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Congress should improve the child care credit to help working parents


October 30, 2017
Alan Viard
The Hill

As lawmakers prepare to expand the popular $1,000 child tax credit, they run the risk of overlooking the child care credit, a provision that cries out for expansion. The child care credit, also called the dependent care credit, offers tax relief for child care costs incurred by working single parents and by married couples in which both parents work.

The economic case for tax relief for child care costs is straightforward. If workers are taxed on their wages, they should receive tax relief for the costs they incur to earn the wages, just as businesses deduct the costs of earning the income on which they pay tax. There can be little doubt that child care costs are tied to work.

Common sense suggests, and statistical studies confirm, that making child care cheaper encourages parents to enter the labor force. That logic persuaded Congress to provide tax relief for child care costs in 1954. Today’s child care credit offers 20 cents of tax savings, and more for some moderate income workers, for each dollar spent on child care. But the credit has two key shortcomings.

First, the tax savings apply to only the first $3,000 of child care costs for parents with one child and the first $6,000 for those with two or more children. Those limits have risen only 50 percent since 1976, failing to keep pace with rapidly rising child care costs. Congress should increase the limits and build in an automatic inflation adjustment.

Second, the child care tax credit is unavailable to workers too poor to owe individual income tax. Those workers pay Social Security and Medicare payroll taxes on their wages without any tax relief for the child care costs they incur to earn those wages. Making the credit refundable would extend relief to those workers.

In a rare moment of agreement during last year’s presidential campaign, both Donald Trump and Hillary Clinton recognized the need for additional tax relief for child care costs. Surprisingly, however, the recent tax framework set forth by the White House and the Republican congressional leadership makes no mention of expanding the child care credit.