Financing Child Care in the United States - Ewing Marion Kauffman ...

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LOOKING TO THE FUTURE TAX POLICY The child care community has historically been reluctant to propose tax policy as a method of financing child care because existing child care tax credits and deductions have had almost no impact on the child care industry. Indeed, the benefits that are currently available from the Dependent Care Tax Credit represent only a small fraction of the cost of child care and have failed to significantly affect consumer behavior. Likewise, employer tax credits for child care expenses have not produced meaningful results. But lessons from other fields indicate that appropriately crafted tax policy can profoundly impact the behavior of both consumers and investors and generate new dollars. Several tax credit financing initiatives from the housing and community development fields, for example, offer helpful ways to think about using tax policy to generate new investments in an industry. Each of these approaches is described in more detail below. Additionally, a paper that provides detailed analyses of each of these approaches and possible links to child care finance is available on the Alliance for Early Childhood Finance website, www.earlychildhoodfinance.org. None of the tax strategies described in this section should be viewed as a model that can simply be replicated in early childhood. Each has its own set of strengths and weaknesses. They can, however, offer new and unique ways of thinking about how to develop effective tax policy. THE LOW–INCOME HOUSING TAX CREDIT The Low–Income Housing Tax Credit (LIHTC) is the largest federal program to fund the development and rehabilitation of low–income housing. Since it was established, the program has generated $12 billion in private investment. The LIHTC allows businesses and individuals who invest in low–income housing to receive a dollar–for–dollar federal tax credit against federal tax owed for over a ten–year period. The LIHTC acts as a capital subsidy, allowing investors to obtain a competitive return on their investments while allowing rents to be set below the cost of developing or maintaining the property. The LIHTC is administered at the state level. Each state is permitted to allocate a certain amount of tax credits each year, based on its population. States develop plans for allocating tax credit funds to specific projects, based on federal guidelines. Once the state has decided that a project should receive tax credits, the project sponsor (a nonprofit or for–profit developer) seeks investors to buy the tax credits. National syndicators — or intermediary organizations — including nonprofit groups such as the Enterprise Social Investment Corporation and the National Equity Fund, as well as financial institutions such as Boston Financial and Related Capital, have become involved in “selling” the credits to investors. The intermediaries act as a bridge between investors and projects, most typically by establishing equity funds that allow many investors to pool their contributions and spread their risk over tens or hundreds of projects. Project developers also use funds generated through the LIHTC to leverage additional financing from banks and other commercial investors, and often combine them with grants and/or loans from public agencies. Several states have created state tax benefits that make the federal LIHTC even more attractive to investors. Missouri, Hawaii and California have state LIHTC credits that piggyback on the federal credit. Oregon has established a lender’s credit that allows banks and other lenders to use the state tax credit benefits to recover the cost of no– or low–interest loans to these projects. What makes the LIHTC unique is that it allows investors to simultaneously make a social contribution to their community and a sound financial investment. The LIHTC also provides economic incentives for developers and syndicators to carefully manage the property to ensure that it is well maintained and occupied by income–eligible tenants. If the property falls into disrepair and cannot be rented, or if the property is not rented to low–income families for the entire 15–year period, the tax credit benefits will be reclaimed and additional penalties may be charged. Additionally, banks that make LIHTC investments are permitted to use these investments as evidence that they are complying with the Community Reinvestment Act (CRA). Unfortunately, the LIHTC is complex and expensive to administer, requiring developers and syndicators with broad expertise to manage the project. Some believe that this poses a significant and costly barrier to its adaptation in the early childhood field. Others believe that the field would benefit from having large organizations become involved in helping to finance and manage child care projects and that, in the long run, these organizations would pay for themselves through the additional dollars they could generate for the field. 167
It is difficult to use the LIHTC in its current form to finance child care facilities. Even if a housing project financed with tax credits is making space available for a child care center, they can only count these expenses in the eligible basis of the property if the center will exclusively serve project tenants. Proposed federal legislation, introduced by Representative Nancy Johnson (R), seeks to eliminate this restriction. STATE NEIGHBORHOOD ASSISTANCE PROGRAMS Twelve states (Connecticut, Delaware, Florida, Illinois, Indiana, Kansas, Maryland, Missouri, Nebraska, Pennsylvania, Virginia and West Virginia) have established Neighborhood Assistance Programs (NAPs) to provide tax credits to businesses that contribute (cash, materials, staff) to community–based nonprofit organizations, often targeting low–income people and communities. In 1991, NAPs generated more than $63 million in private–sector contributions to nonprofit organizations. Like the LIHTC, NAPs link the private sector to nonprofit organizations through the vehicle of tax credits. However, the NAP approach is different from the LIHTC in several important respects. The NAP tax credit is typically designed as a one–time charitable contribution given by a corporation to a nonprofit organization. Therefore, unlike the LIHTC, the corporate investor does not become a limited partner of the nonprofit, and therefore has no ownership interest in the nonprofit’s business. Consequently, after a contribution is received, the nonprofit has no further responsibilities to the corporate investor. Typically, the state revenue department works with another state agency (e.g., Department of Community and Economic Development) to administer the NAP. State Neighborhood Assistance Acts (NAAs) encourage contributions to a range of community programs, including child care, job training and education, economic development and physical revitalization of housing or buildings. Generally speaking, any tax–exempt organization located in a low–income community or serving low–income people can apply for NAA certification. To obtain the tax credit, the nonprofit submits a written proposal to the state agency running the NAP. The proposal includes the amount of tax credit that the nonprofit would like to receive. If a nonprofit is awarded a tax credit, it may solicit a contribution from any businesses (often including self–employed persons) authorized to operate in the state. To receive the tax credit, businesses can contribute cash, materials and/or property to a nonprofit, although some states, such as Connecticut, limit contributions to cash. Some states have minimum eligible contributions ($2,400 to $10,000), and some have maximum contributions ranging from $25,000 to $500,000. States vary in the amount of the value of the tax credit that can be subtracted from any state taxes due, ranging from 40 percent to 70 percent of the value of the contribution. The more the credit is worth, the greater the incentive for corporate investors to contribute. Businesses may usually carry forward unused tax credits for up to five years. While they are theoretically eligible in many states, few child care providers apply for NAP tax credits. The child care industry is typically unfamiliar with NAPs and, in most cases, unable to spend the time and energy necessary to market the credit to potential donors. In general, NAP tax credits are used by Community Development Corporations (CDCs) or by programs that are linked to a neighborhood CDC. Child care providers interested in NAP tax credits in the 12 states with programs should contact the NAP program office in their state. COMMUNITY DEVELOPMENT CORPORATION TAX CREDIT The Community Development Corporation (CDC) Tax Credit offers another useful tax credit approach for consideration by the child care industry. Established as a demonstration project in 1993, the CDC Tax Credit program provided a tax credit for individual and corporate contributions to nonprofit CDCs. During the six–year period that the credit was available, it raised $20 million in private–sector loans, grants and investments for the CDC activities pilot. Under the program, each year for a ten–year period funders who gave grants, provided loans or made investments in 20 CDCs (which were competitively selected to participate in the pilot project) could claim a tax credit equal to five percent of the overall amount provided. If the contribution was a grant, the contributor could claim the tax credit and the standard income tax deduction for charitable contributions. CDCs were required to use the contributions generated via the tax credit to create employment and business opportunities for residents of their target areas. The problems encountered by CDCs seeking to employ the tax credit should be studied by those interested in developing effective child care tax strategies. First, many of the CDCs had trouble attracting bank loans or investments through the tax credit. In fact, a Brookings Institution report found that without complex financial structuring of deals provided by the Local Initiatives Support Corporation (LISC), the rate of return on loans was too low to convince banks to lend to CDCs. Second, CDCs had little success in attracting new donors to support their efforts. CDCs’ main source of grant money has always come from tax–exempt entities, such as foundations, government agencies and religious institutions. Thus, the tax credit was not an incentive for such donors to give more. 168
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FINANCING CHILD CARE IN THE UNITED
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FINANCING CHILD CARE IN THE UNITED
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ABOUT THE GRANTEE PHILADELPHIA CITI
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:02 ALLOCATING PUBLIC REVENUES 54 O
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HOW TO USE THIS CATALOG This catalo
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DIFFERENT EXPECTATIONS The expectat
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03 LONG-TERM THINKING Successful st
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LEVERAGING Matching and leveraging
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TAXES Income taxes are the major so
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EMPLOYER INCOME TAXES Twenty-five s
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LOCAL PROPERTY TAXES CHILDREN’S S
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GENERATING PUBLIC REVENUE LOCAL PRO
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GENERATING PUBLIC REVENUE LOTTERIES
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EMPLOYERS Employers increasingly re
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EMPLOYERS AT&T FAMILY CARE DEVELOPM
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