Blog: The Educated Reporter

Trump Eyes Tax Code to Tackle Child Care

The tax code is complicated, the child-care system is fragmented, and President Donald Trump’s policy proposals can seem to change on a whim. And so, making sense of how tax reform can make child care more “accessible and affordable,” as Trump has vowed, is no simple task.

The need to provide relief for families shouldering the high cost of child care has emerged as one of the few points of agreement between the White House and Democrats in Congress, but the two sides differ on just how to do that.

The tax reform “plan” the White House released last week is short on details across the board (to put it mildly). On this issue, Trump simply promised to “[provide] tax relief for families with child and dependent care expenses.”

As a candidate, Trump proposed a combination of tax deductions, rebates, and the creation of child-care savings accounts. Now, the Washington Post reports the administration is considering a new approach that would bolster an existing child-care tax credit — a departure from the proposal laid out during the campaign and one that would be more likely to draw support from congressional Democrats.

Whether a tax overhaul will make it through Congress remains to be seen, of course. But if it does, new assistance for child-care costs seems like a pretty good bet. After all, the issue enjoys the backing of the president’s daughter, Ivanka Trump, who wields considerable influence within the White House and has made defraying child-care costs her signature issue.

And, some Republican senators have previously signaled a willingness to address child care through tax reform. During his 2016 White House bid, Sen. Marco Rubio (R-Fl.) proposed creating a partially refundable child tax credit. Also, Sens. Deb Fischer (R-Neb.) and Angus King (I-Maine) recently introduced legislation to create tax incentives for businesses that offer paid family leave. Still, don’t expect the bulk of congressional Republicans to rally around the issue.

If the talk of tax credits, deductions, savings accounts, and rebates has you scratching your head, don’t worry. Here’s a quick breakdown of five ways the president could address child care through tax reform:

1. Make Child-Care Expenses Tax-Deductible: During the campaign, tax deductions were the initial focus of Trump’s plan to ease the burden of child-care costs. Just as charitable donations are deductible, the plan would allow taxpayers to write off child-care costs for children under age 13. Critics, however, quickly pounced. They noted that deductions only help families that pay federal taxes, but nearly half of American households, predominantly low and middle income, do not pay taxes and therefore would not benefit from this plan.

Perhaps in response to this criticism, the White House may be considering another approach.

2. Expand the Child and Dependent Care Tax Credit: Currently, the federal tax code addresses child-care expenses through the Child and Dependent Care Tax Credit (CDCTC). Depending on their income, families can receive a tax credit of up to $1,050 per child, or $2,100 maximum, to offset child-care expenses. Trump could propose increasing the per-child benefit, allowing parents to claim a larger amount.

However, this credit is non-refundable. That means the credit can be used to lower the amount of taxes owed, but any remaining balance is not refunded. So, just like the tax deduction, it fails to help those who do not owe federal income tax in the first place.

3. Make the Child and Dependent Care Tax Credit Refundable: President Trump could make the CDCTC a refundable tax credit. This would allow low- and middle-income families that do not owe taxes to receive a tax refund for some of their child-care expenses. For that reason, this option would be the most likely to garner support from Democrats.

The Washington Post reports that the administration is considering a plan to expand the CDCTC and make it refundable.  

4. Create a New Child Care Tax Credit or Rebate: Of course, the White House could just opt to create an entirely new tax credit. During the campaign, part of Trump’s child-care package was to create a new tax rebate for child-care spending that, through the Earned Income Tax Credit, would benefit low-income families that don’t pay taxes.

5. Create Child Care Savings Accounts: Part of Trump’s initial proposal and reportedly still under consideration is the creation of savings accounts for child and dependent care. Similar to health savings accounts, families could make tax-deductible contributions to the accounts; the money could be withdrawn later for a variety of child-care expenses. But critics say low-income families living paycheck to paycheck often lack the means to contribute to savings accounts.

Blueprint From the States?

Even as Trump eyes federal tax-policy changes to address child-care costs, some states have taken their own steps. At least ten states, including some led by Republican governors or state legislatures, offer refundable tax credits to help cover the cost of child care, though eligibility requirements and the value of the credits vary considerably.

Still, revisions to the tax code are unlikely to address a key element of improving the child-care system — quality. Trump’s comments have largely focused on access and affordability and his “skinny budget” is notably silent on existing child care programs such as Head Start. High-quality child care can have enormous payoffs, as a recent article in the New York Times notes. At the same time, some research suggests that poor-quality care can actually do more harm than good.

Trump’s tax plan, as it stands, is little more than bullet points. Critical questions loom as the White House and Congress work to craft actual legislation.

  • What lessons do current state tax policies offer for a new federal approach?
  • Is there a way to address quality of care through tax policy?
  • Who will the changes to tax policy primarily benefit?
  • Is tax policy really the right mechanism?

These questions will be part of the conversation during an EWA a panel at this year’s National Seminar in Washington, D.C.