On October 4th, 1976, the Child and Dependent Care Tax Credit (CDCTC) was established to help working families with work-related child care expenses. However, over the years, the tax credit has gone largely unchanged, while the cost of child care has risen dramatically. Congress can work together to ensure the CDCTC better fulfills its purpose and helps working parents of modest means afford the cost of child care.
Tax policy expert Thomas Wechter explains the interesting history of the CDCTC:
“In response to Smith v. C.I.R., (1939) which held that the cost of nursemaids employed to take care of young children so that the parents could work were not deductible as business expenses, the Congress in 1954 provided an itemized deduction for child care expenses in the amount of $600 incurred for the care of children under the age of 12 and other dependents. The deduction was converted into [the CDCTC] in 1976.”
Congress approved a temporary increase to the credit in 2001, and in 2012 a bipartisan majority voted to make that expansion permanent.
Today, the credit varies between 20 and 35 percent of qualified expenses up to $3,000 per eligible child. Qualified expenses are capped at $6,000. That means the maximum credit for working parents with two or more children is $2,100, or only about 10 percent of the average annual cost of care for two children in the United States.
Currently, the credit is not refundable. As a result, most low- and some middle-income, tax-paying families with qualified expenses are unable to take advantage of the credit. Therefore, higher-income families benefit most from the tax credit. The credit’s expense limits are also not indexed for inflation, so even as child care expenses have risen sharply since 2001, the value of the CDCTC has remained frozen in place.
To help the CDCTC better fulfill its role and help working parents of modest means afford the cost of child care, tax reform should 1) maintain this critical credit amidst efforts by some whose primary goal is to flatten the code, 2) increase the value of the CDCTC sharply, and 3) make the CDCTC refundable, so low- and middle-income families can benefit.
The economic case for using the tax code to provide relief for families struggling with the cost of child care costs is straightforward, according to Alan D. Viard, resident scholar for federal tax and budget policy at the American Enterprise Institute:
“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.”
As part of a major overhaul to the tax code in 2017, bipartisan lawmakers were successful in preventing the CDCTC from being eliminated amid efforts to flatten the code. FFYF has endorsed the bipartisan Promoting Affordable Childcare for Everyone (PACE) Act, which would enhance the value of the CDCTC to low‐income working families by making the credit fully refundable, particularly those who face the greatest difficulties in affording the high cost of child care. It would also allow low‐income working parents to benefit on the same scale as middle‐ and upper‐income families. Additionally, indexing the credit to inflation will ensure the CDCTC keeps pace with rising costs of care, helping families for decades to come.