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

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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 33
liability, it receives no immediate benefit, regardless of the amount of its child care expenses. The child and dependent care credit (although not the working family credit) may still benefit the family in a future year, however, for it can be carried forward for up to five years and applied against a later year’s tax liability. The benefit of the credits for higher–income families is also limited; neither credit is available to families above 250 percent of the poverty level who have federal taxable income above $45,000. The working family credit applies to care for children under age 13 and disabled children under the age of 18. The child and dependent care credit applies to care for children under 13 and for a spouse or dependent unable to provide self–care. STRATEGIC CONSIDERATIONS • Generally, the justification for state child care tax provisions is similar to that for the federal credit. Tax provisions recognize that families who incur employment– related child care expenses do not have the same ability to pay taxes as do families at the same income level without such expenses, and adjust tax liability accordingly. • Child care tax provisions are one of many strategies to help families afford child care, and they may be more politically feasible than direct spending in an anti–tax, budget–cutting climate. But tax provisions have their limitations. They usually reimburse only a portion of a family’s child care costs and require that families who incur those costs “up front” receive a benefit in reduced taxes or a larger refund months later. This leaves some families without enough money to pay for care at all or at the time they need it. Tax provisions also do not directly address issues of access or quality of care chosen by a family, though by allowing families to pay more for child care, they can indirectly affect both. Tax provisions also can be designed to afford greater benefits to families that use higher quality care. • Deductions are often worth less to state taxpayers than credits, because state tax rates tend to be relatively low and the value of a deduction is determined by and rises with a taxpayer’s marginal tax rate. For the same reason, deductions favor higher–income taxpayers over lower–income ones. • State tax provisions that are directly linked to the federal provision share the strengths and weaknesses of the federal credit. The federal credit is available to all families, while targeting its benefits to lower–income families. However, the federal credit is not refundable and is not indexed for inflation. This limits its value, especially to the lowest–income families. • State tax credits that are refundable help ensure that the lowest–income families can benefit from the provision. • States that have both “long” and “short” tax return forms can help ensure that lower–income families benefit from a child care tax provision by including it on the short form. • State tax provisions that have expense limits that reflect the cost of good child care in the state and are indexed for inflation will help families more than provisions with fixed expense limits. Similarly, state provisions that have income limits that are indexed for inflation or expressed as a percentage of poverty will maintain their targeting better than provisions with fixed income limits. • States can target assistance to lower–income families by offering a credit instead of a deduction, making the credit refundable, indexing the credit for inflation, using sliding scales that favor lower–income families and putting the tax credit on the short form. • State child care tax provisions designed to “sunset” after a certain number of years may be easier to enact in some legislative climates, but these credits may not be reenacted when they expire. For example, California had a modest credit that expired at the end of 1993 and has not been reenacted. Montana’s child care tax deduction expired in 1994. OTHER STATES WITH SIMILAR STRATEGIES As noted above, 26 states and the District of Columbia have child care income tax provisions. See page 35 for a chart summarizing child care tax provisions for all states. CONTACTS Nancy Duff Campbell National Women’s Law Center 11 Dupont Circle Washington, DC 20036 Phone (202) 588 5180 Fax (202) 588 5185 Oregon Department of Revenue 955 Center Street, NE Salem, OR 97310 Phone (503) 945 8214 Fax (503) 945 8738 34
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 20 and 21: TAXES Income taxes are the major so
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
Page 32 and 33: GENERATING PUBLIC REVENUE SALES AND
Page 38 and 39: TAX CREDITS, DEDUCTIONS AND EXEMPTI
Page 40 and 41: GENERATING PUBLIC REVENUE TAX CREDI
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Page 58 and 59: GENERATING PUBLIC REVENUE LOTTERIES
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Page 66 and 67: EDUCATION Education is a powerful r
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ALLOCATING PUBLIC REVENUES EDUCATIO
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ALLOCATING PUBLIC REVENUES HIGHER E
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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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