The President proposed a massive investment in our nation’s young children and working families in his 2016 budget released today – through a combination of expanded tax credits and direct subsidies for child care.
The rising cost of child care in the United States over the past two decades has far outstripped the overall increase in inflation. When coupled with stagnant wages among those in the low- and middle-income classes, child care for many working families can erode anywhere between one-sixth and one-third of annual earnings, depending on state of residence.
To help alleviate this financial burden on low- and -income families, in a Hamilton Project report released last June, I proposed reforming the Child and Dependent Care Tax Credit (CDCTC) to be more generous for families with children under age five compared to those with children ages 5–12 and for families with children in licensed centers. I also proposed that the CDCTC be more generous for families with children in licensed centers, and to convert it from a nonrefundable tax credit with no income eligibility limit to a refundable credit with an income limit of $70,000.
In the President’s budget, he is proposing to make the credit more generous for working families with children under age five and for those with incomes under $120,000 – up to $3,000 per child compared to $1,050 today. Making the credit more generous for children under age five recognizes that child care costs for infants and toddlers tend to be much higher than for adolescents. Likewise, making the credit more generous for families earning less than $120,000 per year, will touch a much larger segment of the middle class, especially those residing in high-cost areas. Under current law, the credit’s generosity declines after $15,000 in earnings, and thus the President’s plan is a significant middle-class tax cut.
The budget proposal, however, will leave the credit nonrefundable. A limitation of the CDCTC is that many low-income workers do not qualify for the credit – including those receiving the refundable Earned Income Tax Credit – because the CDCTC applies only to those families who owe taxes before applying the credit. This provision would not be altered under the President’s plan.
However, the President is proposing to supplement the CDCTC with an unprecedented expansion in the Child Care and Development Fund (CCDF) that holds the potential of fully covering child care costs for families earning under two-times the federal poverty line. These families generally earn too little to benefit from the CDCTC, and inadequate federal and state funding of CCDF leaves a large fraction of them on waitlists. Thus, many of our most vulnerable families face a stark tradeoff of not working or working with unsafe and unstable child care options. To address the latter issue of quality, the President is proposing financial incentives to states to adopt higher-quality standards of care, along with up to $100 million in funds for the implementation and evaluation of demonstration projects focused on alternative care arrangements.
The combination of expanded child care tax credits for the middle class and the direct provision of child care for working poor and near-poor families offers the promise of stemming the exodus out of the labor force for many who found the cost of child care too exorbitant relative to the financial rewards to work. It also encourages the investment in quality, early-learning environments for our children that have been shown to lead to better educational, health, and labor-market outcomes in the long run.