Efficacy of Employer Tax Credits for Child Care Disputed

November 22, 1989 3 min read

State efforts to expand the supply of child care by providing tax credits to employers who offer or subsidize care for their workers’ children have been largely ineffective, according to a report released last week by a child-care advocacy group.

Moreover, argues the Child Care Action Campaign, the increasing popularity of child-care tax breaks among state policymakers has served to distract attention from other, more effective ways of helping working parents find affordable care.

The study found that 13 states currently offer some form of corporate-tax credits for employer-provided child care: California, Connecticut, Kansas, Maine, Maryland, Mississippi, Montana, New Mexico, Ohio, Oregon, Pennsylvania, Rhode Island, and South Carolina.

The credits allow employers to reduce their state tax liabilities by some portion of their expenses for starting on-site child-care facilities, subsidizing employees’ child-care expenses, or helping workers find a care provider.

The idea of using tax credits to stimulate such employer initiatives has considerable political appeal, the report suggests. The number of states with tax-credit policies has tripled since 1983, and 21 states considered similar legislation in the past year.

“An employer tax credit is sometimes the only child-care policy legislators are willing to consider,” the report says. “If [it] passes, the legislature may perceive that child care has been ‘dealt with.”’

The problem, the report argues, is that such credits have had only marginal success in spurring employers to provide child-care assistance. Fewer than 1 percent of businesses in states with such policies have taken advantage of the credits, the study estimates.

In Connecticut, for example, only 45 of the state’s 80,000 eligible businesses are expected to apply for credits this year.

Benefits, Obstacles

The report concedes that tax cred8its may in a few cases induce employers to offer child-care aid. Companies that already have policies, for example, may decide to expand their current benefits because the credits lower their costs.

In addition, the report indicates, tax credits may provide the “final motivator” for firms that had been considering offering benefits, particularly if costs had been the major obstacle to doing so.

But, as the tiny numbers of participating companies suggest, there is a formidable array of reasons employers do not take advantage of child-care tax credits. The report points to a number of factors, including:

Many employers do not see child care as a major business issue, or feel that the benefits of child-care policies--for example in recruiting and retaining workers--are outweighed by liability and other concerns.

The amounts provided by the tax credits frequently are not large enough to influence business decisions. Moreover, many firms have no state tax liability and so are not affected by tax incentives.

States have not publicized the credits adequately, leaving many businesses unaware of the available benefits.

The report also argues that such credits may be an inefficient use of state funds, in that some of the benefits go to companies that had already created child-care programs for other reasons. And if more employers decided to take advantage of the credits, it adds, the loss in state revenues could be severe.

Instead of putting so much emphasis on child-care tax credits, the report suggests, states should devote more effort to such areas as training child-care workers, implementing possible federal standards, providing grants and loans for starting new programs, and establishing before- and after-school programs.

Copies of the report are available for $20 each, plus $2.40 for postage and handling, from the Child Care Action Campaign, 99 Hudson St., New York, N.Y. 10013.--hd

A version of this article appeared in the November 22, 1989 edition of Education Week as Efficacy of Employer Tax Credits for Child Care Disputed