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Childcare Tax Credit

Written by Dr. Sarah Anderson
Published on February 28, 2024
Research Highlights

High-quality childcare is not affordable for MO families.

Affordable childcare increases workforce participation.

Childcare's affordability calculation does not account for tax credits.

Proposed credits could bring $160 million to the industry.

See Table 1 for details on the following credits.

Child Care Contribution Tax Credit Act. Taxpayers who donate to childcare facilities and businesses who pay for childcare that they do not run or are contracted with for their employees can claim a tax credit. Employers and providers can work with an intermediary who would connect employers who want childcare and providers with open slots.

Employer Provided Child Care Assistance Tax Credit Act. Employers with two or more employees can claim a tax credit on expenditures used

  • To open or run a childcare facility they operate or are contracted with.
  • To pay a childcare facility contracted with the taxpayer to provide childcare services to the taxpayer’s employees.
  • In an employer matching contribution fund for childcare.

Child Care Providers Tax Credit Act. Providers can receive tax credits for the “eligible employer withholding tax” and for 30% of the provider’s capital costs (minimum $1,000).

The "eligible employer withholding tax" is the state tax that employers withhold from their employees’ wages. This tax credit benefits the employer, not the employee.

Eligible childcare providers are those that have at least 3 employees. This could exclude home-based family childcare businesses which are typically run solely by the owner (OPRE 2015).

Table 1. Details about the tax credits outlined in HB 1488 and SB 742.

The current childcare system is a market failure.

MO families pay $630 - $1000/month for a child under 5, with higher costs for younger children due to lower teacher-to-student ratios (CAP 2021; CCA 2020). While the average MO income is $59k, 105 MO counties earn on average less than $50k/ year (MERIC 2022). The U.S. Department of Health and Human Services has proposed 7% of an income as an affordable childcare copayment (HHS 2023). This guideline would make $166 - $290/month an affordable monthly childcare cost in MO.

The monthly cost/ child is about $1,120 in MO centers. Most of these costs cover staff pay but also cover classroom materials, office and administration, and occupancy (CAP 2021). The current hourly wage of childcare workers in MO is $13.80/ hour (MERIC 2022).

Theoretically, high-quality care is about $1,800/ child. Costs include pay equal to kindergarten teachers, benefits, more classroom materials, etc. (CAP 2021; MARC 2017).

The difference between the costs of high-quality care and the affordable family payment means that $1,500-$1,600/ child is needed from an outside source. It would cost $1.6 billion/ year to provide affordable, high-quality care for MO children currently enrolled in childcare, not accounting for children not enrolled due to cost.

 

State and federal tax credits can decrease childcare costs.

CO offers a tax credit allowing individuals and businesses to donate money to intermediaries and childcare providers and receive a 50% tax credit up to $100k (EPIC).

The federal government offers an employer tax credit allowing employers to earn a 25% tax credit for opening and operating or contracting with a childcare center, or a 10% credit for providing employees access to childcare resource and referral services. The tax credit is capped at $150k (U.S. Chamber of Commerce 2022). This credit has been available since 2001but was used in less than 1% of corporate tax returns in 2016 (CRS 2023; GAO 2022). LA offers businesses a 5%-20% tax credit to open and operate a childcare center or pay for childcare for their employees, with higher quality facilities earning a higher tax credit (LA DOR).

LA also offers a provider tax credit and a director and staff credit. The first credit is for providers who care for foster children and children in the Child Care Assistance Program. The second credit is for childcare directors and teachers, with the credit increasing with higher educational attainment (LA DOR). CO offers a refundable tax credit for credentialed early childhood educators. The tax credit increases with higher educational attainment and is eligible for individuals with an adjusted gross income of less than $75k (CO DEC).

The most common tax credit is for childcare expenses for families. This type of credit is offered by 27 states, D.C., and the federal government. AR and LA offer additional refundable tax credits for childcare for children 5 and under (NWLC 2024).

Tax credits aren't factored into childcare affordability calculations, which consider an area's average income and childcare costs. Yet, higher tax credits for family’s childcare expenses lead to more families using paid childcare and more working married mothers (Pepin 2020).

Works Cited

Center for American Progress. (2021, June 28). Missouri. Retrieved from costofchildcare.org: costofchildcare.org

Childcare Aware of America. (2020). Missouri Affordability 2020. Retrieved from Childcare Aware of America: https://www.childcareaware.org/our-issues/research/ccdc/state/mo/

Colorado Department of Early Childhood. (n.d.). Early Childhood Educator Income Tax Credit. Retrieved from Colorado Department of Early Childhood: https://cdec.colorado.gov/early-childhood-educator-income-tax-credit

Congressional Research Service. (2023, April 12). The 45F Tax Credit for Employer-Provided Child Care. Retrieved from CRS Reports: https://crsreports.congress.gov/product/pdf/IF/IF12379

EPIC. (2020). Colorado's Child Care Contribution TAx Credit FAQS Aprroved by Colorado's Department of Revenue. Retrieved from Colorado EPIC: https://www.coloradoepic.org/wp-content/uploads/2020/10/EPIC-CCTC-FAQs-DOR.pdf

HHS Press Office. (2023, July 11). New Rule Proposed to Improve Child Care Access, Affordability, and Stability. Retrieved from U.S. Department of Health and Human Services: https://www.hhs.gov/about/news/2023/07/11/new-rule-proposed-improve-child-care-access-affordability-stability.html

Louisiana Department of Revenue. (n.d.). School Readiness Tax Credits. Retrieved from Louisiana Department of Revenue: https://revenue.louisiana.gov/IndividualIncomeTax/SchoolReadinessTaxCredit

MERIC. (2022). Occupational Employment and Wage Estimates. Retrieved from Missouri Economic Research and Information Center: https://meric.mo.gov/data/occupation/occupational-employment-wages

Mitchell, A., & Ritter, K. (2017). Expanding Access to Quality Preschool and Early Childhood Education in Kansas City, Missouri. Kansas City: Mid-America Regional Council.

National Survey of Early Care and Education Project Team (2015). Fact Sheet: Who is Providing Home-Based Early Care and Education? OPRE Report No. 2015-43, Washington DC: Office of Planning, Research and Evaluation, Administration for Children and Families, U.S. Department of Health and Human Services. Available at http://www.acf.hhs.gov/programs/opre/research/project/national-survey-of-early-care-and-education-nsece2010-2014.

National Women's Law Center. (2024, February 21). States can make care less taxing: tax credits related to child care, tax year 2023. Retrieved from National Women's Law Center: https://nwlc.org/resource/states-can-make-care-less-taxing-tax-credits-related-to-child-care-tax-year-2022/

Pepin, Gabrielle. 2020. "The Effects of Child Care Subsidies on Paid Child Care Participation and Labor Market Outcomes: Evidence from the Child and Dependent Care Credit." Upjohn Institute Working Paper 20-331. Kalamazoo, MI: W.E. Upjohn Institute for Employment Research. https://doi.org/10.17848/ wp20-331 https://research.upjohn.org/cgi/viewcontent.cgi?article=1350&context=up_workingpapers

Shrove, J. (2022, April 28). Employer Guide to Childcare Assistance and Tax Credits. Retrieved from U.S. Chamber of Commerce: https://www.uschamber.com/workforce/employer-guide-to-childcare-assistance-and-tax-credits

United States Government Accountability Office. (2022, February). Employer Provided Childcare Credit Estimated Claims and Factors Limiting Wider Use. Retrieved from United States Government Accountability Office: https://www.gao.gov/assets/gao-22-105264.pdf#:~:text=Established%20in%202001%2C%20the%20Employer-Provided%20Child%20Care%20Credit,employers%20have%20used%20the%20credit%20than%20originally%20projected.

Workman, S. (2021, June). The True Cost of High-Quality Child Care Across the United States. Retrieved from Center for American Progress:

https://americanprogress.org/wp-content/uploads/sites/2/2021/07/True-Cost-of-High-Quality-Child-Care.pdf?_ga=2.200453735.814729235.1682514566-1501405645.1677617961

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