Evaluating Proposals to Alleviate Child Care Burden for Working Families

Purpose. Family policy for child care in the United States is implemented through means-tested subsidies or non-refundable tax credits. Many low-income families are eligible for the means-tested benefits, yet take-up rates are low. These same families are generally excluded from child care benefits in the tax code because the Child and Dependent Care Tax Credit (CDCTC) is non-refundable. Child care proposals in this analysis address the burden of child care expenses for low-income working families in two distinct ways: guaranteeing families do not have to spend more than the Department of Health and Human Services affordability guideline, or making the CDCTC fully refundable and increasing its generosity. We also show the range of poverty alleviation possible when making child care universally available to low-income families. Additionally, our approach addresses potential labor supply responses when parents have lower work-related costs.

Methods. We simulate the potential poverty alleviation effects of the child care proposals using the Supplemental Poverty Measure (SPM) in the 2018 Current Population Survey. The SPM framework determines poverty status based on a definition of income after taxes, transfers, and certain medical or work-related expenses, such as out-of-pocket child care spending.  These policy proposals target working families who have children and are paying for child care, so our analysis focuses on poverty measures for children under age 13 whose families are paying out of pocket for child care. The proposals could reduce poverty by increasing families’ disposable income, and the decreased cost of child care could also increase labor supply leading to further poverty reduction through higher earnings.

Results. The estimated poverty reduction effects are provided for a range of relevant policy proposals. Among families paying for child care, about 1.65 million children (11.9%) are in poverty. These families in poverty only have income just over half of their needs on average. Accounting for potential labor responses, CDCTC-related proposals would reduce poverty by about 30 to 90 thousand children compared to as many as 630 thousand according to Senator Elizabeth Warren’s universal child care plan, which would imply a 38% reduction. The average poverty gap would be reduced by 2.1 to 4.3% for CDCTC-related proposals and upwards of 30% under the universal plan.

Conclusion and Implications. These child care proposals offer new ways to directly offset the costs of working that can be a barrier to lower-income families in meeting their needs. Modifying the existing tax code appears to have modest poverty-reduction benefits even after making child care credits fully refundable. A plan that directly covers child care burden is much more target-efficient than expanding the CDCTC. Further, dynamic responses to these policies could have broader implications for poverty alleviation in the long term because of changes in the labor market and intergenerational effects of improved child development. These proposals would lift many out of poverty, reduce the poverty gap for others, and the benefits would also extend to other non-poor families ranging from low income to the middle class.