Journal Issue: The Next Generation of Antipoverty Policies Volume 17 Number 2 Fall 2007
Federal Child Care Policy and Funding: A Summary
Although a wide range of federal programs support early care and education in some manner, federal child care policy has two principal components: tax provisions and block grant funding to states.21 The tax and block grant provisions differ in eligible population, type of care paid for, amount of assistance, delivery mechanism, and virtually every other policy dimension.
The major federal tax provisions relating to child care are the Child and Dependent Care Tax Credit and exclusions from income for benefits under dependent care assistance programs (DCAPs). The CDCTC is a tax credit for a portion of child and dependent care expenses for children under age thirteen or for dependents of any age who are mentally or physically unable to care for themselves. In 2006, the maximum credit was 35 percent of the first $3,000 of qualifying expenses for one child or dependent or $6,000 for two or more qualifying children or dependents. No family qualifies for the maximum credit because of the way the provision interacts with tax rates and other credits. As income rises, the credit gradually declines to cover 20 percent of qualifying expenses (at income levels of $43,000 and higher). In 2005, a total of 6.3 million tax units claimed the CDCTC with an average benefit of $529. The CDCTC cost $2.7 billion in 2006.22
The CDCTC is not refundable: a family’s credit cannot exceed the amount of its income tax liability. As a result, the credit provides almost no benefit to lower-income families. In 2005, families with incomes below $20,000 received an estimated 0.6 percent of CDCTC benefits, while two-thirds of the benefits went to families with incomes exceeding $50,000.23 A single parent paying for child care for two children would not benefit from the credit unless her earnings reached about $21,500.
Dependent care assistance programs allow an exclusion from taxable income for employer contributions toward child and dependent care benefits. The amount of the exclusion is limited to $5,000 per family per year. Benefits may take several forms, but the most common is a salary reduction plan in which employees may set aside up to $5,000 from annual pretax earnings for work-related child or dependent care expenses. The program cost an estimated $810 million in lost federal revenue in 2006.24
The DCAP structure provides little or no benefit to lower-income families. Because it allows only an exclusion from taxable income, families with no tax liability receive no benefit from the provision. Moreover, because it reduces taxable income, it provides the most assistance to higher-income families with higher marginal tax rates.25
The largest source of federal child care subsidy funding for low-income families is the Child Care and Development Fund. CCDF involves a complex mix of federal and state funding.26 A state can also transfer up to 30 percent of its Temporary Assistance for Needy Families (TANF) funds to its CCDF program. It must spend most of its CCDF funds on subsidy assistance for families with incomes below 85 percent of state median income. A state must also spend at least 4 percent of its CCDF funds to promote the quality of child care. Quality expenditures can benefit all families, including those who do not qualify for CCDF subsidies. State CCDF programs must meet federal “parental choice” requirements. Under the federal requirements, families must have the option of receiving a voucher that can be used with an eligible provider, and state policies and requirements cannot expressly or effectively exclude any category of care or type of provider. Federal law also provides that state payment rates must be sufficient to ensure “equal access” to child care services comparable to those provided to families not eligible to receive child care assistance under CCDF or other programs. Most CCDF assistance (85 percent in 2005) is delivered through vouchers, with the remainder provided through contracts with providers (11 percent) or cash to families (4 percent).
The TANF block grant is the other principal federal source of low-income child care assistance. Under TANF, each state qualifies for an annual block grant. A state’s TANF grant may be used for cash assistance for lowincome families and a wide array of other benefits and services. Total federal funding to all states is $16.8 billion a year. States must also spend a specific amount of state funds (known as the “maintenance of effort” requirement) to avoid being penalized. A state may “directly spend” an unlimited amount of TANF funds for child care for “needy” families— that is, families that meet the state’s definition of low-income. It may directly spend TANF funds whether or not it also transfers TANF funds to CCDF. When a state directly spends TANF funds for child care, it may, but need not, follow CCDF rules concerning eligibility, parental choice, and quality.
Federal child care subsidy funding grew rapidly after the enactment of the 1996 welfare law, but the rapid growth ended early in this decade. Total child care spending across CCDF, TANF, and related state funds reached $12.3 billion in 2003 and fell to $11.7 billion in 2005.27 The Deficit Reduction Act of 2005 increased federal funding by $200 million a year. Thus it will eventually not be possible to sustain current spending and service levels unless federal funding is increased or states spend new state funds.
The Department of Health and Human Services has estimated that 2.2 million children were assisted through CCDF, TANF, and a small amount of Social Services Block Grant funding in 2005, down from a peak of about 2.45 million children earlier in the decade. Those children represent a small share of the 15.7 million children who were eligible for CCDF assistance in federal fiscal year 2000 (the most recent year for which data are available).