Low income families were a little-noticed casualty of the 2011 budget battles in Sacramento, losing a benefit worth $70 million. With the passage of Senate Bill 86, California’s legislature took away a key feature of California’s Tax Credit for Child and Dependent Care Expenses — its refundability — by simply deleting a few words in the state tax code.
Tax credits like California’s are an essential support for working families. For families with children, child care is a necessary outlay in order to work and earn income. But child care is very expensive — a recent report by the National Association of Child Care Resource and Referral Agencies found that, in 2009, center-based care in California cost on average $11,580 per year for infants and $8,234 for four-year olds. That’s why the federal government and over half the states offer a credit or deduction to help defray the cost of employment-related child care expenses.
Refundable credits, offered in 12 states — 13 before California’s S.B. 86 — are particularly valuable for poor families. Many low-income families don’t owe state income taxes or owe very little because their income falls below the taxable threshold after standard deductions and exemptions. If the state offers a refundable child and dependent care credit, such a family may receive a refund to defray the cost of child care. But if the state credit is non-refundable, that family receives little or no benefit, because a non-refundable credit only reduces the amount of tax due. Refundability is critical to ensuring that a tax credit for employment-related child care expenses provides meaningful assistance to low-income families.
California’s repeal of refundability will have a real impact on low-income families’ budgets. According to a report by the state, in 2007 families with adjusted gross incomes of less than $20,000 were allowed more than $30 million under the credit, most of which was likely refundable. Unfortunately, these families can’t turn to the state’s child care assistance program, because there are nearly 200,000 families already on the waiting list.
For California parents at the bottom of the income scale, it’s going to be much more difficult to make ends meet in Tax Year 2011. In Tax Year 2010, a family with two children could have qualified for as much as $1,050 from California’s tax credit to offset child care costs. But in Tax Year 2011, many families will qualify for little or no assistance. Picture a California single parent with two young children, not yet school age. She pays for child care in order to work as a home health aide, but earns only minimum wage, so her total income is low enough that she owes little or no state taxes. In Tax Year 2010 — before S. B. 86 — this mom could have qualified for a refund from California’s child and dependent care tax credit. But in Tax Year 2011 — after the passage of S.B. 86 — this same mom will receive little or no benefit from the credit. This is a dollars-and-cents difference for working families with children in California, who can ill afford to lose these resources.
California’s S.B. 86 was a significant loss for low-income families; we hope that California’s legislature will reconsider their decision and restore the credit’s refundability in next year’s session.