The child care crisis in the U.S. continues to impact families, workers, and businesses alike. As costs rise and access to quality care remains limited, tax policy reform is increasingly recognized as a key solution to address these challenges. The latest resource from the First Five Years Fund (FFYF) delves into the intersection of child care and tax policy, exploring how modernizing key tax provisions could help alleviate the burden on families while incentivizing businesses to support child care solutions for their employees.
Current Tax Policies Supporting Child Care
The Child and Dependent Care Tax Credit (CDCTC) and the Employer-Provided Child Care Credit (45F) are two major tax provisions currently in place to help families and employers. However, they have limitations in scope and effectiveness that hinder their full potential in addressing today’s child care crisis.
The CDCTC: This tax credit allows families to claim a percentage of their child care expenses, but it is capped at $3,000 for one child and $6,000 for two or more children. Given that the average cost of child care for a single child exceeds $10,000 in many areas, this credit covers only a fraction of what many families spend. Additionally, the CDCTC is non-refundable, meaning low-income families, who often need the most help, are unable to fully benefit.
The Employer-Provided Child Care Credit (45F): This credit encourages businesses to provide child care support to employees by offering a tax break. However, it is underutilized because it applies primarily to on-site child care facilities, which are costly for smaller companies to implement. The current framework excludes many other forms of child care assistance businesses might offer, such as subsidies or partnerships with local providers.
Proposed Reforms to Make a Difference
The FFYF resource highlights several proposed reforms that could significantly impact how tax policy supports child care access:
Expanding the CDCTC: Modernizing this credit to cover a higher percentage of child care costs, increasing the cap, and making it refundable would make it more meaningful to the families who need it most. Recent proposals have suggested increasing the cap to better reflect the real cost of care, ensuring that families who pay the most for child care receive adequate relief.
Improving the 45F Credit: Expanding the types of child care support businesses can claim through the 45F credit could make this tax break more appealing and accessible. This includes allowing businesses to offer subsidies, vouchers, or other forms of child care assistance, rather than requiring on-site centers. Such reforms would allow more companies to participate, particularly small and mid-sized businesses that cannot afford large child care centers.
Tax-Free Child Care Benefits: Encouraging businesses to offer tax-free child care benefits to employees is another strategy that could alleviate costs for families. By providing direct financial assistance for child care as a benefit, businesses could help bridge the gap between what families can afford and the actual cost of care. Coupled with tax incentives, this could lead to broader adoption of child care support across industries.
Growing Bipartisan Support
The urgency for tax reform is underscored by growing bipartisan support. Recent polling cited in the FFYF resource shows that Americans across the political spectrum favor modernizing tax policies related to child care. This reflects a shared recognition that child care is not just a family issue but also an economic one. Without affordable, reliable child care, parents—especially mothers—are often forced out of the workforce, impacting the broader economy.
At the same time, businesses recognize that providing child care support can help them attract and retain talented employees, reduce absenteeism, and improve overall productivity. As labor shortages continue across many sectors, child care benefits are emerging as a critical tool for both supporting working families and driving economic growth.
Looking Ahead: The Role of Tax Policy in Solving the Child Care Crisis
The reforms outlined in the FFYF’s capsule collection make it clear that modernizing tax policy is one of the most effective ways to address the child care crisis. By expanding and updating existing credits like the CDCTC and the 45F, both families and businesses stand to benefit. These changes could provide much-needed financial relief to parents struggling with rising child care costs while encouraging businesses to take a more active role in supporting their employees’ child care needs.
As momentum builds for meaningful policy change, there’s hope that these reforms will be a cornerstone in the larger effort to improve child care accessibility, affordability, and quality across the U.S.
For more in-depth insights, visit the full resource from FFYF here.