High-quality child care is fundamental to the economic security of women and families, but it is out of reach for too many.
The child care proposal that President Trump released during the
campaign includes a provision aimed at “incentiviz[ing] employers to provide child care at the workplace” through the tax code. Unfortunately, this aspect of the Trump proposal, if enacted, is likely to have little impact. Rather than advance ineffective tax incentives for employers, policymakers should increase investments in direct child care assistance and tax assistance for families.
Current Law: The Credit for Employer-Provided Child Care
The existing federal Credit for Employer-Provider Child Care provides a tax benefit to employers who incur child care or child care resource and referral expenditures. The credit was enacted in 2001, and has been in effect since 2002. Employers may claim this nonrefundable credit if they incur eligible expenses related to acquiring, building, or operating child care facilities, contracts for child care services provided by a qualified child care facility, or contracts to provide resource and referral services for their employees.
- The credit is worth 25 percent of eligible child care expenses, and 10 percent of resource and referral expenses.
- The maximum value of the credit for any taxable year is $150,000, which would mean that the employer claimed between $600,000 and $1.5 million in eligible expenses.
- If expenses for building a child care facility are claimed for the credit and the employer stops operating the facility within 10 years, a portion of the credit is recaptured.
The Trump Proposal to Improve the Existing Federal Credit
The Trump proposal purports to increase the incentive for employers to provide on-site child care by making the existing federal tax Credit for Employer-Provided Child Care “more effective.” The proposal states that it would:
- increase the “cap” on the size of the credit (although it does not say by how much),
- shorten the period that an on-site child care center must be in operation before a portion of the credit is recaptured (although it does not specify by how much), and
- “devise ways for companies to pool resources in order to make the credit more attractive.”
The Credit Is Underutilized
In 2001, prior to the credit’s enactment, the Joint Committee on Taxation (JCT) estimated that, over a ten-year period, tax expenditures from claims of the credit would total $1.4 billion. However, the actual expenditures from the credit have been far below those projections. In the first ten years after the credit went into effect, the tax benefits from claims of the credit totaled about one-tenth of the amount projected by the JCT ($151 million).
And in tax year 2013, the most recent year for which data are available, claims of the Employer-Provided Child Care Credit resulted in tax expenditures and benefits to employers of $16.8 million. IRS data do not specify the number of employers who claimed the credit, but if all the employers who did so in 2013 claimed the maximum credit amount of $150,000, there would have been just 112 claimants.
The modest amount claimed for the credit suggests that it has done little to incentivize employers to provide child care to their employees. Indeed, it may well be that only employers that were already providing child care to their employees before the credit was enacted are claiming the credit. The anemic performance of the federal credit is consistent with that of state employer child care credits: a 2002 National Women’s Law Center study found that in 16 of the 20 states with employer tax credits and utilization data, five or fewer employers claimed the credit in the most recent tax year for which data were available.
One reason that claims of the credit are low may be that many employers do not have federal tax liability. These employers include government agencies and non-profit organizations, as well as active for-profit corporations. Government agencies and non-profit organizations are not eligible for the credit, and a recent GAO study concluded that, “[i]n each year from 2006-2012, at least two-thirds of all active corporations had no federal income tax liability.” In the absence of tax liability, the nonrefundable Employer-Provided Child Care Credit has no value to an employer.
The Trump Proposal Is Not Likely to Have Much of An Impact
The unspecified changes proposed by the Trump campaign are unlikely to increase claims of the credit, especially if the Trump Administration succeeds in its efforts to lower the corporate tax rate from a maximum of 35 percent under current law to a maximum of 15 percent. Although many corporations currently pay effective tax rates of less than 35 percent because of tax exclusions, deductions and other credits, lower nominal rates would likely produce still lower effective rates and lower corporate tax liability. And the more tax liability is reduced or eliminated for corporations, the less attractive tax credits like the Credit for Employer-Provided Child Care will prove. Making the maximum amount of the credit larger will do nothing to alter that effect. In short, the Trump employer child care tax proposal is unlikely to increase the number of employers providing child care to their employees or make a difference in the lives of families who need child care in order to work.
What Would Help Families Meet the High Cost of Child Care
Instead, policymakers should focus on efforts that would increase support for working families and the middle class.
- Congress should increase funding for the bipartisan Child Care and Development Block Grant sufficiently to enable it to serve all the low- and moderate-income families who qualify for its help. CCDBG
- Gives real help to families paying for the child care provider they choose so they pay less out of pocket each month;
- Helps ensure children have safe and healthy learning environments;
- Ensures that funds are available to inspect child care settings, help families find child care, assist child care providers with increasing their credentials, and improve child care quality; and
- Helps increase the wages of child care providers so they do not have to worry about putting food on the table for their own children.
- Congress should also expand the Child and Dependent Care Tax Credit, including by:
- improving the sliding scale that determines the percentage of expenses that families can claim for the credit,
- increasing the expenses that families can claim for the credit, and
- making the credit refundable to provide help to families with low or no tax liability.