Child care costs far outpace wages, but dependent care tax credit stuck at 2001 rate

The U.S. House of Representatives voted overwhelmingly last week to assist low-income families through an expansion of the child tax credit and the bill now awaits approval in the Senate. But some organizations are also highlighting a separate tax credit for child and dependent care, which they say is not providing adequate assistance to families and providers amid rising costs.

The National Association of Tax Professionals supports expansion of the child and dependent care credit, said Tom O’Saben, the organization’s director of tax content and government relations. As it is, the credit has not kept up with inflation, he said, and Congress is currently not discussing its expansion alongside the child tax credit.

It’s easy to confuse the two credits, but advocacy groups such as the First Five Years Fund say it’s important to know the difference and understand why both are needed to help families. The child tax credit is meant to support families with the costs of raising a child, and it is commonly used to assist with everyday expenses.

The child and dependent care tax credit is meant to offset the cost of child care for working families, and only the cost of formal child or dependent care qualifies, not informal arrangements for care with family members or others.

“More and more people are having the discussion of, is it worth it to me to work outside the home when I’ve got to pay $25,000 in child care?” O’Saben said. Some clients he sees as a tax professional are paying as much as $35,000 per year for two children.

Right now, his only recommendation to help those clients is to take advantage of pre-tax flex spending accounts through their employers if they have them, but those are capped at $5,000 per year, so it can only provide a fraction of what many families need.

A report from Bank of America in October showed the average child care payment per household has increased 30% since 2019, with families earning between $100,000 and $250,000 experiencing the largest increase. A January 2023 report from the U.S. Department of Labor also called monthly prices across the country for child care “untenable” and said counties with more expensive child care prices had lower rates of maternal employment.

According to data from the Bureau of Labor Statistics, child care costs have increased 214% since 1990, while the average family income has risen 143%.

Expansion bill with bipartisan authors has not received a hearing in Congress

Congress temporarily increased the child care tax credit through the American Rescue Plan Act in 2021. It was the first time the credit had been adjusted since 2001, during former President George W. Bush’s administration. Instead of $3,000 for one child and $6,000 for two or more children, the credit increased to $8,000 and $16,000, respectively, for qualifying expenses. The amount of the credit varies based on the taxpayer’s adjusted gross income.

During that time, the credit was also refundable, so a taxpayer could claim the full credit even if it exceeded the amount of taxes owed to the federal government and receive the remainder as a refund.

“It was coming to be more in line with reality, but it lasted for one year,” O’Saben said. “If I was to bet on this back at the end of 2021, I would’ve bet that Congress would’ve extended that provision, because it was so family positive.”

But Congress couldn’t reach a deal to extend either the child care credit or the general child tax credit, and only one is up for expansion now, if it clears the Senate.

There is a bill that has been introduced in Congress to address the expansion of the child care credit, sponsored by Democrat Rep. Salud Carbajal of California and Republican Rep. Lori Chavez-DeRemer of Oregon. It was introduced in July, but has not received a hearing. A group of 85 child care providers and employers and business leaders from states across the country also sent a letter to members of the Senate Committee on Finance and House Ways and Means expressing their support for expansion of the child care credit. The states included Kansas, Kentucky, Idaho, Texas, Utah and Ohio, among others.

State and local government must step in too, advocacy group says

Michael Cassidy, director of policy reform and advocacy at the Annie E. Casey Foundation, told States Newsroom both credits are important, but it may take time to reach both goals, and it will require more than just federal investment.

Some states have made efforts to continue the same level of assistance that the federal government provided through the pandemic, such as Minnesota, where Democratic Gov. Tim Walz approved a $1.3 billion package to assist child care providers with wage enhancements and allow more families to qualify for financial assistance with costs. But in other states, such as Texas, $2.3 billion in federal aid went unused, and in Missouri and Louisiana, the amounts budgeted from federal aid didn’t make significant inroads in helping providers and families.

“The pandemic and our recovery out of it have revealed the huge challenges we have in this country regarding child care. I think everybody saw that,” Cassidy said. “It’s a policy thicket that has vexed this country for decades … so transitioning from this faltering child care system to a functioning one is going to take some investment at the state, local and national levels.”