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

LOOKING TO THE FUTURE
THE HOME MORTGAGE TAX DEDUCTION
The home mortgage interest tax deduction has proven to
be an effective way of providing financial assistance to
families who wish to purchase a home. Any household
that elects to submit an itemized tax return is permitted to
deduct the full amount of interest paid on mortgages of
less than $1 million ($500,000 if married and filing
separate returns) for a primary or secondary home. The
home mortgage deduction also includes first and second
mortgages, home equity loans and refinanced mortgages.
Depending upon the family’s tax bracket, the home
mortgage deduction can effectively reduce monthly
mortgage payments by as much as 30 percent.
The home mortgage tax deduction directly affects consumer
decision–making. When determining how much
they can afford to spend on a home, families typically
estimate how much the deduction will lower their monthly
payments. Real estate agents often remind families of the
financial benefits of the home mortgage tax deduction
when selling homes. Banks and other commercial lenders
also consider the financial benefits of the tax deduction
when evaluating how much debt a family can carry.
Because the deduction is large enough to significantly
lower monthly payments—thereby encouraging the
purchase of more expensive homes—it has the ability to
simultaneously spur the housing and banking industries
at the same time it makes home purchases more
affordable for families.
A similar result could occur in child care. The Dependent
Care Tax Credit could be revised to allow families to claim
the full cost (or a significant percentage of the cost) of
early care and education services. Special incentives also
could be included to encourage the use of higher quality
care, such as allowing families that use an accredited
program to claim a higher tax credit. With these changes,
the child care industry could begin to market the credit,
perhaps by distributing information about tax benefits
when they inform parents about fee increases.
EMPLOYMENT TAX INCREMENT FINANCING
The tax strategies described thus far are primarily designed
to lower taxes on business or investment profits.
Another way to offer tax incentives is by lowering
employment taxes. Maine’s Employment Tax Increment
Financing (ETIF) takes this approach.
ETIF is available to a Maine business that creates at
least 15 new jobs within a two–year period and: 1) pays
those employees an income that exceeds the average
per capita income in the county of employment and 2)
provides the employees with health insurance and
retirement benefits. The business must also be able to
demonstrate that its expansion project will not succeed
without ETIF benefits.
An ETIF–approved business would receive a reduction
of between 30 and 75 percent of the state income tax
withholdings paid for qualified employees for up to ten
years. Jobs created in a labor market where unemployment
is at or below the state average earn a 30 percent
reimbursement, while those with higher than average
unemployment earn 50 percent. In areas where unemployment
exceeds 150 percent of the state average the
reimbursement is 75 percent.
While a child care program theoretically is eligible for
the ETIF, to date none has applied. The Maine Department
of Economic Development, however, is exploring
the feasibility of marketing and/or adapting the program
to increase participation from the child care industry.
Employment Tax Increment Financing could be a promising
strategy for encouraging improvements in the child
care field. For example, a special ETIF could be established
for early childhood programs that participate in state
career development initiatives, pay higher wages and
offer health and retirement benefits. This would be an excellent
way to provide the financial assistance child care
businesses need to offer higher wages to higher qualified
staff. This approach also could be positioned as a way
to cut the taxes paid by child care businesses, and as a
result, might garner support from policy–makers who
would otherwise be reluctant to support a proposal to
supplement the wages of child care staff.
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