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Journal Issue: The Next Generation of Antipoverty Policies Volume 17 Number 2 Fall 2007

Next Steps for Federal Child Care Policy
Mark H. Greenberg

A Better Way

Policymakers should restructure current tax and subsidy policy to guarantee child care assistance to low-income families within a broader framework that helps all families attain access to care that promotes the health and development of children. To that end, I propose a combination of expanded tax credits, a direct subsidy system with a guaranteed eligible population instead of the current block grant structure, and a federal early care and education strategy fund to support state efforts to improve quality and develop coordinated early care and education systems in states.

These recommendations are grounded in the premise that there is no fundamental difference between the conditions facing families just below and just above the poverty line and that a very large group of families faces the challenge of affording high-quality child care. Accordingly, policies to help low-income families should be designed in ways that do not create arbitrary differences among families with similar needs. In advancing their commitment to end child poverty, policymakers in the United Kingdom have articulated a principle of “progressive univeralism,” which has been defined as providing “support for all and more help for those who need it most, when they need it most.”32 A framework of progressive universalism seems particularly appropriate in the context of child care, where the stresses and challenges faced by low-income families are also faced by a far broader group of middle- and higher-income families.

Expand the Child and Dependent Care Tax Credit
The CDCTC should be made refundable, expanded to cover at least 50 percent of allowable expenditures for lower-income families, and indexed for inflation. Making the credit refundable would extend its benefits to the lowest-income families and ensure that all eligible families could receive the full amount for which they qualify. Making a greater share of a family’s child care spending subject to the credit would both defray expenses and help families purchase higher-cost care. Leonard Burman, Elaine Maag, and Jeffrey Rohaly estimate that a refundable credit would provide benefits to 1.5 million more households and would expand the share of benefits going to tax units with incomes below $20,000 from less than 1 percent under current law to almost 26 percent.33 They estimate that making the CDCTC refundable, expanding the top credit rate from 35 percent to 50 percent, indexing it for inflation, and making a set of related technical changes would cost approximately $25 billion over five years.

If the CDCTC were larger and refundable, could all subsidy assistance be provided through the tax system? The United Kingdom has implemented a refundable child care credit that covers the first 80 percent of eligible expenses up to £300 (about $580) a week for families with two or more children, with the credit gradually phasing down as income rises.34 The idea of a unified tax-based approach is attractive, but it presents a range of difficulties. It is appealing because it would enable all families to receive help through a single, universal, nonstigmatized system, without waiting lists or closed intake and without extreme variations across states. Moreover, as the earned income tax credit (EITC) experience has shown, national and local outreach could promote participation and employer awareness.

But even a larger and refundable CDCTC could not fully substitute for direct assistance to families. First, the CDCTC expansion proposed here would not provide a large enough credit to substitute fully for direct subsidy assistance. If the credit were raised to 50 percent and made refundable, the maximum credit would be $1,500 for one child, $3,000 for two or more children. By contrast, CCDF payments to providers (including family copayments), which are often criticized as inadequate, averaged $4,236 in 2005, with large variations based on age of child, hours of care, type of care, and geographical location. 35 Child care costs in much of the nation far exceed CCDF levels.36

Even if the CDCTC were made larger, it could not be the principal vehicle for helping many lower-income families unless its structure allowed for advance payment. Current block grant–based subsidies are typically provided monthly, with provisions to address changes in family circumstances and emergency needs. By contrast, unless alternative provisions were designed, a family’s CDCTC credit for a year would be determined at the end of the tax year and paid in the subsequent year in a lump sum. Families would need to pay the full costs of care on their own throughout the year and rely on partial reimbursement in the next year. Many families would likely opt for the least costly care, which could also be the least reliable and of lower quality.

Some form of advance payment structure would be essential in order for tax credits to be a practical means to provide child care assistance to low-income families. The EITC has an advance payment option but it is rarely used, for a number of reasons. For a start, many beneficiaries are unaware of the option. Other reasons include its complexity, the need for employer participation, fear of subsequent tax liability, and the preference of many families for the “forced savings” of the once-a-year lump sum. Families might be more likely to use an advance payment option for child care, because they would likely be more interested in getting ongoing help to meet costs throughout the year. Still, the EITC experience highlights the need to develop an advance payment structure that families would view as a practical option. Moreover, developing an advance payment structure for the CDCTC could be even more difficult than developing an effective one for the EITC, because the family’s eligibility for the CDCTC would turn on both income and child care costs; it is unclear whether such a structure could be effectively implemented through employers or another delivery mechanism would be needed.

The difficulties that an advance payment structure presents should not preclude efforts to develop one. Indeed, as interest grows in expanding refundable tax credits, it will be important to develop a more viable advance payment structure for a range of tax credits.37 Absent such a structure, tax credits could not effectively substitute for much of the existing child care subsidy system.

A Guarantee of Child Care Assistance to Low-Income Working Families
Instead of the current block grant structure, federal law should provide for a guarantee of child care assistance to working families with incomes below 200 percent of poverty— about $34,340 for a family of three and $41,300 for a family of four in 2007. States would administer the guarantee through a federal-state matching structure. Families would be required to make a copayment toward the cost of the care, with the copayment increasing with income. States would pay the remainder of the cost of care. Payment rates would be adequate to ensure that lowincome families had access to a range of choices, including high-quality, developmentally appropriate care. At the same time, each state would have a responsibility to act to improve the quality of choices available to all families.

A case can be made for different choices regarding each detail of the guarantee. However the details are resolved, the starting point should be the need to shift from a block grant structure with no articulable national policy to a national policy that ensures child care assistance with high-quality choices for all eligible low-income families.

A threshold question is whether having a guarantee, or entitlement, is good policy. The answer should turn on the nature and terms of the benefit. On the one hand, for example, few people question the appropriateness of entitlements to Social Security benefits, the earned income tax credit, or K–12 public education. On the other hand, a principal focus of the 1996 welfare reform law was to end the entitlement to cash assistance for lowincome families. The objection to the cash assistance entitlement was that it encouraged behavior that society wished to discourage. Here, the opposite is the case. The nation should have an interest in ensuring that the need for child care is never a barrier to getting a job and that working families can purchase good care without spending a large share of their income to do so. Moreover, the nation already has entitlements to child care assistance, albeit small ones, for higherincome families; this proposal would extend entitlements to all families.

A guarantee of child care assistance for eligible families has important advantages over a block grant structure. First, it would provide a clear, simple, powerful message: if you work, you will have help paying for child care. Second, it would ensure that no working family would ever be compelled to leave a child alone or in an unsafe environment simply because of financial necessity. Third, it would ensure that all families had the opportunity to have their children in enriching environments while parents were working. Fourth, it would ensure that families in identical situations would not be treated differently simply because of the state in which they lived or the time of year in which they applied for assistance. Fifth, it could help bring the nation closer to achieving two other broad goals— that no family should ever be worse off by going to or remaining in work and that working families should have enough income to support a decent standard of living. The existing block grant structure does not ensure that any of these goals are met.

One argument against a guarantee is that in a world of limited resources, difficult choices must be made about allocating scarce dollars, and states and localities are better able than the federal government to make those judgments. Moreover, with broad discretion in use of funds, states can test a range of approaches to the parameters of their subsidy systems in order to determine the most effective ways to use limited resources. The reality is that it would be far better to have a national debate about those choices and to provide sufficient funding to serve the population defined as needing assistance, rather than to provide states with a lump sum of money and direct them to develop rationing rules.

A related argument is that entitlements of any sort put government spending on “autopilot” because there is a risk that spending will simply increase without Congress’s ever considering whether the growth in spending is desirable. Here, the two principal reasons why spending might grow more than anticipated would be if more parents entered employment or more eligible families sought and benefited from assistance. Neither should be a troubling result.

Who should be guaranteed assistance? First, it is important to ensure that help is available for families receiving TANF, but it would be a serious error to limit guarantees to families receiving or leaving TANF. It is contrary to basic principles of equity to create a structure in which families can receive child care assistance only by entering the welfare system. Second, although the lowest-income families need the most help, assistance should be phased out gradually as income increases. Parents should not need to fear that working additional hours or getting a raise will make their families worse off because of loss of child care assistance. Moreover, under a subsidy structure providing for a gradual phaseout of assistance combined with an expanded CDCTC, families losing direct assistance would still qualify for refundable tax credits of up to $1,500 to $3,000.

This proposal would guarantee child care assistance to all working families with incomes below 200 percent of poverty and to families engaged in work activities while receiving TANF assistance. As under current law, states could use funds to provide child care assistance to other low-income families involved in education or training, but the federal guarantee would not extend to these families. An eligibility threshold of 200 percent of the poverty line is consistent with the growing body of research that recognizes this as a reasonable measure of low-income status and with evidence that families with incomes below 200 percent of poverty pay a far greater share of their income for substantially less costly care than higher-income families do.

A 200 percent standard is lower than maximum current CCDF eligibility. In 2006 (under HHS income guidelines) 200 percent of poverty for a family of four was $40,000, while 85 percent of the national median income for four was $56,966. As a practical matter, only three states set their CCDF income levels that high, but this proposal posits that it would be better to ensure assistance to the eligible population below 200 percent of poverty than to have a higher eligibility threshold while states are unable to serve large numbers of qualifying families. Thus, federal matching funds should be available for states that elect to provide assistance to families with incomes up to 85 percent of the state median, but the federal guarantee should be limited to families with income below 200 percent of poverty.

Under the proposal, all working families receiving subsidy assistance would be required to make a copayment toward the cost of care, subject to limited state waiver authority. Current HHS guidelines recommend that copayments not exceed 10 percent of income. However, higher-income families spend only 6.5 percent of their incomes on care, and even 6.5 percent seems excessive for poor families. Under current state policies, most states waive copayments for at least some families in poverty, ten states waive copayments for all families below poverty, and only four states require copayments for all families in poverty.38 Under this proposal, families would face a copayment of 3 percent of their income below the poverty line and 10 percent of any income that exceeds the poverty line. With such a structure, families approaching 200 percent of poverty would face an average copayment requirement of about 6.5 percent of income, the same share as higher-income families pay for care.

The proposal would maintain the role of states in administering child care subsidies, for several important reasons. First, maintaining the state role would allow for timely ongoing assistance and adjustments for changing circumstances during the year. Second, states are currently responsible for subsidy administration and quality initiatives, and subsidy policy can function as an important vehicle for promoting quality. For example, states can act to improve quality through provider registration, training, and support; by connecting families with resource and referral agencies; by implementing qualityrating systems; and by contracting for types of care. Moreover, as states develop prekindergarten and early education models, they can use their subsidy systems in efforts to develop full-day, year-round services.

Federal and state governments would continue to share in the cost of subsidized care under this structure. Under current law, federal funds represent, on average, 57 percent of block grant–related funding and state matching rates vary, based on state per capita income. It would be reasonable to retain a federal-state cost-sharing relationship, though an argument can be made for increasing the federal share. Whatever rate is established, each state’s match rate could apply to all spending, substituting for the complex rules that apply under current law.

Implementing a guarantee would require decisions about how to establish the amount of subsidy assistance for families. Current CCDF regulations are based on the premise that a payment rate sufficient to pay for 75 percent of available care in a community is adequate to ensure that families receiving assistance get “equal access” to care comparable to that received by families with incomes above the subsidy level. As noted, most states do not set payment rates that high. It is not clear how effective the 75th percentile standard is as a benchmark for equal access, as there appears to be virtually no research comparing the characteristics of care above and below the 75th percentile. The idea of “meeting the market” as the way to set payments for child care is in some ways flawed, because current care often falls short of desired quality standards, and providers wanting to upgrade facilities or raise teacher education or compensation are constrained by what parents can pay. Moreover, basing payments on characteristics of local markets may mean paying lower rates in poorer communities where families are least able to afford more expensive care.39

One possible approach would draw on an important variant of the 75th percentile framework. In recent years, many states have developed quality-ratings systems that categorize child care providers according to specific quality benchmarks; higher-rated providers qualify to receive higher state payments. 40 Quality-ratings systems have been a significant step forward in state efforts to promote child care quality. They recognize the importance of parental choice, while providing valuable information to providers and families about markers of higher-quality care and creating incentives for providers to raise the quality of care. In establishing a child requiring that all states use quality-ratings systems and pay at least the 75th percentile within each band of the state’s rating system. For example, a state with a four-star rating system would need to have payments for four-star care that were high enough to pay for at least 75 percent of four-star care. This approach would ensure that families could purchase a significant share of care within the highest-rated band, while at the same time making clear that states need not pay for the most expensive care in the lowest-rated bands.

This approach is not the only possible way to set subsidy rates, and others should be considered. The key principle, however, is that to ensure that families have access to high-quality care it is not sufficient to simply meet current market costs, which are constrained by families’ inability to pay, particularly in lowincome areas. Rather, subsidy payment rules should be designed so that payments are high enough to ensure that participating families have effective access to high-quality care among their choices.

An Early Care and Education Strategy Fund
Although expanding families’ capacity to purchase care would likely spur important market responses, a comprehensive strategy should address supply as well as demand. Federal policy should encourage and support state efforts to raise quality and to foster the coordination of early care and education. As noted, under current law states must spend at least 4 percent of their CCDF funds on quality initiatives, including those directly seeking to raise quality, as well as initiatives on health and safety monitoring, consumer education, and resource and referral activities. In some communities, simply expanding demand may lead to increases in supply. In others, states will likely need to provide assistance and support to develop supply. Current compensation levels for child care teachers are far too low to permit providers to recruit and retain highly educated teachers. Raising payment rates can help but is not likely to solve the problem by itself. And as states expand prekindergarten efforts, it will be essential not only to develop mechanisms to help child care programs meet higher standards and become prekindergarten providers but also to promote coordination between child care and prekindergarten programs to provide year-round, full-day opportunities for families. Therefore, along with a guarantee of care, federal law should require each state to develop and implement a strategic plan to improve the quality of care for all families and to address cross-program coordination. Federal funding should support these efforts.

Thus, instead of the current requirement that states spend at least 4 percent of federal funds for quality, I propose creating a federal Early Care and Education Strategy Fund, established initially at $2 billion a year—about twice current state spending on quality.41 States could use these funds for the same range of activities for which they spend their quality dollars under the existing block grant structure.42 Funds would also be available for each state to develop and implement a strategic plan to improve the quality of care available to all families in the state and for state efforts to coordinate child care, Head Start, prekindergarten, and other programs into a comprehensive early care and education system for children from birth to age five.