Child care tax credit can end no-win choice for working parents

Much has been made of the unprecedented delivery of meaningful financial relief and support to low- and moderate-income Americans under President Biden’s $1.9 trillion American Rescue Plan Act (ARP). In particular, the Child Tax Credit is being heralded as an impressive step to dramatically reduce child poverty.

Not getting nearly enough attention is another provision of the legislation that will go a long way towards lifting up those hardest hit by COVID-19 — working poor parents, many of whom are people of color. Among them are the low-wage workers most likely to be deemed essential: grocery, food service and retail workers and ride-share drivers who couldn’t opt to work from home and who lost or had to abandon their jobs to care for children during the crisis.

A provision of the ARP expanded the Child and Dependent Care Credit (CDCC) and made it available to the lowest-earning families. The CDCC expansion offers much-needed relief, up to $8,000 for working parents when they file their 2021 tax returns.

The CDCC is a federal tax credit to help working families pay for child care. Income and child care spending determine benefits — up to $4,000 per child for up to two children during 2021. The credit is available to households with children younger than 13 in which all parents have positive annual earnings. While many families meet these criteria, from its introduction in 1976 through 2020, the CDCC was nonrefundable, so it failed to reach those who earned too little to pay taxes. In light of child-care issues created by the coronavirus pandemic as many schools and child-care providers closed, the ARP made the credit refundable and increased its generosity — but only during 2021. 

Like the ARP’s more publicly lauded Child Tax Credit provision, if made permanently refundable, the CDCC will continue to support low-income working parents in coming years, versus walking back this progress. In an Upjohn Institute working paper, I estimate that if the CDCC reverts to its pre-pandemic nonrefundable state, 5 percent of single parents will lose eligibility. Eligibility decreases will be particularly large among Black and Hispanic households, groups disproportionately harmed by the pandemic. 

Because benefits are tied to and promote work, precluding low-income parents from the CDCC could harm both families and government budgets. For instance, as I have written before, if the credit keeps parents in the labor force, large decreases in eligibility could increase reliance on other safety net programs.

Furthermore, as low-income families tend to spend a higher portion of their income on child care, a nonrefundable CDCC could exacerbate inequities in financial resources that have increased substantially during the pandemic. Such disparities may be passed on to children, as researchers show that family income affects a number of children’s outcomes, including their health, academic achievement and educational attainment.

No doubt opponents of carrying on with a refundable credit may argue it would mean a big increase in government spending. In the aforementioned working paper, I estimate that permanent refundability will increase government spending annually by about $800 million. Because the credit has decreased in value over time, as it’s not tied to inflation, total spending in real dollars ends up being only slightly higher than it was during the early 2000s. If we were willing to spend that much on child care assistance for working parents then, why not now, when we face a much larger crisis?

It has been sobering to see so many working parents, particularly Black and Hispanic women, lose their jobs or feel compelled to drop out of the labor force to take care of stay-at-home children during the pandemic. This has compounded the economic crisis that disproportionately hurt our front-line workers and communities of color. 

The working poor have borne the brunt of a ruthless pandemic. Parents shouldn’t have to choose between their children and a job that keeps bread on the table. Providing tax breaks to high- but not low-income families, who have suffered the most due to COVID-19, hardly seems fair. Making the CDCC permanently refundable would help all working families to continue to afford child care in 2022 and beyond.

Gabrielle Pepin is a postdoctoral researcher at the W.E. Upjohn Institute for Employment Research.