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

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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. 169
UNEMPLOYMENT INSURANCE AND OTHER SOCIAL INVESTMENT STRATEGIES Financing child care is not only about generating funds that can support out–of–home care. It also is about helping families that choose to stay at home and care for their own children. Social investment strategies, such as Unemployment Insurance (UI) and Temporary Disability Insurance (TDI) are two cost–effective ways to finance partial wage replacement during family leave. TDI is already used by many states and employers to support “pregnancy–related disability” and some states, such as New Jersey, are looking at expanding these benefits to include coverage for more broadly defined family leave. (See profile on page 142.) The U.S. Department of Labor has developed rules that will allow states to use Unemployment Insurance benefits to make family leave more affordable. This is a promising strategy. Many states have ample reserves in their unemployment insurance trust funds and are therefore well–positioned for an expansion of benefits. Nine states (including Washington, Vermont, Indiana, Massachusetts, Minnesota, Connecticut, New Jersey, Maryland and Illinois) have already proposed legislation to cover workers on family leave. Additionally, President Clinton proposed a $20 million allocation for competitive planning grants to help states and other entities explore ways to make family and medical leave more affordable. Additional information can be obtained from The National Partnership Family Leave Network (dlenhoff@nationalpartnership.org). 170
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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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This revised, expanded edition of F
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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 SALES AND
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TAX CREDITS, DEDUCTIONS AND EXEMPTI
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GENERATING PUBLIC REVENUE TAX CREDI
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GENERATING PUBLIC REVENUE FEES OTHE
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GENERATING PUBLIC REVENUE FEES •
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GENERATING PUBLIC REVENUE LOTTERIES
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SOCIAL AND HUMAN SERVICES A number
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EDUCATION Education is a powerful r
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ALLOCATING PUBLIC REVENUES SOCIAL A
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HEALTH EARLY CHILDHOOD EDUCATION LI
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EDUCATION STATE INVESTMENTS IN PREK
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ALLOCATING PUBLIC REVENUES HIGHER E
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EMPLOYERS Employers increasingly re
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EMPLOYERS AT&T FAMILY CARE DEVELOPM
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FINANCING CHILD CARE IN THE PRIVATE
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