Testimony: Support Extending Income Tax Credits for Child Care

Senior Policy Analyst Natalie O’Donnell Wood provided testimony in support of extending income tax credits for child care. 

The Bell strongly supports HB17-1002, which extends income tax credits for child care, helping low- to moderate-income Coloradans who pay for this service. This tax credit fixes a glitch in the way that federal and state tax laws interact, so Colorado families earning $25,000 or less will receive a tax credit to cover a portion of their child care expenses. This fix puts these families on a level playing field with high-income Coloradans who can claim child care tax credits.

The Bell researches policies that make it easier for Coloradans to make career choices that help them get ahead economically. We recently talked with low- to moderate-income parents who need child care. These parents put it simply: “To work as hard as I do, I need child care,” and “child care has gotten crazy expensive.”

Access to affordable child care is a critical support for working parents. Access to high-quality child care is crucial to helping their children prepare for success in school. However, child care, and particularly high-quality child care, is very expensive in Colorado. Over time, Colorado has consistently been rated as a state where child care was least affordable for families. On average, in 2016 it cost $11,000 per year for a 4-year-old and nearly $15,000 for an infant in full-time, center-based child care. In general, child care provided in a caregiver’s home has lower tuition, but it is still costly for working families, ranging between $8,000 and $9,000 in 2014.

Several data sources show family incomes have not kept up with the cost of care. Research from the Care Index, a methodology used to measure child care cost, quality and availability, found “the average cost of center-based care (nationally) is one-fifth the median household income.” Longitudinal data from Child Care Aware of America shows that in Colorado, while median family income increased by 8.9 percent between 2008 and 2015, costs for infant and 4-year-old care increased by 19 percent and 9.7 percent, respectively. The Economic Policy Institute’s (EPI) Family Budget Calculator measures the income a family needs “in order to attain a secure yet modest standard of living,” a measurement that is different from the federal poverty level (FPL). EPI’s modeling shows in families with two children, child care costs take up about 20 percent of total family income in Colorado. In every geographic region profiled, child care costs comprised the largest percentage of a family’s budget – more than housing and health care.

Lower-income Coloradans face even greater affordability challenges. For Coloradans making minimum wage (about $17,000 a year in 2016), costs for just one child in child care vastly exceed one’s ability to pay, particularly when combined with other rising household costs. Both the Care Index and the Economic Policy Institute found for minimum wage earners, “the average cost of care would take up an unsustainable two-thirds of (parent) earnings.”

There are steps the public and private sector can take to help families mitigate the high cost of care. For example, dependent care flexible spending accounts can also provide some relief from child care costs. These accounts, offered through employers, allow employees to save up to $5,000 in pre-tax income that can be used to pay for caregiving costs. Unfortunately, they are not universally offered. According to the Bureau of Labor Statistics (BLS), nationally only 54 percent of state and local government workers and 36 percent of private industry workers had access to this type of benefit and access has been stagnant over time. The BLS analysis also found that 16 percent of the lowest paid workers had access to these accounts compared to 61 percent of the highest paid workers.

Subsidies can also help, and Colorado has made many improvements to the Colorado Child Care Assistance Program (CCCAP), which helps offset child care costs for low- and moderate-income families. The Legislature has supported a pilot program that enables parents to gradually receive raises or promotions while continuing to qualify for CCCAP at a reduced level.

Income tax credits for child care also help working Colorado families. Those with incomes of $60,000 and less can claim a refundable state tax credit for child care expenses. This means child care tax credits are first used to reduce income taxes owed. If the value of the tax credit exceeds the amount of taxes owed, the difference is refunded to the family. Colorado’s credit is calculated as a percentage of the federal Child and Dependent Care Tax Credit and weighted so that it provides a higher percentage for lower-income families.

However, the federal Child and Dependent Care Tax Credit is not refundable. Low- to moderate-income families have limited federal tax liability, thus many do not receive the federal credit. Because the federal and the state tax credits were linked, for a time Colorado families earning $25,000 a year or less were not able to receive the state tax credit either.

We fixed this inequity in 2014 by creating a new state tax credit for families with incomes of $25,000 or less, set at 25 percent of their actual child-care expenses, with a cap of $500 for families with one dependent and $1,000 for families with two or more dependents. These families must meet the other requirements of the federal tax credit, in the same way that higher income families must. Colorado Legislative Council Staff’s analysis shows that in fiscal year 2015-16, 34,337 taxpayers claimed an average tax credit of $158 – a real help for low-income working families.

The Bell Policy Center has long advocated for policies to help working families better afford the cost of child care. Research consistently shows that affordable child care is a decisive factor in promoting work effort among low-income mothers. This helps them pursue careers, advance economically and provide for their children. Family members, the businesses that rely on them as employees, and our economy overall benefit from smart child care policies.

We support the extension of income tax credits for child care and HB17-1002 because it keeps in place a commonsense fix that helps more low- to moderate-income families pay for high care costs. Making child care more affordable increases opportunities and reduces some of the barriers that prevent working families from getting ahead financially.

We thank Representatives Pettersen and Exum for bringing this bill to you and thank the committee for the opportunity to share our thoughts with you.

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