Trump’s child care plan: Poorly directed with lots of unanswered questions

November 30, 2016

Child care costs can present significant barriers to employment, particularly for low- and moderate-income families. In response, President-Elect Donald Trump offered a multi-pronged approach to subsidizing child care, which would tilt benefits to high-income families—those least likely to need help.

While the plan is clear on its intent to subsidize families who care for children but do not incur out-of-pocket costs, how large those subsidies will be and whether low-income families could benefit remain unclear. The plan also relies on the tax code, a system ill-suited for providing subsidies at the time child care bills are due.

Under current law, working parents can use two tax benefits to offset these costs: the child and dependent care tax credit and the exclusion for employer-provided child care. The Treasury estimates that these provisions saved 6.9 million families almost $5.3 billion on their 2015 taxes (a relatively small amount by tax standards). More current law benefits accrue to high-income families than to lower-income families.

Trump would add three more benefits: a child care savings account, a new deduction, and a separate credit for some low-income families. Besides making an already confusing system even more complicated, the new benefits would tilt even more toward high-income families.

For example, the child care savings account would allow parents to deposit up to $2,000 annually on behalf of children. The government would match half of the first $1,000 deposited each year by lower-income parents (though the plan doesn’t define “low income”). Parents could contribute pretax dollars to the accounts, which would be allowed to grow tax-free as well.

For tax folks, that’s like getting the benefits of a traditional IRA and Roth IRA tied up in one package—an unprecedented tax benefit. The money could be spent on child care, tuition, and after-school programs. It’s not clear what would happen if the funds weren’t used for these purposes (would there be a penalty?), or even how much low-income parents could use them. In contrast, many wealthy parents would already save this money and would already be paying for some or all of these items.

The main benefit of the savings accounts is reducing taxable income and thus paying less (marginal) income tax. Because tax savings would be proportional to income tax rates, the highest earners would benefit the most. For example, a family in the 39.6 percent top tax bracket would save $396 in tax for every $1,000 they deposit (plus the additional benefit of not paying tax on interest earned in the account).

In contrast, a family in the 10 percent bottom tax bracket would save just $100 on the same $1,000 deposit.

But of course, many low-income families don’t earn enough to owe federal income tax, so they wouldn’t benefit from these accounts. Some low-income families might benefit from the government match, but the plan does not describe how  the match would work. Would parents have to keep the money in the account for a certain amount of time?  Would the match be available for each child, or would there be just one match per family?

The new deduction would allow parents earning less than $250,000 per year ($500,000 if married) to deduct the cost of child care up to their state average. The plan spells out that even stay-at-home parents would receive a benefit, so unlike the current child care tax subsidies, parents could collect the tax savings without spending anything.

As with the plan’s savings accounts, families who pay the highest tax rates would benefit most and low-income families would benefit little or not at all. The plan doesn’t specify how large the deduction would be for stay-at-home parents, whether the deduction would vary by the age of the child, or and how the state average would be calculated.

Finally, Trump’s plan would aim to help low-income parents by offering a “child care spending rebate” though the existing earned income tax credit. Trump’s  campaign website says that “this boost would be half of the payroll taxes paid by the lower earning parent, and would be subject to an income limitation of $31,200.” That’s significant—low-income married couples would benefit only if both spouses work. In contrast, high-income couples with one worker would benefit from other provisions.

Finally, as with all tax benefits, families wouldn’t get financial assistance until they file their tax return in the spring, many months after child care bills were due. For low-income families struggling to pay for child care, benefits from Trump’s plan would not only be too little—they’d also come too late.

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