President Trump released his “skinny” budget proposal last month, shining a light on some of the values and priorities of his administration. While the proposal is light on detail and includes some deeply troubling elements, it does state that early care and education is of “high priority.” Those interested in understanding how President Trump might approach early care and education need to look to the child care proposal that his campaign released last fall. Although a wealth of solid research highlights the importance of prioritizing early care and education for the disadvantaged, the President’s existing plan would do little to help families that are truly struggling to afford the high cost of child care. This blog post examines three main components of the President’s early care and education proposal: tax deductions, tax-preferred savings accounts, and tax rebates.
The Proposed Child Care Tax Deduction Would Overwhelmingly Benefit Families With High Incomes
President Trump’s proposal would provide a tax deduction worth the value of the average cost of care, based on age, in each state for children under the age of 13. Families would qualify for this deduction regardless of whether they have child care expenses. For example, a family with a stay-at-home parent could claim the deduction even if their children are not in formal, paid care. Tax deductions lower a family’s taxable income. This means that the higher a family’s income tax bracket, the larger the benefit it receives. To illustrate, let’s say the average annual cost of child care for a 2-year-old in California is $10,000. A family in the current high-income 33 percent tax bracket could use the deduction to reduce their tax owed by $3,300. Meanwhile, a family that is less well off — in the lower-income 15 percent tax bracket — could only reduce their tax owed by $1,500. What’s more, the income eligibility limits for this proposed tax deduction are extremely high — it’s available to single parents with incomes up to $250,000 and two parents with incomes up to $500,000 — and the deduction would even assist families with incomes in the top 5 percent of households in the US.
The proposed tax deduction falls far short of providing meaningful support to low- and middle- income families struggling the most to afford the high cost of child care. Further, in order to even take advantage of a tax deduction, families must earn enough to owe federal income taxes. If their incomes aren’t high enough, the tax deduction would be useless. In fact, the United States once had a federal tax deduction for child care expenses, but it was converted to a tax credit — the existing Child and Dependent Care Tax Credit — in 1976 because the deduction was deemed inequitable.
The Dependent Care Savings Account Would Strongly Favor Families With High Incomes While Providing Little Benefit to Lower-Income Families
The second component of President Trump’s child care plan is a tax-preferred savings account: the Dependent Care Savings Account (DCSA). The DCSA would allow families to save up to $2,000 per child per year up to the age of 17 for a variety of expenses like private school or extracurricular activities — that is, not just child care. Eventually, if a balance remains after covering eligible expenses, families could use these dollars to pay for college tuition. Contributions to a DCSA would not be taxed, which is why they are referred to as “tax-preferred” savings accounts, and families with any income — $10,000 or $1,000,000 or more — could take advantage of the DCSA. For families with low incomes, the federal government would match 50 percent of the first $1,000 deposited into a DCSA each year — a maximum of $500 per child per year.
As a way of helping families with the high cost of child care, a tax-preferred savings account is an ill-advised approach. Families who are living paycheck to paycheck would find it very difficult to put money into a special savings account when they don’t have enough cash on hand to pay for current child care expenses, much less diapers, rent, or bus tickets. Finally, much like President Trump’s proposed child care tax deduction, the DCSA would overwhelmingly benefit higher-income families. The higher a family’s income tax bracket, the greater the tax savings from any dollars placed into this savings account.
The Tax Rebates Would Do Little to Defray the High Cost of Child Care
The third component of President Trump’s child care proposal is a tax “rebate” offered as a supplement to the federal Earned Income Tax Credit (EITC). The tax rebate would be worth 7.65 percent of the average cost of care for the age of the child in the state and would be limited to families with annual incomes up to a certain limit: single parents with incomes up to $31,200 and married parents with incomes up to $62,400. Returning to the example above, assuming the average cost of care is $10,000, a family would receive just $765 a year — at most — to help pay for child care expenses. It’s unclear whether or not families with a stay-at-home parent could even take advantage of the rebate, unlike the proposed deduction which would clearly include families with stay-at-home parents. (Read more from the Tax Policy Center and the National Women’s Law Center.)
Moreover, President Trump’s proposal would only cover a miniscule portion of overall expenses, which means it wouldn’t go far in helping families make ends meet. In addition, although the federal EITC has a long track record of increasing working families’ economic security, offering a tax rebate for child care expenses as an add-on to the federal EITC may risk limiting the reach of the rebate. For example, some families may not file taxes to receive the EITC because they are unaware that they qualify for the federal tax credits.
A Different Approach: Federal Policymakers Should Boost Child Care Funding and Improve Existing Tax Credits
President Trump’s child care proposal does little to help families that need assistance in affording the high cost of child care. But the right policy choices could make a real difference. There are a number of actions federal policymakers could take to significantly help families who are truly struggling with child care expenses:
- Boost federal funding for subsidized child care assistance. The Child Care and Development Block Grant (CCDBG) provides funding to states for child care assistance. CCDBG was reauthorized in 2014, but Congress did not increase funding to help states comply with new requirements, and federal funding for child care assistance is down 18 percent from 2008 to 2014, after adjusting for inflation. There is tremendous unmet need for subsidized care. Just in California, more than 1 million children eligible did not receive subsidized care in 2015, according to our recent analysis. Increasing funding would help more families with the high cost of child care and boost parents’ earnings, too.
- Improve the existing Child and Dependent Care Tax Credit (CDCTC). As mentioned above, there already exists a federal tax credit for child care expenses. The CDCTC allows families to claim a percentage of work-related child and dependent care expenses (up to a limit) in order to reduce the amount of taxes they owe. Federal policymakers could improve the CDCTC in a number of ways:
- Make the credit refundable. In order for any tax credit to benefit low- and moderate-income families, it must be refundable. If a credit is refundable, then families whose credit is larger than the amount of income taxes they owe will get the difference in a tax refund. This allows even families with low incomes who do not earn enough to owe income tax — but who do pay other taxes — to still receive the credit. The CDCTC is limited in its reach because it isn’t currently a refundable credit.
- Increase expense limits and income limits, and index them to inflation. Not only is the CDCTC not refundable, but the limit on the amount of child care expenses a family can claim ($3,000 for one child or $6,000 for two or more) doesn’t come close to the actual cost of care. In addition, the CDCTC phases out as family income increases, which means that the higher a family’s income, the smaller the percentage of the credit they can claim. Normally, phasing out a tax credit as family income rises reflects sound tax policy. However, the income phase-out for the CDCTC begins before a family is even above the poverty line. The CDCTC limits on expenses and on income haven’t been updated in over 15 years. Updating the limits on expenses and income, and indexing these limits to inflation to make sure they don’t lose value over time would — especially in combination with making the credit refundable — go a long way toward helping families with the high cost of child care.
Low- and moderate-income families are often forced to stretch family budgets to pay for child care, rent, diapers, food, and other basic necessities. Yet, President Trump prioritizes generous tax benefits for families that are well off, with the largest benefits going to families that spend the smallest share of their income on child care expenses. President Trump and federal policymakers should direct resources to working families that truly need assistance in affording child care in order improve families’ economic security.
—Kristin Schumacher
