Journal Issue: Financing Child Care Volume 6 Number 2 Summer/Fall 1996
The Child Allowance Proposal
The proposed child allowance plan would give an allowance (a cash payment) to the parent(s) for each of the three youngest children living in a household with income less than 175% of the poverty threshold (approximately $27,000 for a family of three in 1995). This payment could be used for any household purpose but would presumably be used primarily for the care of children in the household.
Benefits would vary with the number and age of the children within the household, as depicted in Table 1. A base or "full" allowance would be paid for children living in households with income less than 150% of the poverty threshold ($23,150 for a family of three in 1995), while children in households with income between 150% and 175% of the poverty line would receive an allowance equal to one-half of the full allowance. In families with annual household incomes less than 150% of poverty, the youngest, second youngest, and third youngest child under the age of six would receive base allowances of $4,000, $2,400, and $1,200 per year, respectively. First, second, or third youngest children who were 6 to 18 years of age would receive $1,200 per year.
In other words, the maximum amount that a family with a household income of less than 150% of poverty could receive would be $7,600 per year. The maximum for a family with a household income between 150% to 175% of the poverty level would be $3,800 per year (half the full allowance).
Child allowances would be taxable and paid quarterly. An important feature of the plan is that household income and the number and the age of children would solely determine benefits under the plan. The composition of income (whether earned or transferred [for example, from Aid to Families with Dependent Children or food stamps]), the level of family assets, and household structure (for example, parents' marital status) would not affect the benefit level. Benefits would vary with income only with respect to the reduction in benefits at 150% of the poverty threshold. Households with income below 150% of the poverty line would experience no reduction in allowances with increases in household income.
The plan proposes that benefit levels decline with the number and ages of children because research indicates that the per-child cost of rearing children declines as families get larger and children grow older.8 Nevertheless, the proposed allowances are more generous than those paid by existing programs such as AFDC. As implied above, for example, a family with a household income below 150% of the poverty threshold and with three children ages two, five, and seven would receive $7,600 per year. In comparison, average AFDC benefits for an adult and three dependent children in 1994 were about $4,400, and only five states paid more than $7,600 per year.9 Even if all three children in a household were school-aged (ages 6 to 18 years), the child allowances would equal $3,600, nearly 80% of the average AFDC benefit.
The child allowance program as proposed here would cost $45 billion per year. That is expensive, but it would cover more families than are currently covered by AFDC and, as Table 2 illustrates, it is a reasonably priced plan compared with some alternatives. Table 2 contrasts the estimated cost of the proposed child allowance program with that of a universal program that would pay full benefits to all eligible children independent of their household income. Under the proposed plan, more than 11.3 million families would receive child allowances covering 22.2 million children versus the roughly 5 million families and 9 million children currently covered by AFDC.10
Table 2 also indicates the costs if the program were extended in a variety of ways. For example, if the child allowance program were extended universally to cover the three youngest children in all families (no matter household income level), the cost would be $135 billion, three times the cost of the more modest proposed plan, and approximately equal to state and federal spending on Medicaid in 1993.11 Serving families up to twice the poverty level would cost $3.75 billion— less than 10% of the cost of the proposed program but roughly 15% of all government spending on AFDC in 1993. Keeping the eligibility requirements the same (limited to families with household incomes up to 1.75 times poverty level), but extending the program to all children in the household, and not only to the three youngest children, would increase the cost of the program by $3.1 billion (not depicted in Table 2).12
In sum, the cost of the child allowance program would rise or fall depending upon how many families were covered, the number of children covered per family, and the amount of the allowance. The proposed plan, however, is a reasonable middle course that serves those families who need it most.Financing the Child Allowance Program
The child allowance program can be financed by eliminating and redirecting the funding for many existing programs. Table 3 lists several programs whose elimination would more than finance the proposed child allowance program (for families up to 175% of poverty). These include the AFDC program and related child care subsidies, the Title XX block grant expenditures for child care, tax credits for child care, and the tax exemption for dependent children.
Eliminating AFDC will pay for roughly half of the child allowance program. More children will be served under the child allowance program that offers higher benefits to the most vulnerable households (the poorest households and those with young children) than are currently served by AFDC; therefore, there is no reason to retain the AFDC program or the federal programs designed to subsidize child care for AFDC recipients. In addition, there would probably be some administrative savings through eliminating AFDC, though these are not included in Table 3.13
Perhaps the most politically controversial source of funds listed in Table 3 is the proposed elimination of the income tax exemption for dependent children. This exemption currently benefits families with children regardless of their income levels. Estimating the cost of this tax exemption is difficult, but reasonable assumptions about the proportion of children covered and about the average marginal tax rate suggest that it is large enough to fund the remaining portion of the child allowance ($28.2 billion). The child care tax credit (the primary child care program of the federal government with current forgone revenues of $2.8 billion) should also be eliminated. (See the article by Stoney and Greenberg in this journal issue for a discussion of this tax credit.) Parents receiving these child care tax credits have the means to support their children and can do so in the absence of a government subsidy, as evidenced by the fact that they had to have paid for child care already to qualify for the tax credit. Families have children voluntarily, and those that can take care of them on their own should not be subsidized for the care of their children. On the other hand, low-income families do need some assistance with child care costs, and the child allowance offers low-income families the means to select from the broader menu of child care options available to more affluent households.