Building Blocks for Childcare Reform

Families need resources and options, not an overengineered subsidizing of demand

The Actual Problem to Solve

As with many labor-intensive services, price increases have been sharper in childcare than other sectors of the economy. About half of families utilize at least some regular paid or center-based care, and the costs can get inarguably hefty. A family in a large urban area looking for full-time care for their newborn will spend, on average, about $17,170 per year, according to data compiled by the Department of Labor. But prices vary by type of care, region, and a child’s age. A family in a rural area using home-based care for their preschooler will face less than half the bill of the city-dwellers with a newborn.

Polling and analysis by American Compass, the Institute for Family Studies, the Bipartisan Policy Center, my own work at the Ethics and Public Policy Center, and more stress that parents’ preferences are more complicated than one-size-fits-all approaches from D.C.

The cost can be a huge burden to low-income families, especially single parents. Ever since the 1990s, public policy has sent households headed by a single parent a clear message about the importance of participation in the labor force; for them, targeted childcare assistance makes sense. That is not the same, however, as creating a middle-class entitlement out of the purportedly widespread desire for full-time, center-based childcare. Polling and analysis by American Compass, the Institute for Family Studies, the Bipartisan Policy Center, my own work at the Ethics and Public Policy Center, and more stress that parents’ preferences are more complicated than one-size-fits-all approaches from D.C.

To a first degree of approximation, the families expressing a preference for full-time childcare, like a center or nanny, tend to be headed by college-educated parents, especially dual-career couples. Other families, particularly where parents do not have college degrees and work in less prestigious jobs, want part-time or late-night care; some, like the parents of Senator Warren and Senator JD Vance, turn to relatives; some have a strong preference for home-based or faith-based providers. Many make the choice to have a stay-at-home parent.

One factor is a family’s ability to pay. The amount spent on childcare expenses among low-income families that pay for care can surpass one-third of household income. For families making six figures, by contrast, the median share of household income spent on childcare is around 7%. But much of the preference gap is also due to the difference in how parents of different socioeconomic classes see their work—as a “job,” rather than as a “career.” For some parents, paid childcare is essential to their career trajectory; for others, it’s a stopgap while they put in the extra hours to make ends meet.

But much of the preference gap is also due to the difference in how parents of different socioeconomic classes see their work—as a “job,” rather than as a “career.”

A 2022 survey of working parents from the Bipartisan Policy Center found, “parents are satisfied with their informal childcare arrangements, and most say formal childcare arrangements are unappealing to them…[even if they were] free and in a convenient location.” New York City, a national posterchild for universal childcare, has had to scale back plans for expansion because nearly one-third of its seats went unfilled; largely in the poorest and most racially diverse parts of the city.

Thus, any approach to childcare should reflect the reality that parents’ preferences vary across race, education, income, and their child’s age. Universal programs flatten those distinctions and privilege those whose preferences most closely mirror whatever policymakers presume to be the norm—typically, those most like the Acela Corridor types making policy decisions, or the professional activists lobbying them. The result is also to create the expectation that every parent should be taking advantage of universal pre-kindergarten or other forms of center-based care for young children. Supporting families with young children should include some form of material assistance while empowering them to make the decision right for them, rather than presuming one model or another deserves public support.

Universal programs flatten those distinctions and privilege those whose preferences most closely mirror whatever policymakers presume to be the norm—typically, those most like the Acela Corridor types making policy decisions, or the professional activists lobbying them.

Existing Policy

The federal tax code already includes a provision intended to help families offset the cost of childcare. Single-parent households with a working parent are eligible for the Child and Dependent Care Tax Credit. Two-parent households where both parents are working or looking for work are eligible as well. Families in which one spouse stays home full-time (and is not a full-time student or physically/mentally incapable of self-care) are ineligible to claim any CDCTC.

The credit itself offers limited assistance. The lowest-income taxpayers (with incomes below $15,000) receive a non-refundable tax credit worth 35% of their childcare expenses, up to $3,000 of expenses for one child or $6,000 for two or more (thus, the maximum credit would be $2,100). The credit becomes less generous as income increases; families with incomes above $45,000 receive a credit worth 20% of their expenses up to the same cap. The maximum amount was set in 2001 and hasn’t been adjusted for inflation since; on paper, that’s a 43% decline in real value.

As a helpful explainer by the First Five Years Fund outlines, the CDCTC helps families by “reducing their taxable income by a maximum of $1,050 for one dependent and $2,100 for two or more dependents.” But most parents don’t claim the maximum; in fact, most parents don’t claim any of the childcare tax credit at all; just 13% of taxpayers with children claim the CDCTC. Because the CDCTC is capped and non-refundable (that is, taxpayers do not get a refund if the amount of the credit surpasses their tax credit), the average tax reduction for taxpayers claiming the CDCTC is $593. (This data is from tax year 2019, the most recent data from a year wholly unaffected by COVID.)

But most parents don’t claim the maximum; in fact, most parents don’t claim any of the childcare tax credit at all; just 13% of taxpayers with children claim the CDCTC.

And because higher-income taxpayers have higher tax liabilities, they are far more likely to benefit from the CDCTC, compared to the more even-handed distribution of the CTC (particularly with its refundable component, the Additional Child Tax Credit (ACTC), for working-class families with low tax liability.)

But in general, the CDCTC bears all the hallmarks of an overly engineered approach to policymaking.

The CDCTC does have one notably salutary aspect: providers only need a Social Security Number or Taxpayer Identification Number, so payments made to childcare centers, babysitters, neighbors, or even relatives are eligible expenses. This allows parents to receive reimbursement for a wide range of non-parental care arrangements, an important gesture toward a more pluralistic childcare approach.

But in general, the CDCTC bears all the hallmarks of an overly engineered approach to policymaking. At best, it is a clunky attempt at improving childcare affordability. At worst, it works against itself by helping nudge prices higher, just like the subsidies for higher education that encourage colleges to increase tuition. A 2018 paper in the Journal of Urban Economics found “childcare tax credits are passed through to the childcare provider in the form of higher prices and wages,” at about 60 cents on the dollar, with larger pass-throughs observed in urban areas and among higher-income populations.

The CDCTC is the only federal childcare program available to all households at all income levels. Earnings that are set aside in a savings account to pay for childcare expenses can also receive favorable tax treatment. Together, these provisions cost the federal government about $5 billion in 2023 in forgone tax revenue.

Together, these provisions cost the federal government about $5 billion in 2023 in forgone tax revenue.

Low-income households are also eligible for additional assistance in affording childcare through the Child Care Development Block Grant, or CCDBG. Launched in 1990, the CCDBG became a critical tool in establishing the welfare reform paradigm of the 1990s. If the federal government was going to scale back cash welfare and tie benefits to work, the thinking went, it should ensure single parents had someone to watch their kids while they were on the job.

The CCDBG is a block grant, not a federal program, so its administration varies by state. To be eligible, at a minimum, parents must be working (or in school) with children under age 13 and incomes no greater than 85% of their state’s median income. But funding does not necessarily cover all eligible families and so states prioritize. Families with very low incomes or children with special needs, as well as homeless kids, are supposed to be given priority. States can have much more restrictive income eligibility thresholds. New Jersey, for instance, caps eligibility at households with incomes below 36.25% of the state’s median.

That threshold is often referred to as the benchmark for “affordable” childcare, though it’s more accurate to say it was plucked out of thin air as the average of families’ childcare expenses as a share of their income over recent decades.

Most states operate CCDBG as essentially a voucher system. If eligible parents are selected for participation, they bring their dollars to the provider of their choice, so long as it is licensed by the state—robust protections exist for faith-based providers. While 94% of parents who participate in CCDBG are served by this approach, some states (particularly big blue ones like California and New York) choose to contract directly with childcare providers for seats, rather than giving parents a voucher. In exchange for this assistance, low-income parents are charged a co-pay; generally 7% of their household income. That threshold is often referred to as the benchmark for “affordable” childcare, though it’s more accurate to say it was plucked out of thin air as the average of families’ childcare expenses as a share of their income over recent decades. (Defining “above average” as “unaffordable” is one stock-in-trade of childcare activists that conservatives should challenge more vocally.)

For FY 2023, federal CCDBG funding was boosted to $8 billion, though as a discretionary program its yearly funding can fluctuate. CCDBG dollars are intended to increase low-income parents’ ability to find childcare. But over the years, additional strings have been attached in the name of “increasing the quality” of the care provided. States are now required to spend 12% of their federal CCDBG dollars on “quality improvement” activities; prior to a 2014 reauthorization, the requirement was just 4%.

CCDBG dollars are intended to increase low-income parents’ ability to find childcare. But over the years, additional strings have been attached in the name of “increasing the quality” of the care provided.

“High-quality childcare” sounds nice, but the required 12% includes spending on professional development, pursuing voluntary accreditation, or higher standards relating to mental health, physical health, and nutrition. It’s worth interrogating whether a program aimed at supporting low-income parents’ childcare options should be diverting more than one out of every nine dollars spent to increase the number of certificates of completion and best-practices binders on the shelves of childcare providers.

But overall, the CCDBG structure makes a good deal of sense. If welfare benefits are conditioned on work, low-income single parents will—almost by definition—require some targeted assistance. And if low-income households receive targeted assistance, a voucher-like system that respects parents’ preferences and affirmatively protects religious providers is the right model. But this is not an all-purpose way of helping parents with young kids.

And if low-income households receive targeted assistance, a voucher-like system that respects parents’ preferences and affirmatively protects religious providers is the right model. But this is not an all-purpose way of helping parents with young kids.

Misguided Solutions

In service to their broad, conceptual commitment to making subsidized childcare available to all families, progressives propose large wage subsidies for childcare workers, caps on household spending on childcare, and large-scale investments in universal pre-kindergarten; the ill-fated Build Back Better proposal included all three. These all reward formal programs over informal ones and use of paid childcare over stay-at-home parents or relative-provided care.

While no one knows what a Harris administration would prioritize, some observers expect her to resurrect an approach she co-sponsored in the Senate, which would cap childcare expenses at 7% of household income for most families. This would disproportionately benefit families who spend relatively more on childcare than families who opt for less expensive options.

Barring unified Democratic control of Congress, that dream seems unlikely to be realized. Tax credits strike some on the Left as the next best thing and appeal to Republicans as, essentially, harmless. As American Compass’s Oren Cass has noted, tax credits have become the stock-in-trade for domestic policy because deciding to forgo taxes seems, somehow, like less of a government action than actually choosing to allocate resources toward pursuing goals. With its strong preference for governing through the tax code and adding on what already exists, rather than undertaking the harder work of reforming and improving, Congress will seemingly always have an appetite for CDCTC expansion.

As American Compass’s Oren Cass has noted, tax credits have become the stock-in-trade for domestic policy because deciding to forgo taxes seems, somehow, like less of a government action than actually choosing to allocate resources toward pursuing goals.

Two recent bills would expand the subsidy for childcare expenses in the tax code. The Promoting Affordable Childcare for Everyone (PACE) Act, introduced in the House of Representatives by Congresswoman Claudia Tenney (R-NY) and Congressman Brad Schneider (D-IL), would make the Child and Dependent Care Tax Credit (CDCTC) fully refundable (that is, families with low tax liability could receive the credit’s full value through a rebate check) and expand the amount of pre-tax dollars that a family can put toward a childcare savings account. In the Senate, the Childcare Availability and Affordability Act is co-sponsored by Senators Katie Britt (R-AL) and Tim Kaine (D-VA) and would do much the same thing, with some additional tax incentives for employers to sponsor their employees’ childcare.

You can’t demand-subsidize your way out of a supply-side problem, but that doesn’t stop policymakers from trying. Congress—particularly members concerned by the federal fiscal picture and the state of American families—should think twice before proceeding with feel-good bills expanding the CDCTC. Improving and increasing the Child Tax Credit (CTC), especially if undertaken in ways that ensure a connection to work and promote marriage, is a far more even-handed way of supporting families. Per taxpayer dollar spent (or foregone), the CTC provides the same increase in family resources as the CDCTC, equally helping families that utilize paid childcare to afford it. But unlike the CDCTC, the CTC provides equal support to families regardless of their preferred childcare arrangements, providing support to the family trying to make ends meet with a stay-at-home parent as well.

You can’t demand-subsidize your way out of a supply-side problem, but that doesn’t stop policymakers from trying.

Unfortunately, some Republicans, like Senator Britt, have positioned themselves on exactly the wrong side of both credits, co-sponsoring the push to make the CDCTC fully refundable while opposing expansion of the CTC. An agenda that respects working-class parents’ preferences—and prioritizes them as a key part of the realigning conservative coalition—would reverse those stances.

When it comes to CCDBG, some Republicans are giving serious attention to improving the program. Earlier this summer, Senator Marco Rubio (R-FL) introduced a bill that would allow parents greater flexibility in meeting the eligibility requirements while also eliminating marriage penalties. This is potentially fertile ground for experimentation; some states have used TANF funds to go toward parents caring for infants at home. But CCDBG dollars are intended to help the lowest-income households maintain a connection to work; inclusion of support for stay-at-home parents, generally a worthy reform, looks in this instance like mission creep.

A different Republican bill, co-sponsored by then-Senator Richard Burr (R-NC) and Senators Tim Scott (R-SC), and Todd Young (R-IN), would also have made worthwhile changes to CCDBG. But it would have increased the allowable income threshold from 85% of a state’s median income to 150%. That may also be well-intentioned, but it is a bridge too far—middle-class (if not upper-middle-class) parents would be competing with low-income parents for the same pot of discretionary dollars. Better options are available.

That may also be well-intentioned, but it is a bridge too far—middle-class (if not upper-middle-class) parents would be competing with low-income parents for the same pot of discretionary dollars. Better options are available.

A More Inclusive Approach

Both the Rubio and the Burr-Scott-Young approaches are notable for what they stress: the importance of parental choice. The voucher-like approach of CCDBG is an important component of that choice. But an emphasis on parental choice within the CCDBG program would, ideally, be situated within a broader tax framework that celebrated the diversity of parents’ choices at different stages of their child’s life as well as across the different preferences parents in different socioeconomic classes say they have.

Both the Rubio and the Burr-Scott-Young approaches are notable for what they stress: the importance of parental choice.

A welcome contribution came earlier this month, when Senator Deb Fischer (R-NE) introduced legislation to reauthorize CCDBG by bolstering childcare supply and increasing reimbursement rates for providers. The emphasis on increasing supply, such as steps to expand provider capacity and better support in-home and rural childcare providers, is essential for the program to function better.

But beyond the specifics of supporting low-income parents, policymakers should embrace a holistic view of early childhood. Instead of pumping new subsidies into the current, clunky system, policymakers should approach the problem through a wider lens. Elsewhere, I’ve proposed we should scrap the CDCTC entirely, and use the current childcare-related tax expenditures to help fund a young-child CTC supplement. Simply re-allocating the existing CDCTC tax expenditures could give each family currently claiming the CTC an extra $250 per child under age six to use however they wish, rather than tethering a tax deduction to whether a family has both parents working and how much they spend on childcare.

But beyond the specifics of supporting low-income parents, policymakers should embrace a holistic view of early childhood.

Prioritizing a young-child CTC supplement would provide families with more flexibility and improve affordability for many families that don’t benefit much from existing policy. That, rather than expanding subsidies for only a certain approach to work-life balance, should be the goal for policymakers as they consider tax reform in 2025. Expanding the CTC, or transforming it with an eye towards the needs of parents with young kids, as proposed by Senator Mitt Romney’s Family Security Act 2.0 or American Compass’s Family Income Supplemental Credit, would be a healthy step toward that vision.

Shifting our approach away from chasing rising prices through increased childcare-specific subsidies will require standing in the way of some facially-popular bipartisan legislation. Just as gimmicks like inclusionary zoning and rent control don’t do much for reducing housing costs absent plans to actually build more houses, childcare policy needs a dose of that old-time supply-side religion to help increase options for parents.

Shifting our approach away from chasing rising prices through increased childcare-specific subsidies will require standing in the way of some facially-popular bipartisan legislation.

Caveat emptor—childcare has a natural limit to how much deregulation can be applied. Child-to-staff ratios, for example, are there to protect kids (who, in many cases, aren’t exactly able to provide much in the way of legible feedback), even as they constrain the operator’s ability to cut costs. While there are surely many cases of credentialism run amok (Washington, D.C., is a particular horror story), other states flirt with ideas toward the other extreme that could end in dangerous or heartbreaking situations. Just like any other policy domain, deregulating is the correct instinct for conservatives, but isn’t a silver bullet.

States will have to take the lead, but Congress could help by encouraging states to review their regulations for needless barriers to entry, offering supply-side tax breaks for owner-operated childcare facilities or homes, and reforming zoning laws to allow childcare to be operated in most residential neighborhoods. The case for state grants aimed at boosting provider capacity is particularly strong, especially for non-profit and faith-based providers, allowing them to tap into low-cost capital to build a new facility or expand or retrofit an old one. When it comes to state-level experimentation, conservatives don’t need to be doctrinaire about what might and might not work. One intriguing pilot program in Michigan involves a three-way split of the cost of childcare, with the worker, the employer, and the state each picking up a share of the cost. Broadening tax incentives for employer-provided childcare can help businesses do right by working parents without creating a large-scale federal program that puts a thumb on the scale of work versus family.

Single parents need childcare almost by definition. Many two-parent households seek it out as a way of allowing both parents to keep at least some connection to the labor force, even if only part-time. We can and should seek way to expand options in the childcare market and make it run smoother (New York’s new childcare portal is an example of trying to improve the user experience.)

But parents’ preferences around work and family are far more complex and diverse than either tradwife memes or the soft condescension that assumes anyone not on the career track is wasting their talents. Devoting sparse fiscal capacity to clunky demand-side subsidies for paid childcare, over all the other ways families might arrange work and family life, sends a signal about which activities are celebrated and which are merely tolerated. Congress should strive for even-handedness toward parents as both a policy matter and a political one—nothing’s “weirder” than lamenting the wasted economic potential of moms who choose to spend their infant’s early years at home.

Conservatives have policy answers that can spark more options for parents for young kids, and make the cost of raising a family a little easier without falling for superficial “fixes.” They should unabashedly make that case as we head into the 2024 election and the 2025 battle royale over how our tax code will treat families.