On Tuesday Senators Shaheen, Boxer, Murray, and Gillibrand introduced the Helping Working Families Afford Child Care Act—legislation that would dramatically reform government subsidies for child care.
Child-care costs are a major disincentive to work. Low-income workers face a host of penalties on their wages, ranging from payroll taxes to the phase-out of benefits like food stamps and Medicaid. But for many workers, paying for child care is the highest of all these costs. While families with children under the age of fifteen spent an average of 7.0 percent of their income on child-care expenses in 2011, the lowest-income households with child-care expenses—those with monthly incomes of $1,500 or less—spent a remarkable 39.6 percent of their income on child–care expenditures.
The high cost of child care is enough to incent working parents to stay home. Indeed, the rising cost of child care has been cited as one reason for the reversal in the employment rate of working mothers. In 1999, just 23 percent of mothers with children younger than the age of eighteen stayed home, but by 2012, this share had gradually risen to 29 percent. For many parents, especially for working-age mothers, it simply does not pay to work.
Child care costs can be considered a tax on work, just like income or payroll taxes. Even though low-income families do not tend to pay very much in income taxes, they still face very high marginal tax rates. Estimates by the Congressional Budget Office show that, after accounting for the phase-out of benefits associated with additional earnings, families near the poverty level can face some of the highest tax rates in the country. In 2012, roughly one-quarter of families at or just above the poverty level faced effective tax rates of roughly 45 percent or higher—and these estimates do not even include the payments for child care, which can reduce effective pay after taxes and work-related costs to just pennies on the dollar.
Working families can receive a break on their child-care expenses through the Child and Dependent Care Credit (CDCC). The CDCC offers families a subsidy of between 20 and 35 percent on qualified expenses if all parents in the household work. Unfortunately, the credit is non-refundable, which means that it is generally of little value to low-income households. As a result, the 44 percent of households with income below $30,000 receive only 8 percent of the credit’s annual benefits of $3 billion.
One solution is to reform the credit to make it more valuable to families with low wages for whom high child-care costs might push them out of the labor force. As part of a new Hamilton Project series on poverty, I propose to reform the CDCC so that it is a refundable credit (available to those with low or no income tax liability) and available only to families with annual incomes below $70,000. These reforms would reduce the implicit tax on work facing low-income families and boost labor-force participation among America’s lowest-paid workers.
I also propose to make the credit dependent on the child’s age (ages 0-4 versus 5-12) and on whether the child is enrolled in a licensed care facility. Basing the credit on the child’s age is a way to provide targeted incentives to parents of young children, who often incur especially high child-care costs. Additionally, allowing for a more generous credit for formal care acknowledges that steering kids into licensed child-care facilities often results in better outcomes for the children down the road.
My proposal differs in some respects from the new legislation introduced earlier this week, but either approach offer tremendous benefits for working families. For example, the refundable credit I propose offers higher benefits to low-income families and is more targeted to lower and moderate income families than the new Senate proposal. Under my proposal a single mother with a 2 year old child earning $20,000 per year could be eligible for up to $4,000 in refundable child-care credits if the child is enrolled in a licensed care facility; and up to $2,000 if the child is placed in unlicensed care. Alternatively, the maximum credit in the Helping Working Families plan is $1,600. Moreover, the credit in my plan begins to phase out after $25,000 in earnings and eligibility for the credit terminates at earnings of $70,000 per year. In the Senate plan the credit does not begin to phase out until $200,000 and is fully phased out at $300,000 per year.
High effective tax rates on low-income workers contrasts with the fundamental notion of being rewarded for work. Reforming the CDCC to better benefit the workers paying the highest share of their income to child-care costs would go a long way towards making work pay.
I believe the new child care credit proposal by Senators Shaheen, Boxer, Murray, and Gillibrand is a real positive step toward making work pay for American families.