Tax Reform: Access to Child Care for Working Families

Congress appears close to agreeing on a budget resolution, which will include instructions for the Senate Finance Committee and House Ways & Means Committee to approve tax reform legislation. For working families with young children, it’s important to look beyond the leadership framework announced in September and ask about the details.

Nearly 15 million children under age 6 live in families with working parents. Many of these parents struggle with child care costs.1

kids under 6 with working parents pie chart

Source: U.S. Census Bureau

The average annual cost of center-based care for an infant is $10,476; the average annual cost of center-based care for a preschool-age child is $8,469.2  The average annual cost for infants in home-based care is $7,669; the average annual cost for a preschool-age child in home-based care is $6,967.3  Historically, the tax code has helped make child care more affordable for parents. The rationale has been that working parents with young children need child care in order to obtain and retain employment and employers depend on working parents.

The current Child and Dependent Care Tax Credit (CDCTC) offers working families with child care expenses a modest credit in recognition that child care is an expense related to work. Although child care costs have increased over the past 16 years, the value of the credit has not been increased since 2001.  Among families with children who benefit from the CDCTC, taxes are reduced by an average of $551.

Another policy in the current tax code that helps families with child care costs is the provision that allows employers to offer Flexible Spending Accounts (FSAs), which enables employees to set aside up to $5,000 per year tax-free to be used for reimbursement of child care expenses. In 2014, 39 percent of civilian workers had access to a dependent care FSA.

The tax reform framework as proposed by President Trump and the Congressional leadership simplifies the tax code by lowering tax rates. It doubles the standard deduction (currently $6,350 for single individuals and $12,700 for married couples).4 However, it eliminates personal exemptions (currently $4,050 for each taxpayer, his or her spouse, and each child – currently indexed annually for inflation).5  The framework says that the Child Tax Credit (which is available for families with children under age 17)  will be “significantly increased” – but it doesn’t say by how much and it doesn’t mention any income tax breakpoints that may apply (i.e., at what income level households would receive the full significant increase (whatever amount it is) and at what income level it would be phased out).

Although the framework does not pay for itself (i.e., the expected revenue loss over 10 years is about $1.5 trillion), lower rates are achieved (at least in part) by eliminating credits and deductions not mentioned in the framework. The child care related provisions in the current tax code are not mentioned and therefore fall into the bucket of potential tax policy to be eliminated.

For working families with young children, tax policy that helps support their need for paid child care is important. Some families may not need paid child care. However, many families depend on it. For those families with child care costs, the current child care provisions in the tax code should be updated, not discarded.

As tax reform is debated, and pro-growth strategies are supported, it’s important to understand that jobs require working parents. And, many working parents of young children need paid child care. Senator King (I-ME) and Senator Burr (R-NC) introduced legislation last January (S. 208) to update both the Child and Dependent Care Tax Credit and Dependent Care Flexible Spending Plans.  It’s time to dust that bill off the shelf and recognize that updating the child care related provisions in the tax code should be part of the tax reform discussion. These provisions are specific – families must have qualifying children, must be working, and must have child care costs.

Increasing the child tax credit for families with children younger than age 17 (as the framework outlines)  is good policy.  It helps partially offset the cost of raising children. However, it is not specifically related to whether a family with young children has child care expenses.  There is a cost to raising children, all families know that. However, it is even more expensive for families who have child care costs. That’s why retaining and updating the child care provisions in the current tax code is important.

1U.S. Census Bureau, Table B23008, Age of Own Children Under 18 Years in Families and Subfamilies by Living Arrangements by Employment Status of Parents, 2016 American Community Survey 1-Year Estimates.

2Child Care Aware of America, 2017. Parents and the High Cost of Child Care: 2016 Update.

3Ibid.

4U.S. Congress Joint Committee on Taxation, The Taxation of Individuals and Families, JCX-41-17, September 12, 2017.

5Ibid.