil servants are free to make arbitrary decisions, without any oversight.

This hidden tax on philanthropy, which enables the government to save money on its social responsibilities, taps into the shallow pool of philanthropic assets that would be better invested in testing and developing innovative intervention models. Historically, even mildly successful social innovation initiatives by the third sector generate immediate financial gains for the government by enabling it to meet social needs better and less expensively.

The system is broken and needs to be fixed. Individual NGOs, operating on their own in perpetual survival mode, are not in a position to solve this problem. Collectively, however, NGOs together with philanthropists can generate practical solutions, present them to representatives of the ministries of Social Welfare and Treasury, and advocate for change.