Poorest Families, Poorest Child Care

Congress allows the highest paid executives to reduce their taxes through a child care credit. But the credit gives no help to poor parents who donít owe income taxes.

Question 3. Ask the Candidate:

Would you make the child care credit refundable so that it helps low- and moderate-income working parents who donít owe income taxes and can least afford their child care costs?

The child care credit is equivalent to a direct grant of money to parents to help with their child care costs. If it were a direct grant from the Department of Health and Human Services, it would be unimaginable for low-income parents to be disqualified because their income was too low. Yet Congress denies them the tax subsidy because their income is too low to owe an income tax.   

The Child Care Cost Dilemma

It’s a terrible dilemma: The poorer the family, the more parents need to work—and the less they can afford child care while they’re at work. This Catch-22, while most daunting for low-income single parents, is a problem shared by millions of moderate- and middle-income parents.

All-day care of a single infant at a day-care center for five days a week is likely to cost at least $40 a day, $200 per week, or $10,000 for 50 weeks; and it could cost a lot more, particularly for toddlers.  Ouch!  Imagine handling the costs for two kids!

Welfare laws now require most single parents to work, which takes them away from home at least nine hours a day for a full-time job. Federal and state welfare funds provide child care assistance for a transitional period. Still, millions of low- and moderate-income parents do not qualify for the assistance.

Some Simple Math Adds up to a Dreary Picture

Take Carol, a single parent with a three-year-old daughter, Melissa. Carol is a receptionist for an insurance broker, where she will earn $17,000 this year (more than she would earn at the federal minimum wage of $7.25 per hour in 2012). Fortunately, as a single parent with one child, Carol also will receive a wage supplement of $3,170 from the government’s earned income credit (EIC)—the maximum EIC for a single parent with one child--which will bring her income up to $20,170.[1]

Now let’s look at what lies ahead for her:

While not owing any federal income tax, Carol must pay $1,300 in Social Security and Medicare taxes on her wages.  She makes arrangements with family, friends, and a child care center to keep her child care costs at $6,000, or only $24 a day. She is left with $12,870 ($20, 170 -$1,300 - $6,000), or $1,083 a month for everything else. If her rent and utilities are $500 a month—a typical figure in a typical city—she would have $583 to pay for food, clothing, toys, furniture for the apartment, apartment supplies, personal supplies, telephone, laundry, sales taxes, other possible taxes, public transportation to and from work and for personal needs, and health expenses. (Imagine if she wanted to go to a movie or buy a present for Melissa!)  

Carol might get some child care assistance under welfare laws; she and Melissa also might qualify for Medicaid or some other publicly-funded health program. Even then, Carol clearly needs help with her child care costs.  

Low-Income Parents Excluded From Child Care Credit

Congress agrees that child care costs matter when we calculate our tax burdens. Parents are entitled to a tax credit for a portion of their child care expenses while at work, provided that the child is (in most cases) under the age of 13.  Each $1 of credit reduces their taxes by $1. The maximum credit is $1,050 for one child and $2,100 for two or more children. The credit declines for parents whose income exceeds $15,000, but it never falls below $600 for one child and $1,200 for two or more children.[2]

In 2011, the credit saved parents, and cost the government, $4.6 billion in taxes.[3]  So what’s the issue? First, about 30% of this amount (over $1 billion) reduced the taxes of parents with incomes over $100,000[4]the credit even saved a neat $1,200 for the boss who earned $750,000 and had twins Melissa’s age. Second, none of the benefits were for moms like Carol because they don’t earn enough money to owe income taxes. What Carol needs is real financial help.

You might be wondering whether members of Congress really understand the implications of their tax laws. It's a good question. Consider this: Congress allows working parents to exclude from their income tax return up to $5,000 paid for child care costs through a salary reduction plan at work. High-income workers can save $1,750 (35% x $5,000), compared to a $600 child care credit if only one child is involved. Again, lower-income workers who don’t owe taxes can’t benefit at all under such a plan. And if Congress were to understand its tax policy on child care, why would it allow high-income workers to save far more through the $5,000 exclusion than they can save through a child care credit?

What Congress Should Do: Make The Credit Refundable

There is a mechanism for helping people like Carol, called a refundable credit, such as the Earned Income Tax credit. Congress could create a refundable credit for child care that would work like this: The IRS would treat working parents as if they had paid taxes equal to at least the amount of the credit. If the credit exceeds any income tax they owe, the IRS would send them a refund check, up to the maximum credit for one or two children.  (Of course, if Congress really was serious about simplifying the tax laws, it could eliminate the credit and provide child care grants through direct funding.)

How much extra would refundable child care credits cost the government? A ballpark figure would be $3 billion a year. But the net increased cost from this expansion of the child care credit could be much less—perhaps only a third of this amount--if Congress eliminated the credit for higher-income parents.

Helping lower-income parents afford child care clearly makes social and economic sense. We know that children without proper child care are more likely to become problems as juveniles and adults. When child care is more affordable, parents also have greater opportunities to develop better skills and find better jobs to support their households.

In short, child care subsidies for parents like Carol will increase the odds that parents and their children will be productive members of their community. It also will decrease the odds that we will have to pay extra taxes down the road because they have fallen on hard times, or worse.

As a matter of dollars and cents, then, this government investment should pay off for parents, their children, and the rest of us, too. Or you may simply prefer to support it because it seems unjust to help the richest parents with child care costs and not the poorest.

 We need to find out whether the candidates agree. If they don’t, what would they do about hard-working parents who can’t afford basic costs of food, clothing, rent, and commuting to work if they also have to bear all of their child care costs?

[1] The EIC supplements the wages primarily of low- and moderate-income working parents who have one or more dependent children. It functions as a “refundable” income tax credit: The EIC offsets income taxes if you owe any; but to the extent that the EIC exceeds your tax liability, the IRS sends you a tax-free check for the difference. Carol will receive the full EIC because she will not owe any federal income tax.

[2]  Once the parent’s income exceeds $43,000, the maximum credit becomes, and remains, $600 for one child and $1,200 for two or more children.

[3] Joint Committee on Taxation. Estimates of Federal Tax Expenditures for Fiscal Years 2011 – 2015, JCS-1-12. Washington, D.C.: GPO, 2012, 42.

[4] Ibid, 51. I’ve used distribution figures from 2010 because the Joint Committee does not yet have them for 2011. The distribution figures have been roughly comparable for many years.

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