The “Helping Working Families Afford Child Care Act” Would Help, but Doesn’t Solve the Timing Mismatch
By Elaine Maag :: July 28th, 2014
The Child and Dependent Care Tax Credit (CDCTC) does not work for low-income families. It fails on three counts – the credit is nonrefundable, covers only a portion of expenses, and comes long after expenses have been incurred.
Senators Jeanne Shaheen (D-NH), Barbara Boxer (D-CA), Patty Murray (D-WA), and Kristin Gillibrand (D-NY) have proposed the Helping Working Families Afford Child Care Act to address the first two problems. The bill would also limit benefits for families with incomes in excess of $200,000. The Tax Policy Center estimates the bill would cost about $38 billion over the 10-year budget window from 2015–2024. It’s a great start for helping low-income families pay for child care. A better option would be one that delivers benefits contemporaneous with expenses.
The Senate bill would allow families to receive a refundable 20 percent credit for childcare expenses of up to $8,000 per child ($16,000 max per family). That translates to a credit of up to $1,600 ($3,200 for families with more than one child). Because the credit would be refundable, low-income families would get the full value they qualify for, rather than only that part of the credit that offsets the taxes they owe. That’s important for low-income families, most of whom do not pay federal income tax.
Under current law, families with income of $43,000 or less qualify for up to a 35 percent credit on as much as $3,000 of child care expenses ($6,000 per family). But very few people fully benefit from the higher credit rate because they have little or no tax liability. A 20 percent refundable credit would be worth far more, particularly when coupled with increasing allowable expenses (see table).
Comparison of Current Law Child and Dependent Care Tax Credit and Helping Working Families Afford Child Care Act, 2015
|Current Law||Helping Working Families Afford Child Care Act|
|Maximum Expenses||$3,000 per child; $6,000 per family||$8,000 per child; $16,000 per family|
|Credit Rate||20 – 35%; lowest rate applies once income exceeds $43,000.||20%|
|Phase out?||No||Yes. Credit phases out between $200,000 - $290,000 of AGI.|
|Indexed for inflation?||No||Yes|
Source: Urban-Brookings Tax Policy Center and http://www.shaheen.senate.gov/imo/media/doc/MCG14435.pdf.
In 2015, the TPC estimates that the CDCTC will deliver $3.7 billion in benefits to 6.6 million families. Under the proposal, $6.9 billion would go to 8.4 million families. Average benefits would increase from $563 to $822 – but some lower-income groups would see much larger average increases (see figure). Under current law, almost no families with incomes below $10,000 can benefit from the CDCTC. Because the proposed credit is refundable, 140,000 families would receive an average benefit of $728. For families with incomes between $10,000 and $20,000, the number of beneficiary families would rise from 26,000 to 764,000 – and average benefits would quadruple from $153 to $630.
Higher income families would also get larger credits under the proposal because of the increase in the maximum allowable expenses. Very high income families, however, would see their average benefits drop because the credit phases out. Families with income between $500,000 and $1 million would see their average credits fall from $560 to $292; the number of families with benefits in that income range would decline from 51,000 to 1,000. Families with even higher incomes would lose their credits entirely. (Note that our tables are based on an expanded income measure, which tends to be higher than AGI, the income concept used to determine eligibility.)
The proposal would complicate childcare benefits for families with one child, just as they are already complicated for families with more than one child who can benefit from both dependent care spending accounts and the CDCTC. This problem could be fixed if the dependent case spending account limits were the same as the CDCTC limits – or if dependent care spending accounts were eliminated.
Even if this bill became law, low-income families would still face the problem of paying their childcare bills. They typically have to pay when services are performed, generally long before tax benefits show up in tax refunds, a major problem for people facing cash-flow constraints.
Congress could address that problem by expanding funding for direct childcare subsidies rather than increasing the credit. Government has experience delivering monthly benefits and it better fits the cash flow needs of many families. In spite of this shortcoming, the Senate bill does address the current system’s failure to provide tax credit for childcare for the people most in need. Making the CDCTC refundable and increasing allowable expenses is a huge step in improving child care assistance for low-income families.