The full report, Extra Credit: How Louisiana Is Improving Child Care, can be found here.

Executive Summary

This report analyzes the impact of a unique package of tax credits intended to improve the quality of child care in Louisiana – the School Readiness Tax Credits – in the first four years of their implementation.

The news is good.  Between 2008, when the credits took effect, and 2011, utilization of the credits resulted in millions of dollars in new investments in child care quality.  The amount claimed for all of the School Readiness Tax Credits more than tripled, increasing from more than $4.1 million in 2008 to nearly $14.1 million in 2011. Over the same period, there were measurable improvements in the quality of child care in Louisiana, including for low-income children.

The five separate tax credits that make up the package target different groups of stakeholders, all of whom have a role in increasing the quality of care children receive (see sidebar). To each of these stakeholders, the credits provide meaningful assistance to improve quality.  With the exception of the portion of the Parent Credit for families with income above $25,000, the credits can be worth thousands of dollars for claimants – including as a tax refund for claimants with little or no tax liability.  The credits also complement each other – often providing overlapping and mutually reinforcing benefits – and are integrated with the Louisiana Quality Start Child Care Rating System (Quality Start), the state’s voluntary system for rating child care centers; with Louisiana Pathways Child Care Career Development System (Pathways), the state’s child care career development system; and with the state’s Child Care Assistance Program (CCAP).

The correlation between the specific incentives and resources provided by the credits and the following outcomes provide strong evidence of the impact of the credits on improving the quality of care in Louisiana between 2008 and 2011.

What Are the School Readiness Tax Credits?

The Child Care Provider Credit (the Provider Credit) is an income tax credit available to child care providers whose facilities have a Quality Start rating of at least two stars.  The amount of the credit varies based on the quality rating of the facility and the average monthly number of children the facility serves who are receiving CCAP subsidies or foster care services through the Department of Children and Family Services (DCFS).  The higher the quality rating, the higher the credit amount per child; the greater the number of eligible children, the higher the credit amount.  The credit amount ranges from $750 to $1,500 per child.  The credit is refundable and available to both for-profit and non-profit child care providers.

The Credit for Child Care Directors and Staff (the Director and Staff Credit) is an income tax credit available to child care directors and staff with Pathways Career Ladder credentials classified as Level 1 to Level 4, and employed, for at least six months out of the tax year, at a child care facility participating in Quality Start.  The higher the director or staff member’s credential level, the higher the credit amount.  The initial credit amounts for each level are set by statute and adjusted annually for inflation; they ranged from approximately $1,524 to $3,048 in 2011, and the credit is refundable.

The Child Care Expense Credit (the Parent Credit) is an income tax credit available to families who incur child care expenses for children under age six enrolled in child care facilities with a Quality Start rating of at least two stars.  The higher the rating of the child care facility, the higher the credit amount.  The credit amounts range from 50 to 200 percent of a family’s Louisiana Child Care Credit, and the credit is most valuable, and refundable, for families earning $25,000 or less, who can receive a maximum of $2,100 for each eligible child.  Eligible families may claim both the Child Care Credit and the Parent Credit.

The Business-Supported Credit is an individual or corporate income tax or corporate franchise tax credit available to businesses for eligible child care expenses paid by the business to child care facilities with a Quality Start rating of at least two stars.  The higher the quality rating of the facility, the higher the credit amount.  The credit amounts range from 5 to 20 percent of eligible expenses; the amount of eligible expenses is capped at different levels, depending on the type of expense, and the credit is refundable.

The Resource and Referral Agency Credit (the R&R Credit) is a dollar-for-dollar individual or corporate income tax or corporate franchise tax credit for businesses who make donations or pay fees, up to $5,000 per tax year, to child care resource and referral agencies.  It is refundable, and eligible businesses may claim both the Business-Supported Credit and the R&R Credit.

 

First, the number of child care centers participating in Quality Start nearly doubled, and both the number and the proportion of these centers with higher quality ratings increased even more significantly.  The number of centers participating in Quality Start increased from 484 in 2008 to 924 in 2011, bringing more centers into a system that publicly evaluates their quality.  The number of centers with higher quality ratings – two to five stars – increased more than sixfold, from 73 in 2008 to 460 in 2011, and the proportion of centers with quality ratings of two to five stars more than tripled, from 15 percent in 2008 to almost 50 percent in 2011.

The fact that the number of centers participating in Quality Start increased significantly between 2008 and 2011 points strongly to the impact of the tax credits, because participation in Quality Start is an eligibility requirement for four of the five School Readiness Tax Credits (the Provider Credit, Director and Staff Credit, Parent Credit, and Business-Supported Credit).  The fact that the number and proportion of centers with quality ratings of two to five stars increased even more dramatically between 2008 and 2011 points strongly to the impact of the tax credits, because for three of the five credits (the Provider Credit, Parent Credit, and Business-Supported Credit) the higher the quality rating, the larger the credit amount. 

Second, the number of child care directors and staff with Pathways career development system credentials classified as Level 1 nearly tripled, the number of directors and staff with higher-level credentials increased nearly sixfold, and the proportion of directors and staff with higher-level credentials nearly doubled.  The number of directors and staff with Level 1 credentials increased from 963 in 2008 to 2,620 in 2011. The number of directors and staff with higher-level credentials – Levels 2, 3 or 4 – increased, from 284 in 2008 to 1,603 in 2011, and the proportion of directors and staff with these higher-level credentials, as a share of all directors and staff with Level-1-to-4 credentials, increased from 23 percent in 2008 to nearly 40 percent in 2011.

Third, the number of children under age six receiving CCAP subsidies or foster care services who were enrolled in centers with higher quality ratings increased, and the proportion of such children increased significantly, despite a decline in the number of children receiving CCAP subsidies.  Although the number of children receiving CCAP subsidies declined by about 21 percent between 2008 and 2011, due largely to a reduction in the income eligibility limit for families to qualify for CCAP, the number of children under age six receiving CCAP subsidies or foster care services who were enrolled in child care centers with quality ratings of two to five stars increased slightly, from 9,291 in 2008 to 9,418 in 2011.  Moreover, the proportion of such children enrolled in centers with quality ratings, as a share of all children under age six receiving CCAP subsidies or foster care services enrolled in all centers, increased from 54 percent in 2008 to 67 percent in 2011, and the proportion of such children enrolled in centers with quality ratings of two to five stars increased from 30 percent in 2008 to 43 percent in 2011.

The fact that the proportion of children under age six receiving CCAP subsidies or foster care services enrolled in centers with quality ratings of two to five stars increased between 2008 and 2011 points strongly to the impact of the credits on the enrollment of children in higher-quality-rated centers, because eligibility for the Provider Credit requires the enrollment of children receiving CCAP subsidies or foster care services in centers with ratings of two to five stars, and eligibility for the Parent Credit requires the enrollment of children under age six in centers with ratings of two to five stars.  The fact that the proportion of such children enrolled in centers rated two, three and four stars increased at each of these quality rating levels between 2008 and 2011 also points strongly to the impact of these credits, because for each credit, the higher the quality rating, the larger the credit amount. The fact that the number of children under age six receiving CCAP subsidies or foster care services enrolled at these centers increased, even slightly, despite a precipitous decline in the number of all children receiving CCAP subsidies after 2010, also points strongly to the impact of the credits. 

The increased enrollment of mostly low-income children (those receiving CCAP subsidies or foster care services) in higher-quality-rated centers is notable, because low-income families often find it difficult to obtain higher-quality care.  Both the Provider Credit and the Parent Credit are particularly targeted to increasing the enrollment of low-income children in higher-quality-rated care. 

Louisiana’s integrated package of School Readiness Tax Credits has been an important strategy for improving child care quality, but the credits could be improved – and they cannot do the job alone.  Increased funding for CCAP would not only enable more children to receive this critical assistance but also, in combination with the credits, likely increase the number of low-income children receiving quality-rated care or higher-quality-rated care than they now receive.

In fact, although beyond the scope of this report, reductions in eligibility for CCAP assistance since 2011 have decreased the number of families receiving CCAP assistance and thereby threaten the continued positive effect of the credits on increasing the number of low-income children receiving higher quality care.  Because of the interrelationship of the credits, reductions in the number of families receiving CCAP also threaten the ability of child care providers and child care directors and staff to increase the quality of the care they provide.  In establishing the credits, Louisiana wisely recognized that their effectiveness depends on the ability of each stakeholder to contribute to the quality of care. Significantly reducing the ability of one stakeholder – low-income families – to do so has ripple effects on the other stakeholders that make it difficult for them to do their part in increasing the quality of care for all families.

In addition to increased funding for CCAP, increased direct investments in Quality Start, Pathways, and resource and referral services would improve the quality of child care for children at all income levels by helping ensure effective quality-rating standards and compliance with them, helping providers receive higher-level credentials, and helping families and businesses obtain the quality-rated care they need for their children and their employees’ children. 

In sum, in the first four years after enactment, the School Readiness Tax Credits had a strong and positive impact on child care quality in Louisiana. As part of a comprehensive early care and education strategy, these tax credits can continue to be an effective way of improving the quality of child care for Louisiana’s families.

Published On: April 14, 2015Associated Issues: Child Care & Early LearningChild Care Tax StrategiesFamily Tax CreditsFederal Tax PolicyTax & Budget