Last week, The Washington Post reported that the Trump Administration was considering making the child and dependent care tax credit (CDCTC) refundable. Earlier estimates from the Tax Policy Center show that a refundable credit would deliver more benefits to lower income families. However, just making the existing CDCTC refundable would do little to help families who have no paid child care expenses (often the case for low-income parents) as well as married couples with only one worker.
The current tax code includes two benefits – the CDCTC and the employer-provided child care exclusion (which includes flexible spending accounts used to pay for dependent care) —that help families pay for work-related child care. Neither does much for low-income families who struggle the most to secure quality, affordable child care. Trump would add three more child care benefits onto an already complicated system, yet would provide few new benefits for low-income families.
A refundable CDCTC would increase benefits for some low-income parents. Tax Policy Center analysis of the CDCTC from 2014-2023 show that making the CDCTC fully refundable would cost about $1 billion per year on top of the CDCTC’s current annual cost of almost $5 billion per year. Roughly two-thirds of the benefits from making the CDCTC refundable would go to families with less than $30,000 in cash income. To illustrate the effect of this change, making the current credit refundable would deliver about 15 percent of the total benefits to families with annual incomes of $30,000 or less, more than double today’s share of about 6 percent.
President Trump may be shifting to a refundable credit following repeated criticism that his campaign child care plan would deliver over 70 percent of benefits to families with at least $100,000 and almost nothing to the lowest income families (just 2 percent would go to families with less than $30,000 annually). Making the CDCTC refundable would shift those shares a bit.
But just making the CDCTC refundable would still leave low-income families with fewer child-related tax benefits than high-income families. The problem: the CDCTC is based on child care expenses and low-income families tend to spend less on child care than families with higher incomes who can afford more costly and often better-quality care. Providing meaningful support to low-income families could enable them to purchase better care and make treatment of low- and high-income families more consistent.
The administration didn’t spell out a detailed plan in the tax plan outline it released last week, so we don’t know what Trump will eventually propose. A refundable CDCTC would be a step in the direction of helping low-income families, but by itself it would not create tax-benefit parity with high-income families and would not help many low-income families at all.
