Cutting the cost of care: State income tax relief for child care

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Article Highlights

  • While states are plagued with budgetary imbalances, reductions in individual income tax credits are being considered.

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  • The casualties of income tax credits include the credits that many states offer for child and dependent care costs.

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  • Taxing luxuries at higher rates than necessities reduces inequality but increases work disincentives.

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  • The most common form of child care tax relief is a tax credit linked to the federal child care credit.

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  • In general, the federal credit fails to offer adequate relief for child care costs.

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Cutting the Cost of Care: State Income Tax Relief for Child Care

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As governors and state legislators across the country search for ways to address the budgetary imbalances that many of their states face following the Great Recession, reductions in individual income tax credits and deductions are being considered. Unfortunately, the casualties of that process may include the tax credits or deductions that many states offer for child and dependent care costs. Because those provisions offer tax relief for costs of earning taxable income and thereby promote economic efficiency, we recommend that state lawmakers leave them unimpaired.

In this article, we first discuss the principles governing the appropriate income tax treatment of work-related costs and the application of those principles to child care. We then briefly describe the federal child care tax credit, on which many state child care tax provisions are based. We proceed to summarize the various states’ child care tax provisions and describe changes recently enacted or proposed in three states. We also report some basic  esults on factors associated with states’ decisions on whether to provide tax relief for child care costs. We conclude with policy recommendations. 

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About the Author

 

Alan D.
Viard
  • Alan D. Viard is a resident scholar at the American Enterprise Institute (AEI), where he studies federal tax and budget policy.

    Prior to joining AEI, Viard was a senior economist at the Federal Reserve Bank of Dallas and an assistant professor of economics at Ohio State University. He has also been a visiting scholar at the US Department of the Treasury's Office of Tax Analysis, a senior economist at the White House's Council of Economic Advisers, and a staff economist at the Joint Committee on Taxation of the US Congress. While at AEI, Viard has also taught public finance at Georgetown University’s Public Policy Institute. Earlier in his career, Viard spent time in Japan as a visiting scholar at Osaka University’s Institute of Social and Economic Research.

    A prolific writer, Viard is a frequent contributor to AEI’s “On the Margin” column in Tax Notes and was nominated for Tax Notes’s 2009 Tax Person of the Year. He has also testified before Congress, and his work has been featured in a wide range of publications, including Room for Debate in The New York Times, TheAtlantic.com, Bloomberg, NPR’s Planet Money, and The Hill. Viard is the coauthor of “Progressive Consumption Taxation: The X Tax Revisited” (2012) and “The Real Tax Burden: Beyond Dollars and Cents” (2011), and the editor of “Tax Policy Lessons from the 2000s” (2009).

    Viard received his Ph.D. in economics from Harvard University and a B.A. in economics from Yale University. He also completed the first year of the J.D. program at the University of Chicago Law School, where he qualified for law review and was awarded the Joseph Henry Beale prize for legal research and writing.
  • Phone: 202-419-5202
    Email: aviard@aei.org
  • Assistant Info

    Name: Regan Kuchan
    Phone: 202-862-5903
    Email: regan.kuchan@aei.org

 

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