With Republicans controlling both the White House and Congress, many expect major tax reform to pass this year. One provision almost certain to be included is child care assistance for working families. Not only did President Trump make it a focus of his social agenda on the campaign trail, but child care assistance is often viewed as a bridge issue between conservatives and progressives — conservatives because it supports work and family, and progressives because it expands government assistance to the needy.
Republicans and Democrats should use this as an opportunity to pursue their goal of addressing poverty in the new Congress. It could be argued, as Republicans frequently do, that the War on Poverty has failed considering that the same percentage of Americans are poor today as in the 1960s (13.5 percent in 2015 vs. 14.7 percent in 1965) according to the official measure of poverty.
The federal government has done a good job of reducing material hardship in recent years, but there is no denying that too few poor Americans work. Child care assistance is one of the most effective ways to reverse this trend for poor families with children.
For these families, the affordability of child care can determine whether work is possible or not. Family responsibilities is the most common reason given for not working among poor families with children, even though almost half of financially struggling mothers say they want to work full-time. But when 40 percent or more of their earnings are needed to pay for child care — the average for low-income families — they may find it difficult to justify a job.
Meanwhile, our current system of child care assistance is failing to help most overcome this hurdle: only one-third of all eligible children in poverty and less than half of poor children under 5 receive child care assistance.
The just released edited volume, “A Safety Net That Works: Improving Federal Programs for Low-Income Americans,” from the American Enterprise Institute, includes a chapter on how to improve America’s child care assistance system. In that essay, I recommend expanding the child care tax credit to poor and low-income workers with young children as a way to boost employment rates and improve the quality of child care for poor families. For families with children under 5 (the most critical and expensive years for child care), the existing child care tax credit should be made refundable, providing it to families with no federal income tax liability.
Increasing it to cover a larger percentage of actual costs (50 percent, or more, up to $5,000 per child) and providing it in monthly payments rather than a lump sum at tax time would also make it more effective. My estimates suggest that this would cost up to $9 billion per year, which would almost double what is currently spent on child care assistance for low-income families. Finding 1.2 percent to pay for child care assistance in a federal budget with more than $700 billion already dedicated for low-income Americans seems entirely doable.
The advantages of using the tax system to provide child care relief is that it provides flexibility to parents who may need informal or off-hour care. It also recognizes that many families use a combination of parental and provider care to meet their particular needs. For many of today’s low-income parents trying to navigate a volatile labor market, flexibility is key and the current direct-subsidy system may not be adequate to address their needs.
But to be successful, assistance must come at the time when parents need to pay for child care. This means at least monthly rather than only at tax time, which could be made possible if structured similarly to the Advance Premium Tax Credit implemented as part of the Affordable Care Act.
This would allow beneficiaries to estimate their annual income and the amount of assistance they will need. At tax time, actual expenses and income would be reconciled and over- or underpayments handled. Other countries that have moved toward periodic distribution of benefits through the tax system in similar ways can provide important lessons for implementation in the United States.
Other proposals, such as expansions of the earned income tax credit or the child tax credit, have also been proposed as a way to offset child care costs. But this would entail a bigger budget expenditure: a much larger number of families would be eligible compared to those getting a tax credit directly linked to child care expenses. To sufficiently cover enough child care expenses to induce work for those who need it, the total cost would need to be either much higher, or a more modest per family benefit would be needed, making the work incentives less effective.
A refundable child care tax credit provided in regular payments is a more reasonable approach that will provide the assistance and flexibility that low-income parents need to work and ensure that they can afford a safe and secure environment for their children. Nothing can be more important than that.