Impact of Employer Childcare Tax Credits

Less than 1% of employers used the federal ECTC.

The federal Employer Childcare Tax Credit (ECTC) is a non-refundable credit for businesses to help employees pay for or gain access to childcare.  Non-refundable credits can reduce a business’s income tax liability to zero and cannot be claimed for a cash refund. Businesses may claim up to $150,000 for 25% of eligible childcare facility expenditures and 10% of childcare referral and resources (Internal Revenue Service (IRS) 2025).

Congress first created the ECTC in 2001 and made it a permanent part of the tax code in 2012 (Economic Growth and Tax Relief Reconciliation Act of 2001, American Taxpayer Relief Act of 2012). The ECTC is different from the individual Child and Dependent Care Tax Credit (CDCTC) which is claimed by an individual on their personal tax returns. See the Childcare Tax Credit Science Note for more information.

In 2018, less than 1% of corporate tax returns claimed the ECTC (McDermott 2025, Government Accountability Office (GAO) 2022). Analysts often attributed this minimal impact to the credit cap being too small to incentivize multi-million-dollar capital projects.

To increase use of the tax credit, the One Big Beautiful Bill Act (OBBBA) 2025 updated the ECTC. The main changes taking effect in January 2026 include:

• Maximum annual credit increased to $500,000, or $600,000 for small businesses
• Eligible facility expenses increased to 40%, or 50% for small businesses
• Allows businesses to pay third-party providers or pool resources for jointly owned facilities

Eligible small businesses averaged less than $31 million in annual sales over the previous five years (McDermott 2025).

States offer separate ECTC to meet local challenges.

Twenty states offer their own ECTC to reduce state business tax liability (Committee for Economic Development (CED) 2025, National Conference of State Legislatures 2024). State (CED 2025, Figure 1).

• Eighteen states (AL, AK, AR, CO, CT, FL, GA, IL, IA, KS, LA, MD, MS, NY, OR, RI, VA) focus on increasing childcare supply by offering credits to employers who buy or build new childcare facilities.
• Twelve states (AL, AK, CO, CT, FL, KS, LA, MD, MS, OR, RI) also offer credit to employers who directly share costs with employees.
• KS and LA make their ECTC refundable to increase that owe little tax.
• States give credit for donating money to childcare groups (CO), for hiring childcare workers (AR), or for childcare without specifying how it is used (SC, WV).

KY established a state fund to match employer’s payment for childcare costs.

In 2025, MO HB269 proposed the Employer Provided Child Care Assistance Tax Credit Act, which would have offered 30% credit for employer-provided childcare expenses. However, the bill did not pass.

Figure 1. State Employer Childcare Tax Credit (ECTC) Policies. Twenty states offer tax credits for building facilities, sharing employee costs, making credits refundable to help small businesses that owe little tax, and other incentives for donations or training. Map adapted from CED 2025 and made with https://www.mapchart.net/.

ECTC’s effects were limited and did not increase childcare accessibility or affordability.

Low participation in the ECTC limits the credit's impact across the economy (GAO 2022). Some states (CA, ME, MT, NE, NV, OK, PA, TN, TX) either repealed or sunset their ECTC programs due to low utilization and/or limited effect (CED 2025).

The ECTC’s $150,000 cap did not offset the high costs of building or operating a childcare facility (Melhorn 2025, GAO 2022). The ECTC primarily reduced costs for businesses that already planned to provide or pay for childcare (Bluestone et al. 2025). ECTCs did not reduce turnover across the wider workforce. Employer-based childcare often did not serve employees who work non-traditional hours, such as shift workers (GAO 2022). Even with ECTC assistance, the cost of childcare remained prohibitively high for lower-wage employees.

References

Alaska Statutes § 47.25.011 (2024). https://www.akleg.gov/basis/statutes.asp#47.25.011

American Taxpayer Relief Act of 2012. Pub. L. 112-240, 126 Stat. 2313 (2012). https://www.congress.gov/bill/112th-congress/house-bill/8/text

Arkansas Code § 26-51-508 (2024). https://advance.lexis.com/api/document/collection/statutes-legislation/id/4WVP-0VS0-R03J-S4R6-00008-00?cite=A.C.A.%20%C2%A7%2026-51-508&context=1000516

Arkansas Code § 26-51-508 (2024). https://advance.lexis.com/api/document/collection/statutes-legislation/id/4WVP-15T0-R03N-053Y-00008-00?cite=A.C.A.%20%C2%A7%2026-53-132&context=1000516

Bipartisan Policy Center (2024) State Child Care Tax Supports for Businesses and Parents. https://bipartisanpolicy.org/report/state-tax-policies-working-parents/

Bluestone P, Odibo S, Warner N (2025) Tax Incentive Evaluation: Employer Credit for Purchasing or Sponsoring Childcare for Employees.  Fiscal Research Center. https://www.open.ga.gov/openga/report/downloadFile?rid=33155

Code of Alabama § 40-18-542 to § 40-18-546 (2024). https://alison.legislature.state.al.us/code-of-alabama?section=40-18-542

Code of Virginia § 58.1-439.4 (1996). https://law.lis.virginia.gov/vacode/58.1-439.4/

Colorado Revised Statutes § 39-22-121(2025). https://advance.lexis.com/api/document/collection/statutes-legislation/id/65J5-09V3-CGX8-00SW-00008-00?cite=C.R.S.%2039-22-121&context=1000516

Committee for Economic Development (CED) (2025) State Tax Credits for Child Care. https://education.ced.org/child-care-state-tax-credits

Comptroller of Maryland (2024) Part C-II Child and Dependent Care Tax Credit. URL link

Connecticut General Statutes § 12-217x (2024).  https://www.cga.ct.gov/current/pub/chap_208.htm#sec_12-217x

Connecticut General Statutes § 12-634 (2016). https://www.cga.ct.gov/current/pub/chap_228a.htm#sec_12-634

Economic Growth and Tax Relief Reconciliation Act of 2001. 10 U.S.C. Ch. 105 (2001). https://www.congress.gov/bill/107th-congress/house-bill/1836

Florida Statutes § 402.261 (2024). https://www.leg.state.fl.us/Statutes/index.cfm?App_mode=Display_Statute&Search_String=&URL=0400-0499/0402/Sections/0402.261.html

HB 269, 103^rd General Assembly, 1^st Regular Session. (MO. 2025). https://archive.house.mo.gov/bill.aspx?bill=HB269&year=2025&code=R

Illinois Administrative Code § 100.2196 (2008). https://www.ilga.gov/commission/jcar/admincode/086/086001000B21960R.html

Internal Revenue Service (IRS) (2025) Employer-Provided Childcare Credit. https://www.irs.gov/businesses/small-businesses-self-employed/employer-provided-childcare-credit

Iowa Code § 237A.31(2023). https://www.legis.iowa.gov/docs/code/237A.31.pdf

Kansas Statutes § 79-32,190 (2022). https://ksrevisor.gov/statutes/chapters/ch79/079_032_0190.html

Kentucky Revised Statutes §199.881 (2022). https://apps.legislature.ky.gov/law/statutes/statute.aspx?id=53673

Mississippi Code § 57-73-23

Melhorn SF (2025) Driving Economic Growth Through Child Care: The $63 Billion Opportunity. U.S. Chamber of Commerce. https://www.uschamber.com/workforce/driving-economic-growth-through-child-care-the-63-billion-opportunity

McDermott B (2025). The 45F Tax Credit for Employer-Provided Child Care. Congressional Research Service. https://www.congress.gov/crs-product/IF12379

National Conference of State Legislatures (2024) State Child Care Tax Benefits. https://archive.legmt.gov/content/Committees/Interim/2023-2024/Economic-Affairs/Meetings/March-4-5-2024/4.09-NCSL-Brief-State-Child-Care-Tax-Incentives.pdf

New York Tax Law § 31 (2024).  https://www.nysenate.gov/legislation/laws/TAX/31

Official Code of Georgia Annotated § 48-7-40.6 (2010). https://advance.lexis.com/api/document/collection/statutes-legislation/id/6C0T-MFT3-RRJF-V1G2-00008-00?cite=O.C.G.A.%20%C2%A7%2048-7-40.6&context=1000516

One Big Beautiful Bill Act, Pub. L. No. 119-21, 119 Stat (2025). https://www.congress.gov/bill/119th-congress/house-bill/1/text

Oregon Revised Statutes § 315.204 (2023).  https://oregon.public.law/statutes/ors_315.204

Rhode Island General Laws § 44-47-1 (1994). https://webserver.rilegislature.gov/Statutes/TITLE44/44-47/44-47-1.htm

Revised Statutes § 6107 (2025) https://www.legis.la.gov/legis/Law.aspx?d=453236

South Carolina Code Annotated § 12-6-3440 (1995).  https://www.scstatehouse.gov/code/t12c006.php

U.S. Government Accountability Office (GAO) (2022) Employer-Provided Child Care Credit: Estimated Claims and Factors Limiting Wider Use. https://www.gao.gov/products/gao-22-105264

West Virginia Code §11-24-44 (2022) https://code.wvlegislature.gov/11-24-44/