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

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TAXES Income taxes are the major source of revenue for the federal government, and a significant source of revenue for those states with an income tax. Sales and use taxes are the most common way for states to generate revenue. States generate about 35 percent of their annual revenue from sales taxes and about a third from income taxes. Property taxes are the major source of revenue for local government, accounting for about 90 percent of annual revenue in most communities. LOCAL PROPERTY TAXES Property taxes typically are levied on the value of residential and commercial land and buildings. They may be levied by units of local government, such as the town, county and/or school district in which the property is located. One way to generate funds for child care is to increase property taxes and earmark the increase for this purpose. Seattle, Washington, took this approach. Another strategy is to earmark a percentage of existing local property tax dollars for children's services. San Francisco, California, took this approach. Property taxes also may be levied by “special taxing districts,” which are independent, usually single–purpose, units of local government. These districts are legal entities separate from general–purpose local governments such as cities, towns and counties, although they may share boundaries with a local government unit. Special districts are fiscally and administratively independent of local government. The special taxing districts for children’s services in Florida counties are profiled in this section. STATE AND LOCAL SALES TAXES Sales taxes are the most common way for states to generate revenue. Sales taxes are assessed based on the price paid for tangible goods. Forty–five states have enacted state sales taxes. Some states levy the tax on all purchases, while others exempt certain types of goods. For example, food for home consumption is exempt in 26 states, prescription drugs are exempt in 43 states, and clothing is exempt in 6 states. Often, exemptions are an attempt to make sales taxes more equitable to lower– income taxpayers. Only three states levy sales taxes on services, although a relatively new challenge for states is to identify ways in which services, especially electronic commerce, can be taxed fairly. In 33 states, local government units levy additional sales taxes. Local government also may levy additional taxes on items such as hotel room occupancy, restaurant meals or taxi rides. A few local governments have dedicated a portion of local sales tax revenues to child care. One of these, in Colorado, is profiled in this section. EXCISE TAXES Consumers who buy cigarettes pay excise taxes in addition to any sales tax. Tobacco taxes are meant to account for the “social costs” of smoking, such as increased medical costs. The federal government imposes an excise tax on cigarettes (35¢ in 2000, rising to 39¢ in 2002). States also tax cigarettes—Virginia has the lowest rate and New York the highest. In addition, eight municipalities tax cigarettes. Two states that have dedicated part of their tobacco taxes to children’s services are profiled here – California, which supports early childhood development, and Indiana, which used to support school–age child care with a cigarette tax. STATE INCOME TAXES The public views state taxation of income to generate revenue as “fair,” especially compared with either federal income taxes or local property taxes. Using the income tax reporting form, states often generate revenue for specific programs through a voluntary income tax checkoff. Forty–one states currently have tax checkoffs for more than 150 separate uses. The most common uses for the checkoff are political contributions, wildlife preservation and child abuse prevention. Others include elder care, Indian children, foster care and childhood disease funds. The only state income tax checkoff for child care, enacted in Colorado, is profiled in this section. TAX CREDITS, DEDUCTIONS AND EXEMPTIONS Individual income taxes are the number one source of revenue for the federal government. Forty–three states also tax individual income. At both the state and federal levels, the total revenue raised from individual income taxes is usually about four times larger than the total generated from corporate income taxes. Various credits (taken against taxes owed) and deductions (amounts subtracted from income before computing taxes owed) are allowed by federal and state tax codes. 11
PERSONAL INCOME TAX CREDITS AND DEDUCTIONS The federal tax code allows a credit for some of the expenses of work–related child care. Twenty–six states and the District of Columbia also have child care income tax provisions – either credits (22 states and the District of Columbia) or deductions (four states) or both (the State of Maryland). Nearly all states link their child care tax provisions to some or all of the provisions of the federal child care credit. Nine states have no personal income tax, although one of these has a refundable child care credit provision (Alaska). Sixteen states levy personal income taxes but do not have child care tax provisions. In tax year 1997, the federal credit represented $2.5 billion in child care assistance for families, and in resulting forgone revenue, for government. The estimated total value of forgone state tax revenues from all state child and dependent care tax provisions is about 10 percent of the federal tax credit total, or roughly $250 million. The maximum benefit an individual family can realize from the federal credit is $1,440. The maximum benefit from a state child care tax provision ranges widely from a low of $25 in Louisiana to a high of $1,440 in Minnesota, Nebraska, Ohio and Oregon and $1,584 in New York. Generally, state tax provisions allow claims for the same range of child care services as the federal credit. Any legal form of child care used so that the parent(s) can work is allowable: child care centers, nursery schools, family child care homes, nannies, relatives (as long as they are nondependents over age 18) and day camps (but not overnight camps). Arkansas and Maine are the only states that structure their tax credit to provide greater benefit to families who choose higher quality child care. Because it is particularly generous and especially well designed to benefit lower–income families, the state of New York’s income tax credit related to child care is profiled in this section. Oregon’s tax credits also are profiled because they are unique responses to some of the problems inherent in the federal credit and state credits linked to the federal credit. Included in the New York description is summary information about selected aspects of the child care provisions in other state income tax codes. A chart detailing the characteristics of each state’s child care tax provisions can be found beginning on page 35. While all states with credits also cover the care of adult dependents, the information in both the profiles and the chart focuses on the child care aspects of these tax provisions. PERSONAL INCOME AND EMPLOYMENT TAX BENEFITS The federal Internal Revenue Code allows employers who have established a written, qualified dependent care assistance program (DCAP) to exclude child or dependent care benefits provided to their employees, in an amount up to $5,000 per employee, from federal income, FICA and unemployment taxes. (In most states, these benefits are not subject to state income taxes either.) The benefits may take several forms, including cash, a voucher, or free or subsidized care in an employer’s or other child care facility. Most commonly, however, a DCAP is established as a salary reduction plan, whereby employees are permitted to set aside up to $5,000 from their annual pre–tax salaries for child or dependent care expenses. Specifically, the employee’s pay is reduced by the amount the employee designates (sometimes subject to an employer limitation), and this amount is returned to the employee in the form of reimbursement for child care or dependent care expenses. The value to the employee is that he or she does not have to pay income or FICA taxes on the amount of the salary reduction. The value to the employer is that it does not have to pay FICA or unemployment taxes on this amount. If the employee does not use the full amount of the salary reduction for child care or dependent care expenses, however, he or she loses the right to the money, so care must be taken in designating the amount of the salary reduction. The employer also must ensure that neither this nor any other form of DCAP discriminates in favor of highly compensated employees. The tax benefits provided by a DCAP generally are worth more to higher–income than to lower–income employees, since the former are usually in higher tax brackets. Therefore, if an employer offers only a pure salary reduction plan, the DCAP will be more beneficial to higher–income employees, since the value of a salary reduction plan lies solely in its tax benefits. If, however, the employer itself contributes to the DCAP (for example, by matching amounts reduced from an employee’s salary or by providing child care vouchers), these contributions will be as beneficial to lower–income as to higher–income employees, or – depending on the way the DCAP is structured – could be even more beneficial to lower–income employees. Bank of America’s Child Care Plus program is profiled as an example of a child care benefit structured to help low– and moderate–income workers take advantage of this tax benefit. 12
Page 1 and 2: FINANCING CHILD CARE IN THE UNITED
Page 3 and 4: FINANCING CHILD CARE IN THE UNITED
Page 5 and 6: ABOUT THE GRANTEE PHILADELPHIA CITI
Page 7 and 8: :02 ALLOCATING PUBLIC REVENUES 54 O
Page 9 and 10: HOW TO USE THIS CATALOG This catalo
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Page 13 and 14: DIFFERENT EXPECTATIONS The expectat
Page 15 and 16: 03 LONG-TERM THINKING Successful st
Page 17: LEVERAGING Matching and leveraging
Page 22 and 23: EMPLOYER INCOME TAXES Twenty-five s
Page 24 and 25: LOCAL PROPERTY TAXES CHILDREN’S S
Page 26 and 27: GENERATING PUBLIC REVENUE LOCAL PRO
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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 CRIME PR
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LOCAL GOVERNMENT BEACONS (NEW YORK,
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ALLOCATING PUBLIC REVENUES LOCAL GO
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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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PHILANTHROPY ALLEGHENY COUNTY EARLY
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When businesses in the private sect
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PUBLIC-PRIVATE PARTNERSHIPS EMPLOYE
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PUBLIC-PRIVATE PARTNERSHIPS EMPLOYE
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PUBLIC-PRIVATE PARTNERSHIPS COMMUNI
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CAPITAL INVESTMENT PARTNERSHIPS CHI
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PUBLIC-PRIVATE PARTNERSHIPS CAPITAL
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LOOKING TO THE FUTURE TAX POLICY Th
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LOOKING TO THE FUTURE THE HOME MORT
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LOOKING TO THE FUTURE HIGHER EDUCAT
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APPENDIX 174
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WHAT YOU OWN Property taxes on real
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INDEX 178
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Child Care Scholarship Fund of the
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lotteries and gaming, 14 Neighborho
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Area, Kansas and Missouri), 133—1
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income tax provisions for child car
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