This post originally appeared at https://www.badgerinstitute.org/the-many-problems-with-republicans-latest-childcare-bill/

Separate Badger Institute analysis shows same bill is also bad tax policy

Wisconsin’s Republican lawmakers recently introduced Assembly Bill 660, aiming to help employers provide support for working families in meeting the costs of childcare. While the bill’s intentions are commendable, the approach of directly subsidizing employers to create and subsidize childcare slots has proven ineffective in other contexts.

It would also unfairly disadvantage childcare providers ineligible or incapable of benefiting from the program, such as for-profit small businesses, and has the potential to be costly if participation among employers is high. Instead, lawmakers should focus on reducing the cost of childcare in Wisconsin by reforming the regulatory environment, while providing direct assistance to needy families in a flexible way.

Assembly Bill 660 proposes creating a new tax expenditure program that would help cover capital expenditures for employers to create a childcare program or pay a nonprofit organization to establish one, capped at $100,000. The new program would also reimburse employers that cover at least half of childcare costs for their employees, up to $3,000 per child per year. The program would be “refundable,” meaning that businesses that do not have any tax liability would receive a check from the state to cover their expenses. Wisconsin’s program would be in addition to existing federal and state programs that already offer employer-provided childcare tax credits, individual childcare tax credits, and direct childcare subsidies.

Little evidence exists to suggest that directly subsidizing employers to create and subsidize childcare slots is an effective way to address the childcare problem. The childcare business model is challenging across the country, primarily because state governments heavily regulate the provision of childcare and providers are unable to pass the associated costs onto families due to household financial constraints. That leads to affordability challenges. However, creating a new government program that directly subsidizes the capital costs of some childcare providers but not others would create an unfair advantage and potentially harm those who are not eligible for the subsidies. Offering $3,000 per child only for employees connected to a participating employer also creates an unfair advantage.

The federal government has offered an employer-provided childcare tax credit since 2001, allowing only 25 percent of employer costs to qualify and capping the benefit at $150,000 per year. Even though the federal program is slightly different, a review by the Congressional Research Service (CRS) earlier this year concluded: “Available data show that very few businesses claim the 45F credit, indicating that the credit has only a minimal impact on encouraging employers to provide child care.” A Government Accountability Office (GAO) report found that the tax credit subsidized benefits to employees that employers would have offered regardless of the credit.

According to the CRS report, the reasons so few businesses claim the credit is because of the substantial start-up and ongoing costs not covered by the credit, difficulties predicting demand, and “complexity in navigating regulatory and legal issues related to operating a child care facility.” These problems would also plague the capital component of Wisconsin’s program. Further, because Assembly Bill 660 would also subsidize childcare slots up to $3,000 per child per year (with total expenditures uncapped), it would be much more expansive than the federal program and risks being very costly and difficult to monitor. The more expansive nature of the program also increases the potential to disrupt the existing childcare market by benefiting only those providers connected to an employer capable of participating, while disadvantaging those not connected to employers, such as existing in-home and for-profit providers. 

Proponents of the employer-provided childcare tax credit suggest that demand for existing providers will remain strong, but the downside risks of tipping the scales in favor of employer-connected childcare providers are substantial. These downsides could make the problem of childcare affordability in Wisconsin worse in the end by pushing some providers out of the market because they cannot compete with subsidized providers.

Additionally, questions remain over how employers would provide the $3,000 per child benefit, such as whether the benefit would be taxable compensation, how childless employees would perceive a defined benefit for childcare, and the bureaucratic costs associated with verifying qualifying expenses and preventing fraud.

A better approach to help Wisconsin’s families with childcare expenses is to explore regulatory reform aimed at bringing the cost of childcare down, such as the series of six bills offered by the state legislature that were the subject of another analysis earlier this year. This combined with targeted and flexible government childcare assistance offers a better path forward for Wisconsin’s families. 

Angela Rachidi, a Badger Institute visiting fellow, is also a senior fellow at the American Enterprise Institute (AEI), based in Washington, D.C. In her work, Rachidi studies the impact of safety net programs on low-income families and individuals. She researches the effects of government policies and programs on employment, child wellbeing, family income and economic mobility. Rachidi holds a doctorate in public policy from the New School University in New York City, a master’s degree in public administration from Northern Illinois University and a bachelor’s degree from the University of Wisconsin-Whitewater.

A word from the tax policy standpoint

By Patrick McIlheran

Tax credits meant to meant to influence businesses’ actions complicate the tax code, increase compliance costs and, in the case of AB 660, could increase the burden on other taxpayers.  

The credits in this instance would be refundable — that is, they could lower a business’ tax liability below zero and result in a check being sent from the government  to the business. Refundable credits are a straight-up subsidy from other taxpayers rather than simply a break on taxes.

 It is, moreover,  unfair as a  matter of tax policy that smaller businesses would be less likely to be able to take advantage of a tax credit by setting up a childcare center, according to Katherine Loughead, senior tax policy analyst for the Tax Foundation.

It is possible, Loughead also noted, that some businesses will opt to spend more trying to establish a childcare center  instead of simply paying employees more so they can better afford childcare of their own choosing.

Pat McIlheran is the Badger Institute’s Policy Director.

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