A Republican proposal to offer larger tax credits to help families offset their child care costs is a better deal for families with higher incomes, based on a Wisconsin Examiner analysis of the proposal.
To get the full value of the improved tax credit that is part of legislation that the Wisconsin Senate passed Tuesday, a family spending $10,000 a year for care for one child must have an income of nearly $50,000.
A family paying $20,000 a year for child care for two children would have to have an income of nearly $85,000 to get the tax credit’s full value.
In addition, because of the way the tax credit is structured, the lower the income of a family using the tax credit, the more they must pay out of pocket.
Tim Smeeding, University of Wisconsin, Robert La Follette School of Public Affairs
The tax credit provides the biggest benefit to families “who can afford to spend a lot on child care,” says Tim Smeeding, an economist and emeritus professor at the La Follette School of Public Affairs at the University of Wisconsin. The proposal doesn’t help people for whom the cost of child care is out of reach, he added.
The expanded state child care tax credit is part of the revision that Senate Majority Leader Devin LeMahieu (R-Oostburg) offered as an amendment to the special session legislation that Gov. Tony Evers proposed in August. LeMahieu’s revision of Evers’ bill passed the Senate Tuesday with only Republican votes.
The centerpiece of LeMahieu’s proposal is an income tax cut that would reduce Wisconsin’s third-highest state income tax bracket to 4.4% from the current 5.3%. It applies to single filers with incomes over $27,630 and below $304,170, and married joint filers with incomes over $36,840 and below $406,550.
Evers vetoed that tax cut from the state budget in July. Republicans in the Legislature have revived it in stand-alone legislation that passed the Assembly in September and in a Senate vote in September to override the governor’s veto. The Assembly hasn’t held an override vote, but Republicans lack the necessary two-thirds majority for that to succeed unless Democrats join in.
The measure the Senate passed Tuesday is the Republican lawmakers’ third crack at pushing through the change. LeMahieu said on the Senate floor Tuesday that the bracket reduction would save the “average” taxpayer $600 a year.
A Legislative Fiscal Bureau memo in July said that the average tax savings from a third-bracket reduction would range between $32 a year for incomes of $30,000 to $40,000 and $515 a year for incomes of $90,000 to $100,000. The average savings for people with incomes of $250,000 to $300,000 would be $2,157.
In addition to the income tax cut, which the fiscal bureau values at about $2 billion in its most recent analysis, LeMahieu has highlighted the expansion of the state child care tax credit in his amendment.
LeMahieu said Friday that his rewrite of Evers’ bill “would provide tax relief for the middle class in exchange for state-level investments in the child care industry.”
He reiterated the point on the Senate floor.
“It makes child care more affordable by expanding the Child and Dependent Care Tax Credit,” LeMaheiu said of his amendment. Combining the effect of the income tax bracket cut, the expanded state child tax credit, and the federal child care tax credit, he declared that “an average Wisconsin family with two children in child care will receive a total tax benefit of nearly $6,000.”
LeMahieu’s communications director, Barry Radday, explained Wednesday that the estimate includes the $600 “average benefit” of the proposed income tax cut.
It also includes the federal child care tax credit, which has a maximum benefit of up to $1,200. The maximum benefit a qualifying Wisconsin family could receive from the amendment’s expanded state child care tax credit if adopted is $4,000 for two or more children.
To qualify for that full $4,000 state child care tax credit, a family would have to have two children in child care costing $20,000 a year and a taxable annual income of $85,000, a Wisconsin Examiner analysis of the proposal has found.
The child care tax credit’s design favors people with higher incomes, says Jill Hoiting, who researches early childhood care, education and related policies as a doctoral student at the University of Wisconsin Sandra Rosenbaum School of Social Work.
“Using the tax system for this type of benefit also assumes that families have the resources to cover child care expenses up front, but that is a struggle for many families,” Hoiting told the Wisconsin Examiner.
In addition, however, a particular feature of the child care tax credit works against earners who can’t get its full value because they don’t pay enough in taxes.
The mechanics of tax credits
Unlike a tax deduction — which reduces the amount of income that a person pays taxes on — a tax credit reduces, dollar for dollar, the taxes that a person pays.
Wisconsin’s child care tax credit piggybacks on the federal child care tax credit — officially, the child and dependent care tax credit. Both the state and federal credit are designed for taxpayers who require child care (or other dependent care) so they can work.
For the federal credit, taxpayers can claim a tax credit on a percentage of their child care costs, with a ceiling on the qualified expenses. For one child, the ceiling is $3,000. For two or more children the ceiling is $6,000.
Under the federal credit, an individual with an annual income of $15,000 or less can claim 35% of child care expenses. That qualifies the person for a tax credit of up to $1,050 for one child (35% of $3,000) or $2,100 for two or more (35% of $6,000).
The percentage a person can claim goes down as income goes up. People with incomes of more than $43,000 can claim 20% of their expenses. That results in a tax credit of $600 for one child (20% of $3,000) and $1,200 for two or more (20% of $6,000). There is no income cap.
Currently the Wisconsin credit is 50% of the federal credit. The eligible expenses that can be reimbursed for taxpayers with incomes under $15,000 are $525 for one child and $1,050 for two or more. For taxpayers whose incomes are over $43,000, the eligible expenses for reimbursement are $300 for one child, $600 for two or more.
Raising the tax credit, but with a catch
LeMahieu’s amendment raises the state child care tax credit substantially. But details in how it works can make it possible for lower-income taxpayers to get less value from it than taxpayers with higher incomes.
The proposed revision would make the state credit equal to the federal one. Taxpayers with incomes under $15,000 would get a tax credit for 35% of their expenses. The percentage would gradually decline as income increases. Those with incomes over $43,000 would get a credit for 20% of their cost.
The amendment also raises the ceiling for those costs, to $10,000 for one child and $20,000 for two or more children.
Those changes boost the value of the state tax credit on paper. A person or family with an income over $43,000 would qualify for a $2,000 credit for one child and $4,000 for two or more children.
On paper, a person with an income less than $15,000 would qualify for an even bigger tax credit, 35% of their expenses: $3,500 for one child and up to $7,000 for two or more children.
In real life, that’s impossible, however. A person with an income that low won’t be able to pay for care that costs $10,000 a year, much less $20,000 a year.
“They don’t and can’t if that is their only source of earned income,” says Smeeding, the La Follette School economist. “That’s why they use a relative or informal care.”
In addition, taxpayers at the lower end of the income range who do make enough to pay for child care won’t get the full value of the tax credit.
The state child care tax credit is non-refundable. The term means that regardless of how large a credit a person qualifies for based on child care spending, the actual credit is limited by the individual’s tax liability.
For instance, a taxpayer with child care expenses who would qualify for a $3,000 state child care tax credit, but whose state income tax liability is $1,500, can only claim the $1,500 value.
Taxpayers with higher incomes, because their taxes are higher, can benefit more from the tax credit than lower-income taxpayers, even if both have the same expenses.
Two hypothetical families
Consider two nearly identical taxpaying families. Each pays $20,000 a year for two children in child care, qualifying for the maximum tax credit. Both have annual incomes above $43,000, so they qualify for the same level of reimbursement for their child care costs — 20%, or $4,000.
Family No. 1 has a taxable income of $50,000 a year. The Examiner calculated their state income tax at $2,152, based on 2023 state Department of Revenue tax tables for married joint filers.
Family No. 2 has an income of $85,000, with a state income tax of $4,007.
The tax credit would allow both families to avoid paying any state income tax — wiping out the $2,152 in taxes that the $50,000 family owes as well as $4,000 of the tax bill that the $85,000 family owes.
If both families have the same $20,000 a year in child care expenses, however, the higher income family is faced with a lower out-of-pocket child care bill after the tax credit: $16,000.
The $50,000 family, meanwhile, winds up with an out-of-pocket bill of $17,847 — nearly $2,000 more than the family with $35,000 more in income.
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The same pattern occurs with smaller child care expenses. A family with one child and an expense of $10,000 a year qualifies for a tax credit of $2,000. But if the family’s income is $45,000 or less, the value of the tax credit ends up being less, because their state income taxes are lower.
To get the full $2,000 value requires an income of about $50,000 or more a year.
The tax credit’s sliding scale for how much of the expenses qualify aims to help lower-income taxpayers, but with the higher ceiling in the proposal, higher percentages are not enough to ease the burden.
For example, a family with a $35,000 income that spends $10,000 a year on child care can apply 25% of their child care costs to the tax credit. That family would have a state income tax bill of $1,374 — and a state child care tax credit of the same amount — leaving them with $8,625 in child care expenses that are not otherwise covered. Meanwhile, a family with a $50,000 income and the same expenses gets the full $2,000 state tax credit and has $8,000 in uncovered costs.
Smeeding argues that linking the child tax credit, with its problem math, to the “aggressive” income tax reduction doubles down on helping households that are better off at the expense of the child care infrastructure.
“The net effect is to short-change child care and to help the well-to-do with the cut in [tax] brackets,” he says.
Providers prescribe ongoing support
Evers’ original special session bill included $365 million in ongoing support for child care providers. Republicans have repeatedly questioned why that should be necessary.
During a Senate public hearing Wednesday on another group of child care bills, Sen. Rachael Cabral-Guevera (R-Appleton) asked Sen. LaTonya Johnson (D-Milwaukee) about that premise.
Sen. LaTonya Johnson (Screenshot | WisEye)
“So in essence, what you’re saying to me is child care is not a self-sustaining business, and without government assistance, there’s no way that this entity can stay afloat,” Cabral-Guevera said.
“Exactly,” Johnson, a former child care center operator, replied. “Because the only alternative that child care providers have when parents can’t afford to pay is to kick the child out. … or, unless they have significantly wealthy clients who can afford to pay what [child care] actually costs. And that’s the problem.”
While the child care tax credit may provide relief to individual families, advocates contend that it doesn’t address the child care field’s continuing need for additional support beyond what most families can afford to pay. The support is essential to ensure livable wages for child care workers and a stable, professional child care workforce, according to providers, their allies and outside researchers.
Without it, “we’ll continue to experience chronic challenges that are larger than any one municipality or region in the state can address on their own,” said Paula Drew of the Wisconsin Early Childhood Association (WECA) at a public hearing Oct. 11 on the Evers legislation.
Child care providers, Drew said, “require a broad, sweeping investment of state dollars, or we risk sending Wisconsin into an even larger child care and broader workforce crisis.”
originally published at https%3A%2F%2Fwisconsinexaminer.com%2F2023%2F10%2F19%2Fhow-a-proposed-child-care-tax-credit-helps-wealthier-households%2F by Erik Gunn