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

EMPLOYER INCOME TAXES
Twenty–five states provide some sort of income, privilege,
or franchise tax assistance to employers who provide or
pay for child care for their employees, on top of any tax
benefits an employer may get from a DCAP or (in some
instances) from deducting child care assistance to
employees as a business expense. While provisions vary
widely from state to state, typically the assistance is in
the form of a credit against the employer’s income taxes,
equal to a percentage of the employer’s expenses in
creating a child care center, operating a child care center,
purchasing child care for employees, or reimbursing
employees’ child care costs. The maximum credit
available to an employer is most often limited to a
specific dollar amount.
The number of states offering employer tax credits for
child care has nearly doubled since 1989, and a similar
credit has been repeatedly proposed – although not
enacted – at the federal level. As detailed in a
forthcoming report from the National Women’s Law
Center “Making Child Care Less Taxing,” evidence
indicates that they have been little used at the state level,
suggesting they may not be an effective incentive to
employers to fund child care. For instance, in Mississippi
in 1999, out of 57,294 corporate tax returns filed, only six
corporations claimed the state credit, which is equal to 50
percent of an employer’s child and dependent care costs.
That year only three corporations claimed Montana’s
credit, equal to 20 percent of an employer’s costs in
providing child and dependent care assistance up to
$1,250 per employee. Such low numbers suggest that
not only are the credits failing to encourage employers to
fund child care, but that employers who are already
providing child care assistance are also not taking
advantage of the credits. Overall, state credits have
resulted in relatively small amounts of money for child
care; state tax expenditures for these provisions range
from a high of $5.7 million in California to a low of zero in
several states.
Because traditional employer tax credits have so far
demonstrated little potential for funding child care, we
have chosen to profile a Colorado tax credit that
approaches the problem slightly differently, permitting any
taxpayer (whether a business or an individual) to claim a
credit for contributions to child care.
OTHER TAX INCENTIVES
To encourage economic development, states and more
often localities offer tax abatements, exemptions and
other incentives for various purposes, such as to attract
or retain employers, encourage construction or stimulate
other forms of development. An example from Maine is
profiled here. Maine permits municipalities to establish
a development district, called a “tax increment finance
district,” and use the local taxes collected within that
district for specified development purposes. Since
1999, child care has been specifically included as a
development purpose.
FEES
Federal, state and local governments generate revenue principally through taxation, but
also by imposing fees. Fees are payments in exchange for services, such as admission
to a park, tuition at the state university or tolls on a bridge. Payment of fees is somewhat
voluntary on the citizen’s part, since using the service is a matter of choice. Taxes are
distinguished from fees, since by their nature taxes are compulsory.
FEES
There are three main categories of fees: impact, service
and enterprise. Impact fees anticipate the need for
government services (e.g., roads, water, schools) that will
result from actions taken by the private sector that will
cause population growth, and are intended to offset their
costs. Service fees shift the cost (or part of the cost)
from government to the user of a public service (e.g.,
mortgage/deed records, garbage collection). Impact and
service fees also are referred to as “exactions.” Enterprise
fees are generated from a self–supporting enterprise
created by government (e.g., a municipal golf course, a
national park) for which fees can be charged. The profits
generated by the enterprise can be used for other
government expenses.
Fees are typically charged to cover all or part of the cost
of providing a service, such as producing birth certificates
or granting licenses to practice an occupation. As with an
income tax checkoff, the fee collection procedure may
include an opportunity to make contributions for a
specific purpose. Kentucky allows people requesting or
renewing registration of a motor vehicle to donate to a
child care assistance fund. Fees may be charged for the
use of a public facility, such as a park or swimming pool,
or for a particular public service, such as garbage
collection or water. The County of Santa Cruz requires
new building developments to pay fees related to their
anticipated impact on child care. These fees partially fund
a child care loan program profiled here. Fees may be
generated by one enterprise and used to fund another
activity. For example, Massachusetts uses revenue
generated from vehicle license plate fees to support a
fund for child care improvement.
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