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

GENERATING PUBLIC REVENUE TAX CREDITS, DEDUCTIONS AND EXEMPTIONS
CHILD AND DEPENDENT CARE
CREDIT AND WORKING FAMILY
CREDIT (OREGON)
DESCRIPTION
Oregon is the only state that offers two separate tax
credits for child care expenses. An eligible taxpayer may
claim both credits for the same child care expenses.
Oregon’s child and dependent care tax credit is a
nonrefundable credit equal to a percentage of the
employment–related expenses eligible for the federal
credit, and is available on a sliding scale to taxpayers with
federal taxable incomes below $45,001. The maximum
child and dependent care credit an Oregon taxpayer may
receive is $720 for one child or dependent or $1,440 for
two or more children or dependents. Oregon’s working
family tax credit is a nonrefundable credit equal to a
percentage of the taxpayer’s total child care expenses,
and, beginning in tax year 2001, is available to taxpayers
with federal Adjusted Gross Income at or below 250
percent of the poverty level. The working family credit
has no cap, and is limited only by a taxpayer’s state
tax liability.
WHEN ESTABLISHED
Oregon established its child and dependent care credit in
1975, and has amended it many times since
establishment. Its working family credit was established in
1997 and increased in 1999, effective tax year 2001.
ANNUAL AMOUNT
In tax year 1997 (the most recent year for which
information is available), the Oregon child and dependent
care credit was claimed on 57,000 returns for a total of
$7.6 million, and the working family credit was claimed on
17,000 returns for a total of $5.5 million. The working
family credit has since been increased, effective tax year
2001, which will presumably make it more valuable in
future years.
Both of Oregon’s credits are targeted to help
lower–income families. The child and dependent care
credit is available to families with federal taxable incomes
below $45,001. A credit in the amount of 30 percent of
eligible expenses (and thus equal to the maximum federal
CDCTC) is available for families with federal taxable
incomes below $5,001. This percentage declines as
federal taxable income rises, to 4 percent of eligible
expenses for families with federal taxable incomes above
$35,000 and below $45,001.
SERVICES FUNDED
The child and dependent care credit covers the same
services that are eligible for the federal CDCTC, covering
expenses for these services up to $2,400 for one child or
dependent or $4,800 for two or more children or
dependents.
The working family credit covers care provided for the
purpose of allowing the taxpayer to be gainfully employed
or to seek employment. In contrast to the federal CDCTC
and the state credits modeled after it, it also covers care
that the taxpayer uses for the purpose of attending
school on a part–time or full–time basis. The credit does
not cover care provided by the child’s parent or guardian
or by a child of the taxpayer who is under 19 years old at
the close of the tax year.
An important feature of the working family credit is that it
is calculated on the basis of all a family’s qualified child
care expenses; the federal CDCTC and the child and
dependent care tax provisions of every other state limit
eligible child and dependent care expenses to a specific
dollar amount per year—most commonly $2,400 for one
child or dependent and $4,800 for two or more children
or dependents.
HOW FUNDS DISTRIBUTED
As under other CDCTC provisions, benefits are received
by filing an annual income tax return.
POPULATION SERVED
Many of the families eligible for the child and dependent
care credit may also claim the working family credit,
further offsetting state tax liability. To claim the latter
credit, a family must have at least $6,150 of earned
income for the tax year. Currently, the credit is available to
families with federal AGIs below 200 percent of the
poverty level, but beginning in tax year 2001, it will
become available to families at or below 250 percent of
the poverty level. From 2001 forward, families with
federal AGIs at or below 200 percent of the federal
poverty level may claim a credit equal to 40 percent of all
child care expenses undertaken for the purpose of
allowing a taxpayer to work, look for work or attend
school. The percentage of expenses will then decrease
on a sliding scale as income climbs, down to 8 percent of
expenses for families at or between 240 percent and
250 percent of the poverty level. For families at or below
220 percent of the poverty level, the working family credit
will cover a larger percentage of child care expenses than
the federal CDCTC or any other state CDCTC. Because
eligibility for the credit is tied to a family’s poverty level,
rather than a fixed income mark, the credit is, in effect,
indexed to inflation, since the poverty level changes with
the cost of living. In addition, poverty level is sensitive to
family size, as a fixed income mark is not. Thus, the
working family credit will provide a larger benefit to
bigger families than it provides to smaller families with
the same income.
When the two credits are taken together, Oregon
provides some of the most generous state child care tax
relief in the country. Nevertheless, the benefit of the
credits for the poorest families is limited by the fact that
neither credit is refundable. Thus, if a family has no tax
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