American Enterprise Institute Discusses Role of Tax Credits in Reducing Child Care Expenses

Can the tax system be used to help working families afford child care? An event sponsored by the American Enterprise Institute this week delved into that question by dissecting a bipartisan, bicameral bill that aims to reform the Child and Dependent Tax Credit and Flexible Spending Accounts, aiming to reduce the burden of child care costs for working families.

The Promoting Affordable Child Care for Everyone (PACE) Act was first introduced in January by Senators Angus King (I-ME) and NC’s Richard Burr (R-NC), then picked up in the House later in the year by Representatives Kevin Yoder (R-KS) and Stephanie Murphy (D-FL). NCECF reported on the Act in April.

The bill would make adjustments to the Child and Dependent Care Tax Credit and Flexible Spending Accounts, including:

  • Making the Child and Dependent Care Tax Credit refundable, which would expand its reach to low-income working parents. A refundable tax credit can reduce a family’s tax liability below zero and qualify them for a tax refund. If the amount of the credit is larger than the tax they owe, they would receive the difference.
  • Increasing the value of the credit by raising the rate for all families. Currently, a family can receive a 20-35 percent reimbursement of childcare expenses. Under the new proposal, families would be reimbursed for between 35 and 50 percent of expenses.
  • Setting a higher rate for low-income families than for higher-income families, which expands the reach of the credit for those who are struggling more to meet these costs. Low-income families would receive the higher 50 percent reimbursement rate.
  • Allowing families to put more pre-tax dollars into Dependent Care Flexible Spending Accounts.
  • Adjusting for inflation both the amount of the tax credit and the amount that can be invested in Flexible Spending Accounts, so that those benefits increase as costs go up and families can maintain their buying power.

The American Enterprise Institute event included panel discussions with Representatives Yoder and Murphy, as well as with early education, income support and tax policy experts. There was a lively debate, with a lot of agreement and some passionate argument as well.

The bi-partisan panel agreed on many points.

  • The first five years are the most critical developmental period in a child’s life.
  • High quality child care and early education are critical services to provide, in order to build young brains and to enable parents to work.
  • The cost of child care and early education is far out of reach of many, if not most, Americans, and something must be done to address that.
  • It is possible to address the cost of child care and early education through the tax system.
  • As we create or improve tax benefits for child care and early education, it would be irresponsible to not make those benefits available to the poorest families as well as working- and middle-class families.
  • The bill is headed in the right direction but does not go far enough to make a significant difference for most low-income families who would benefit from it.

These points echo national polling results that find the majority of Americans, regardless of party, support investments in early childhood education. Polling in North Carolina finds similar results. Majorities of NC Democratic, Republican, and Independent voters say the state should make early education more affordable to working families.

There was disagreement, too. Katharine Stevens, who leads the American Enterprise Institute’s early-childhood program and has criticized the PACE Act before, argued that the bill would do next to nothing for low-income Americans. “The house is burning down,” she said. “And we’re providing people with plastic spray bottles. This bill makes us feel good about what we’re doing and does absolutely nothing for them.” Other panelists pushed back, arguing that certain provisions of the bill did mean that more poor Americans would see tax breaks to help cover child care expenses, and that this kind of bipartisan compromise on a program that would reduce child care costs, however slightly, for young low-income families is something to be celebrated.

Ms. Stevens also argued that 98 percent of our “human development dollars” are invested in the K-12 education system, while research is clear and getting clearer every day that birth through age five is the most critical developmental period in a child’s life. She argued that the distribution of our resources should be reconsidered, since “K-12 education does not equate to human development.”

Panelists for the event included:

  • Stephanie Murphy, who represents Florida’s Seventh Congressional District in the US House of Representatives.
  • Kevin Yoder, who was recently sworn in for his fourth term in Congress, where he serves on the House Appropriations Committee.
  • Elaine Maag, senior research associate in the Urban-Brookings Tax Policy Center at the Urban Institute, where she studies income support programs for low-income families and children.
  • Sarah Rittling, national director of the First Five Years Fund (FFYF), where she oversees all policy operations and leads advocacy efforts on Capitol Hill and among national early childhood coalitions.
  • Katharine B. Stevens, who leads the American Enterprise Institute’s early-childhood program, focusing on the research, policy, and politics of early-childhood care and education.
  • Alan D. Viard, resident scholar at the American Enterprise Institute, where he studies federal tax and budget policy.

The panels were moderated by Angela Rachidi, research fellow in poverty studies at the American Enterprise Institute, where she studies poverty and the effects of federal safety-net programs on low-income people in America. The recorded webcast of the event is available below. The American Enterprise Institute is a conservative think-tank based in Washington D.C., focused on issues of government, politics, economics and social welfare.