I recommend expanding the child care tax credit to poor and low-income workers with young children as a way to boost employment rates and improve the quality of child care for poor families. For families with children under 5 (the most critical and expensive years for child care), the existing child care tax credit should be made refundable, providing it to families with no federal income tax liability.
Increasing it to cover a larger percentage of actual costs (50 percent, or more, up to $5,000 per child) and providing it in monthly payments rather than a lump sum at tax time would also make it more effective. My estimates suggest that this would cost up to $9 billion per year, which would almost double what is currently spent on child care assistance for low-income families. Finding 1.2 percent to pay for child care assistance in a federal budget with more than $700 billion already dedicated for low-income Americans seems entirely doable.
The advantages of using the tax system to provide child care relief is that it provides flexibility to parents who may need informal or off-hour care. For many of today’s low-income parents trying to navigate a volatile labor market, flexibility is key and the current direct-subsidy system may not be adequate to address their needs.
But to be successful, assistance must come at the time when parents need to pay for child care. This means at least monthly rather than only at tax time.
This would allow beneficiaries to estimate their annual income and the amount of assistance they will need. At tax time, actual expenses and income would be reconciled and over- or underpayments handled. Other countries that have moved toward periodic distribution of benefits through the tax system in similar ways can provide important lessons for implementation in the United States.
A refundable child care tax credit provided in regular payments is a more reasonable approach that will provide the assistance and flexibility that low-income parents need to work and ensure that they can afford a safe and secure environment for their children. Nothing can be more important than that.
Angela Rachidi is a research fellow in poverty studies at the American Enterprise Institute. She wrote this for InsideSources.com.