By Jocelyn Fischer and Debra Lancaster
Childcare is unaffordable for many families. The U.S. Department of Health and Human Services deems affordable childcare costs as those that are no more than 7 percent of families’ incomes, yet low- and middle-income families spend much more. A new report by the Center for Women and Work in collaboration with the New Jersey State Policy Lab offers New Jersey a menu of policy prescriptions to help resolve the childcare affordability crisis.
The report examines how subsidies, tax credits, and tax deductions have the potential to make childcare more affordable. It finds that subsidies are associated with lower out-of-pocket costs and a lower financial burden of childcare. Tax credits and tax deductions for childcare expenses also have the potential to improve the affordability of and access to childcare. But a potential side effect of subsidies, tax credits, and tax deductions is their potential to raise the price of childcare, which means that such policies could affect both beneficiaries and non-beneficiaries.
Most studies on the effect of subsidies on prices have found that subsidies are associated with a small increase in childcare prices. This is good news, but authors have speculated that the size of the effect could be larger in childcare markets and subsidy policies with particular features. Likewise, available research has shown that tax credits and deductions for childcare expenses might increase the price of childcare. In particular, a recent study by Rodgers (2018) found that a substantial portion of federal and state childcare tax credits that a family receives are passed on to childcare providers in the form of increased prices. Hence, if a tax credit is non-refundable, low-income families who owe little taxes receive few benefits from the tax credit, but still face higher childcare prices.
Although subsidies are associated with greater childcare affordability, they may not reach all families that are eligible or even the neediest families and subsidy spells tend to be short. There are a number of options state and local government have for improving who receives subsidies and for how long. Importantly, increasing funding of subsidies could allow subsidies to reach more families. However, in lieu of substantial funding increases, governments can take action to make subsidies more accessible.
Subsidy policies could be structured to reach families and geographies more in need. For example, some states have tiered reimbursement of subsidies which give higher payments to childcare providers in poorer neighborhoods. In order to decrease unintended interruptions in families’ subsidy receipt, some states have tested interventions and found that providing detailed instructions to parents on how to document that they are meeting work eligibility requirements and providing reminders of upcoming appointments improved on-time renewals of families’ subsidy eligibility and parents’ attendance at appointments. Moreover, administering subsidies through contracts and grants with childcare providers, as opposed to vouchers that parents bring with them to childcare providers, could potentially increase the portion of eligible children served by subsidies. Additionally, some experts recommend setting reimbursement rates for subsidies (whether in the form of vouchers, grants, or contracts) to reflect the actual cost of high-quality care and having reimbursement be based on a child’s enrollment rather than their attendance.
New Jersey and its local governments might also be able to increase access to subsidies through improvements in customer service practices. Specifically, the state could offer a range of options for families to connect with service agencies that reflect the constraints that parents face and address bias in their agencies regarding people of color, secondary English speakers, and low-income people that may impede families’ receipt of subsidies.
States like New Jersey might also be able to improve outcomes by reducing the complexity of the application process, including decreasing documentation requirements, prioritizing that parents report their total number of work hours, allowing self-report of work hours, increasing flexibility in document requirements, and using technology to streamline the process. Likewise, setting higher eligibility income thresholds for losing benefits than for initially gaining them can help families to keep their assistance when their incomes increase.
Moreover, continued conversation with parents, childcare providers, caseworkers, and agencies is necessary to identify problems with access and continuity of subsidy receipt. Additionally, the state might consider streamlined processes between their childcare programs and other work support programs like food assistance and Medicaid, as well as align policies and systems across such programs.
States and local governments could also increase access to childcare by offering publicly provided childcare, though they should carefully consider how to implement universal pre-K in order to avoid some challenges that have occurred with its implementation, including crowding out of the supply of infant and toddler care. Paid family leave is another potential way to make childcare more accessible.
Finally, although recent research has suggested that a substantial portion of tax credits for childcare expenses is passed on to childcare providers in the form of higher childcare prices, tax credits have a number of potential benefits, including low administrative costs, potential stability as a funding source because they do not need to be renewed annually, and greater political viability in some instances. In particular, refundable tax credits for childcare expenses have the potential to improve the affordability of childcare. Tax deductions are another means to make childcare more affordable, but some experts have argued that refundable tax credits might be a more equitable and effective option for low-income families.
Although childcare is a heavy financial burden for families in the U.S., state governments have options for improving access to childcare. Subsidies, tax credits, tax deductions, publicly provided childcare, and paid family leave are all options that have the potential to increase the affordability of and access to childcare.
Debra Lancaster is Executive Director of the Center for Women and Work (CWW) at Rutgers University and Jocelyn Fischer is a postdoctoral associate with the CWW.
Rodgers, L. P. (2018). Give credit where? the incidence of child care tax credits. Journal of Urban Economics, 108, 51-71.