A year ago, it seemed like Congress was on the verge of passing a once-in-a-generation expansion of federal childcare support for working families. Unfortunately, the moment slipped by, a casualty of our deeply divided politics. The passage of the silent-on-childcare Inflation Reduction Act (IRA) served as the notice of passing. Meanwhile, families cannot find the care they need or afford the care they find, which disproportionately impacts the employment choices of women and especially women of color; employers cannot find employees; many of the childcare providers that closed over the past few years never reopened; and, current funding levels lead to woefully inadequate caregiver compensation.
Despite our polarization, there are still things Congress could do with bipartisan support, such as fixing the Employer-Provided Child Care Credit (EPCCC). This would unlock significant private investment in early childhood education without a major policy and spending bill and changes could even be made this year.
EPCCC offers businesses tax credits for several types of childcare spending, including a 25% credit on the cost to build and operate childcare programs for employees, up to a maximum of $150,000 per year. Despite its flexibility – companies can claim credit for investments in on- or offsite programs whether direct-run or managed by third parties, and programs can be exclusively for employees or open to the community – only 250 businesses file for the credit per year, far below Congress’ original projections made when EPCCC was created 20 years ago.
Through conversations with business leaders and owners, I’ve learned that EPCCC misses the mark in different ways for large and small employers. For big businesses, the cap is too low. Patagonia’s much-praised employee childcare program costs $1 million per year to serve a company with about $200 million in annual sales and already far exceeds the annual cap; for the average Fortune 500 company that is 150 times larger, the current cap would offset one-tenth of one percent of the cost of a comparable program.
Owners of smaller businesses, which employ nearly one-third of American workers, don’t have enough employees to warrant dedicated programs and most want neither the risk nor the distraction of operating a childcare program. They can circumvent these concerns by investing in the creation of a third-party, community-based program through a limited partnership (similar to what investors in tax-credit-financed low-income housing projects already do), but keeping the childcare program at arm’s length renders the tax credits ‘passive’, an IRS designation that makes them useless to all but a few small business owners. And for not-yet-profitable businesses or tax-exempt employers, they are locked out of using the credit entirely.
That’s unfortunate, because EPCCC could otherwise be an important source of funding for the creation of new community childcare centers. We’ve been working with Angelica Adisa and Mariyama Ajamu, two veteran early childhood educators from Buffalo, New York, who are preparing to start Sadula Rose Montessori School on Buffalo’s east side. It’s challenging for them to find startup funding – as a nonprofit, they aren’t eligible for Small Business Administration loans or investor capital – so they’ve been looking for a potential employer partner who could fund the cost of renovations and benefit from EPCCC. Last fall, they thought they found one – a local Black-owned construction business with an owner eager to see more childcare in the community. Unfortunately, he cannot make use of passive credits. Without access to other sources of funding, they’ve had to postpone their opening. For the families urgently seeking a new east-side option, this was very unfortunate news.
Congress has recently solved similar problems for other tax credits. In the Inflation Reduction Act, Congress made it possible for businesses to sell green-energy investment and production tax credits they earn but cannot use to others and for tax-exempt organizations to receive direct payments from the Treasury in lieu of tax credits. The Employee Retention Tax Credit was set up as a credit against payroll taxes, which makes them usable by any employer without any passive activity limitations. With more than 50 million Americans working for small businesses and another 40 million working for tax-exempt organizations such as hospitals, universities, schools, nonprofits, and churches, if just 1% of newly eligible organizations invest in new childcare programs, it would support the creation of tens of thousands of new programs serving nearly a million additional children.
A new childcare entitlement for American families is not imminent. But even in these hyperpartisan times, Congress finds ways to make progress on important issues with broad support. The Inflation Reduction Act itself represents a significant compromise to win over moderate Democrats. Leaders from both parties joined forces to enact The CHIPS and Science Act. America’s childcare crisis is just as urgent. Congress should do what it can now, and fixing the Employer-Provided Child Care Credit is a good place to start.