New research finds the Child and Dependent Care Credit meets its goals of helping working families and helping families work, although changes to the program’s structure could improve results. The federal credit, supplemented with state credits in nearly half of states, is available to working parents with children under 13.
Upjohn Institute researcher Gabrielle Pepin examined a 2003 expansion of the federal credit to gain insight into the program. She documents her findings in a new policy brief, “Tax Credits for Child Care Increase Take-up and May Help More Mothers Work,” and working paper.
The Child and Dependent Care Credit is nonrefundable, meaning it reduces taxes for those earning enough to pay taxes: around $13,000 for families with one child and $16,000 for those with two or more. People earning less receive no benefit.
Around 21 percent of single mothers and married households, and 22 percent of single fathers, qualify for the credit. Most spending on the credit goes to low- and middle-income taxpayers.
Pepin finds increasing the credit pushes parents to buy more child care, in line with its goal of helping working parents pay for child care. A 10 percent increase in Child and Dependent Care Credit benefits increases the use of paid child care 4 to 5 percent.
The credit leads married mothers to work more hours, Pepin finds. A 10 percent increase in the credit leads married mothers to increase their weekly work hours nearly 1 percent. As working more hours means earning more money, a 10 percent increase in the credit also leads to a 5 percent increase in annual earnings for married mothers.
In addition, Pepin looked closely at married mothers of very young children. As research shows the birth of a child creates a gendered earning gap—driven by women’s reduced labor force participation, work hours and wages—keeping mothers employed could lead to long-term earnings gains. Pepin’s findings imply that a 10 percent increase in the credit increases employment among married mothers of very young children by 2 percent.
Pepin concludes that the Child and Dependent Care Credit meets its goal of helping working parents pay for child care but misses an opportunity to help more people. Many single mothers, who tend to have lower household incomes, are ineligible. Making the credit refundable would make it available to 19 percent more single mothers and help them enter or stay in the labor force.