Sunday, April 19, 2009

Expand the Child and Dependent Care Tax Credit

Here is a little policy exercise one of my students gave me, along with some of my reaction to her assignment.

The Child and Dependent Care Tax Credit provides too little relief to families that struggle to afford child care expenses. Barack Obama and Joe Biden will reform the Child and Dependent Care Tax Credit by making it refundable and allowing low-income families to receive up to a 50 percent credit for their child care expenses.

The goal is to provide more relief for families who are struggling to afford child care expenses. I believe we should be helping families who are low income and families who have more than two children. Many families who are just above the poverty line struggle just as much as low income families. I believe we should broaden the amount of families supported. The children should not suffer due to their parent’s income. Every child should have the same opportunities to succeed in life. Proposing a lower percent credit on child care expenses for families who make more would be justifiable. Families who make below the poverty level should be allowed a 50 percent credit. Families who make just above poverty level should receive 25 percent credit for their child care expenses.

I wrote this suggestion thinking to help more than just the “low income” families. Many families struggle although they are not below the poverty level. Children are expensive any way you look at it. More families are struggling above the poverty line and need assistance. A small amount of aid would be extremely beneficial to assist families with child care expenses.

Well said. There are a few issues related to this policy suggestion I should consider here. First of all, how much should it cost to provide quality day care to children? Secondly, how much is a fair subsidy to make day care affordable, and how much should people of various incomes end up paying for day care after the subsidy is calculated?

Given the fact that we want highly skilled and responsible persons to work with young children and infants, and given the fact that we want a low ratio of children to caregivers in daycare or child care establishments, there must be some minimum amount that child care actually costs. For example, if we want to pay 80% of the median year-round full-time income (which would be 80% of $48,680, or about $38,950 in 2009) to a child care worker, and provide the child care worker with health insurance and a pension plan, which might add $6,000 a year to the salary, for a total cost of $44,950, we can see that we’ll have about $45,000 in labor costs for each skilled worker. Each worker might have an assistant earning the same benefits with a much lower salary (say, $28,950), costing perhaps $35,000 per assistant. Then, you would need materials, and a rent or mortgage on a place, and utilities for light and heat and so forth. You need to figure what all this would cost, and then divide by the number of children who might be served. Assuming every professional can have two assistants, and the three day care workers together can handle care for 30 children at a time… well, it looks like day care is going to cost about $4,500 per child per year, or $5,400 if you go with a ratio of 8 children to each adult caregiver instead of 10-to-1. That’s thousands of dollars less expensive than the average state is spending on elementary education, but it’s still a pretty high cost.

Is daycare something that ought to be free the way public education is from kindergarten (or first grade) through the end of secondary school? I think many people still assume one parent might be staying at home with children who are under 6 years-old, and the loss of earnings given over to domestic child-rearing in the first four or five years of parenthood is considered a reasonable cost to many people. And yet, there is also now a fairly common idea that if the parents aren’t living together it’s better for the single parent with custody of the children to work and earn an income rather than stay at home and receive a pension. And that idea carries over to all classes, so that even in married couple families many people think having both parents work is just as normal as having one parent stay at home to rear the children full time.

Let’s imagine a family that is significantly above the poverty level, say a family of four with one income-earner bringing in 150% of the four-person family poverty threshold (which would be $33,075 in 2009), and this family has two children who are aged 2 and 4, plus a school-aged child who attends elementary school. Without government support the family would be paying perhaps $10,800 for high quality daycare, or maybe just $9,000 for basic day care (with two children getting full-time day care). That would be tough. The family would have a gross monthly income of $2,756 with daycare costs of $900 (about $21 per day per child). Such a family really could benefit from some government support to reduce the cost burden of daycare.

I’d probably arrange day care assistance along some sort of sliding scale, so that the government would pay up to $4,400 per child (for a household with no income), And then for every dollar earned there would be a 9¢ reduction in the day care subsidy, so that a family earning $10,000 would receive up to $3,500 per child in day care subsides or allowances, a family earning $22,050 (100% of poverty) would get up to $2,415.50 per child for day care, a family earning $33,075 (our example, at 150% of poverty) would get $1,423.25 per child, and even a family earning $48,000 would still get $80 per child for the day care subsidy (hey, my family would qualify!). For our example family earning $2,756 per month this means a subsidy of $237 per month, which reduces the cost from $900 per month for day care down to $663 per month (for two children).

It seems to me when you think of benefits this way, starting with some maximum benefit level that would help a family with no income pay just about the full amount for basic childcare (or basic food, or basic housing, or basic medical insurance), and then calculate a rate of reduction as income increases (a reduction of 9¢ per $1 earned for daycare subsidies for each child), you end up with a policy that helps everyone according to their ability to pay.

I’m not impressed by a policy that gives a low income family a 50% credit for their child care expenses. A person earning $8.50 per hour and working 20 hours per week will be earning about $895 per month. If they put their children in the sort of basic daycare facility I’ve described, the cost would be $375 per month, and even if the government covers 50%, that’s still $187.50, leaving them with $707.50 if they have one child in 50% subsidized daycare. I’m also unhappy with benefits that go between 100% subsidies, 50% subsidies, and 25% subsidies. Such benefits drop dramatically when you cross a specific income threshold. Better to just have a standard decrease in benefits matched to your income, so that no one ends up getting hit with a huge increase in expenses if they earn a little more and cross some threshold.

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