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 don’t owe 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 don’t owe taxes and can least afford their child care costs?
It's a terrible dilemma: The poorer the family, the more the parents need to have jobs-and the less they can afford to have their children cared for 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. Ouch! Consider that it would consume over 80% of a parent's earnings if she works full time at the federal minimum wage (about $12,300 a year as of July, 2008). Imagine if she needs child care 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 expects to earn $15,000 this year. Fortunately, as a single parent with one child, Carol also will receive a wage supplement of $2,853 from the government's earned income credit (EIC), which will bring her income up to $17,853. (As discussed in Question 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 check for the difference.)
Now let's look at what lies ahead for her:
Carol will not owe any federal income tax on her wages, but she must pay $1,148 in Social Security and Medicare taxes. 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 $10,705 ($17,853 - $1,148 - $6,000), or $892 a month for everything else. If her rent and utilities are $500 a month--a typical figure in a typical city--she would have $392 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 to 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. If not, as frequently is true for single mothers in Carol's situation, 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; usually the child must be 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.[1]
In 2006, the credit saved parents, and cost the government, a total of $3.3 billion in taxes. So what's the issue? While more than one-third of this amount ($1.2 billion) reduced the taxes of parents with incomes over $100,000[2]--the credit even saved a neat $1,200 for the boss who earned $750,000 and had twins Melissa's age--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.
What Congress Should Do
Make The Credit Refundable. There is a mechanism for helping people like Carol, and it is called a refundable credit, as in the case of the earned income tax credit. If Congress created a refundable credit for child care, it would work like this: The IRS would treat working parents as if they had paid taxes in advance equal to at least the amount of the credit. To the extent 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 were serious about simplifying the tax laws and focusing tax breaks on people who need them, it could eliminate the credit and instead provide child care grants through a direct funding mechanism.)
How much extra would these refundable credits cost the government? The answer depends in part on the eligibility rules. A ballpark estimate 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. Additionally, when child care is more affordable, parents have greater opportunities to develop better skills and to find better jobs to support their households. In short, child care subsidies for parents like Carol will increase the odds that both parents and their children will be productive members of their community. On the flip side, it will decrease the odds that we will have to pay additional 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 this proposition: It seems unjust to help the richest parents with their child care costs and not the poorest.
Now we need to find out whether the candidates agree. If they don't, what would they do about low-income, hard-working parents who can't afford to commute to and from work, to clothe themselves and their children, to pay rent, and to put enough food on the table so that no one goes hungry, if they have to bear all of their child care costs?
[1] As an alternative to the child care credit, Congress allows working parents to exclude from their income tax return up to $5,000 paid for child care costs by their employer or by the parents through a salary reduction plan at work. High-income workers can save $1,750 (35% x $5,000) even 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 then there's this question: Why does Congress allow high-income workers to save far more through the $5,000 exclusion than they can save through a child care credit?
[2] Joint Committee on Taxation. Estimates of Federal Tax Expenditures for Fiscal Years 2007-2011. JCS-3-07. Washington, D.C.: GPO, 2007, 4.