STATES CAN MAKE CARE LESS TAXING
Tax Credits Related to Child Care, Tax Year 2022
Child care and early education is critical for children’s development, parents’ ability to participate in the workforce, and our economy’s growth. However, years of underinvestment means that high-quality child care is too expensive for many families, even while wages for child care workers are far too low. This leaves many parents and child care workers—especially women of color and their families—without the support they need to care for themselves and their families. While not a substitute for greatly expanded
investments in direct child care assistance, state tax benefits related to child care can help alleviate these burdens—and promote racial and gender equity.
State Child and Dependent Care Tax Provisions Help Families Afford Out-of- Pocket Child Care Expenses
In 2020, the average annual cost of child care for one child in the United States was $10,174, though prices vary widely between states. The average couple with children would need to spend more than 10 percent of their household income to cover this average cost—well above the Department of Health and Human Services’ recommendation that child care costs constitute no more than 7 percent of household income. This burden is even higher for low-income and single-parent families—disproportionately women-headed households and families of color—who spend more than a third of their income on care. Additionally, the Child Care and Development Block Grant (CCDBG)—the main federal program that provides funding to states to help families afford child care, improve the safety and quality of child care, and support the child care workforce—is so underfunded that only 16 percent of eligible children receive care.
While direct child care investments are needed to make child care affordable and accessible for all families, states can help families offset their child care costs by enacting child and dependent care tax provisions. These tax provisions lower the income taxes that families pay and, in some cases, give cash refunds to families who do not owe taxes.
Many states have based their tax provisions on the federal Child and Dependent Care Tax Credit (CDCTC). The federal credit allows families to claim a percentage (up to 35 percent) of their work-related child and dependent care expenses (up to $6000) as a tax credit. The credit covers expenses for child or dependent care that enable the parent (or parents if filing jointly) to work or look for work. However, the federal credit is currently non-refundable, which means that many families with little to no tax liability do not
benefit from the credit. Families with low incomes, including many women-headed households and families of color, are therefore largely shut out of the credit, despite the fact that the costs of child care fall hardest on them. Fortunately, states can help families meet the costs of child care more equitably by making their state credits refundable.
As of tax year 2022, twenty-nine (including the District of Columbia) have child and dependent care tax provisions, most of which are based in some way on the federal credit. Fifteen of those states offer refundable credits (listed in bold in the table below).
States seeking to enact a new child and dependent care tax provision—or improve an existing credit— should prioritize the
• Making the credit refundable;
• Providing higher credit amounts for families with low incomes;
• Providing high expense limits (at least up to the federal limits of $3,000 for one child and $6,000 for more children); and
• Adjusting yearly for inflation.
STATE TAX PROVISION1 & MAXIMUM VALUE
Arkansas Child Care Credit: $420
Arkansas Early Childhood Program Credit2: $420
California Child and Dependent Care Expenses Credit: $1,050
Colorado Child Care Expense Tax Credit3: $1,050
Colorado Low-Income Child Care Expenses Credit: $1,000
Delaware Child Care Credit4: $1,050
District of Columbia Credit for Child and Dependent Care Expenses: $672
District of Columbia Keep Child Care Affordable Tax Credit: $1,045 (per eligible child)
Georgia Child and Dependent Care Expense Credit: $630
Hawaii Credit for Child and Dependent Care Expenses: $1,200
Idaho Tax Subtraction for Child and Dependent Care Expenses: $360
Iowa Child and Dependent Care Credit5: $1,575
Kansas Credit for Child and Dependent Care: $525
Kentucky Child and Dependent Care Credit: $420
Louisiana Child Care Credit6: $1,050
Louisiana Child Care Expense Credit7: $2,100
Maine Child Care Credit8: $1,050
Maine Adult Dependent Care Credit9: $525
Maryland Credit for Child and Dependent Care Expenses10: $672
Maryland Child and Dependent Care Expenses Subtraction: $345
Massachusetts Dependent Care Tax Credit / Household Dependent Tax Credit: $480
Minnesota Child and Dependent Care Credit: $2,100
Montana Child and Dependent Care Expense Deduction11: $180 for 2 children or dependents, $192
for 3 or more
Nebraska Credit for Child and Dependent Care Expenses: $2,100
New Jersey Child and Dependent Care Credit: $2,100
New Mexico Child Day Care Credit12: $920 for 2 children or dependents,
$1,200 for 3 or more
New York Child and Dependent Care Credit: $2,100
Ohio Child Care and Dependent Care Credit: $2,100
Oklahoma Child Care Tax Credit13: $420
Oregon Working Family Household and Dependent Care Credit14: $18,000
Rhode Island Credit for Child and Dependent Care Expenses: $525
South Carolina Credit for Child and Dependent Care $420
Vermont Credit for Child and Dependent Care Expenses15: $504
Vermont Low-Income Child and Dependent Care Credit16: $1,050
Virginia Deduction of Child and Dependent Care Expenses: $345
Wisconsin Additional Child and Dependent Care Tax Credit: $1,050
Child Care/Early Educator Workforce Tax Credits Provide Needed Income Support for Underpaid Child Care Workers
Child care workers—92 percent of whom are women, disproportionately immigrant women and women of color—earn poverty wages for doing essential work that keeps our economy running. In May 2020, a child care worker in a center only earned an average of $12.24 per hour ($25,460 annually). These low wages mean that many child care workers rely on public assistance programs like SNAP to make ends meet and suffer from high rates of economic stress, including concern about putting food on the table. Low wages also contribute to understaffing in the child care industry—a net 79,600 child care jobs have been lost since
February 2020—which exacerbates the ongoing child care crisis.
Robust direct investments in child care are needed to ensure that child workers receive the increased wages, benefits, and improved labor protections they need and deserve. However, tax benefits that provide income support to child care workers can play a complementary role . There is currently no federal tax provision targeted specifically to child care workers, but a couple of states offer a child care/early educator workforce tax credit.
Colorado’s Early Childhood Educator Income Tax Credit and Louisiana’s Credit for Child Care Directors and Staff are refundable tax credits for child care workers who hold applicable child care credentials and have been working in an eligible program for at least six months. Colorado’s credit provides up to $1,500 and Louisiana’s up to $3,787, with the amounts for both based on the child care worker’s level of experience and credentials (see chart below). (Nebraska previously offered a child care workforce tax credit of up to $1,500, but it expired in 2022.)
CHILD CARE/EARLY EDUCATOR WORK FORCE TAX CREDIT AMOUNTS BY EXPERIENCE LEVEL
Colorado’s Early Childhood Educator Income Tax Credit17
Early Childhood Professional 1 $700
Early Childhood Professional 2 $1,000
Early Childhood Professional 3 $1,500
Louisiana’s Credit for Child Care Directors and Staff18
Child Care Teacher I $1,89419
Child Care Teacher II $2,525
Child Care Teacher III $3,157
Child Care Teacher IV $3,787
States seeking to create their own child care workforce tax credit should prioritize the following in designing and implementing their credit:
• Making the credit refundable;
• Ensuring that as many types of child care workers as possible are covered by the credit, including family child and care homebased
• Ensuring that any experience and credential requirements do not exclude child care workers with low incomes;
• Ensuring that claiming the credit is not burdensome; and
• Building in awareness campaigns to educate the workforce about the availability and benefit of the credit.
Seize the Opportunity to Make Care Less Taxing
The severe underinvestment in the child care industry has made it difficult for families to afford child care and for child care workers to make ends meet across the country—but states can leverage the tax code to help. More information about state child and dependent care tax provisions are available in NWLC’s report, Making Care Less Taxing, and more information about state policies to support child care and early education are available in NWLC’s report, State Child Care and Early Education Updates 2022: Progress on a Long Path. For advocates and policymakers interested in introducing or improving a child and dependent care tax provision or a child care/early educator workforce credit in your state, contact Kat Menefee at [email protected].