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Tax credits to pay for child care is the next frontier for the nanny state

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Parents of young children often struggle with the cost of child care, and that's doubly true for lower-income families who have fewer resources at their disposal and often face longer commutes and less flexible workplaces. One solution might be to offer cash grants to low-income parents that phase out as you move up the income ladder. Another, much more complicated solution, offered last week by the Center for American Progress, is a sliding-scale tax credit earmarked specifically for qualified high-quality child care providers.

The proposal is interesting on its own terms as an illustration of where Hillary Clinton might try to take the welfare state, but it also highlights some of the dilemmas faced by a progressive movement that still bears significant scars from the old days of unconditional cash welfare.

Optimistically, this program could not just give a financial boost to struggling families but also could induce the creation of a much larger supply of educationally rich care opportunities for young kids — drastically boosting the long-term outlook of the American economy. Pessimistically, pumping subsidies into a system that already features significant supply-side constraints could do little more than raise prices.

Obamacare for child care

The core of the proposal, familiar to fans of the Affordable Care Act, is a sliding-scale tax credit to subsidize the purchase of child care services, phasing out at 400 percent of the federal poverty level:

Center for American Progress

As with Obamacare, the second leg of the stool is regulation. The vast majority of states currently implement a quality rating and improvement system (QRIS) for their child care providers, and the credits will be eligible exclusively to providers who score highly on QRIS.

"States will need to provide the federal government with a list of eligible providers," the report states, "and parents can select any child care provider that meets the quality threshold."

Funds will be paid directly to the selected provider to minimize the need for extra paperwork and reduce the possibility of fraud. The subsidies will be increased on an annual basis in line with inflation, as measured by the Consumer Price Index.

Unlike the Affordable Care Act, there is no requirement that parents of young children avail themselves of the HCCTC. Families that prefer to use a lower-rated child care provider, to have a parent stay at home with the child, or to rely on other informal arrangements will still be free to do so. But opting out of the HCCTC system will entail leaving thousands — and possibly tends of thousands — of dollars on the table.

In total, CAP thinks this will cost about $40 billion per year.

The limited horizons of modern liberalism

It's interesting to note the sharp contrast between the design of this program and America's approach to providing care and education for older children. Everywhere you go in the United States, there is a local public elementary school, owned and operated by the government, that is free for everyone to attend. By the same token, Social Security and Medicare provide retirement benefits to everyone. These kinds of universal programs are especially useful for the poor, who would struggle to obtain similar services on the open market, but they are available to everyone and used by almost everyone.

CAP's approach, like Obamacare, represents a more contemporary approach to the welfare state.

  • It is a targeted benefit rather than a universal one, with the poor getting more than the less-poor and many families deemed too affluent to benefit at all.
  • It is a subsidy for the purchase of a private commodity rather than the creation of a new public entity.
  • It is semi-buried in the tax code rather than operating as an explicit spending commitment.

What's more, by focusing specifically on the idea of subsidizing paying someone else to watch your kids rather than defraying the financial cost of having a child, the CAP proposal emphasizes the idea that social expenditure should be a complement to work rather than a substitute for it. Social Security is a check that you get so that you do not need to work.

But while Social Security is very popular, the old Aid to Families With Dependent Children (AFDC) program that provided cash welfare to unemployed mothers came to be seen as politically toxic. The program was killed by the 1995 welfare reform law, and since that time Democrats have focused most of their energy on building social assistance programs that help people who are working. Since that time, the welfare state has in fact expanded considerably — mostly through adding a prescription drug benefit to Medicare and the passage of the Affordable Care Act — but it's taken the form of subsidized purchases of specific goods from the private sector, rather than the creation of new public institutions or the provision of cash.

The big question: Will supply increase?

One major advantage of the CAP approach is that not all baby-related expenses are created equal. Brand new graphic onesies may look a lot cuter than plain ones or hand-me-downs, but the kid will turn out about the same one way or the other. By contrast, the educational benefits of a high-quality early learning experience could last a lifetime — both for the child personally and for the American economy as a whole.

The hope is that a targeted subsidy aimed specifically at highly rated child care providers will induce an expansion of the supply of such providers in areas — especially including rural communities — where there currently aren't any.

The report also calls for redirecting the existing Child Care and Development Block Grant away from subsidizing families in need of child care and toward building the supply of high-quality programs.

And it had better work. As the report itself notes, "Available evidence suggests that families across the country are struggling to find quality child care even if they can afford it. ... Reports from locations as diverse as Atlanta, Georgia, to Petersburg, Alaska, document long waiting lists—especially for parents seeking infant care."

Certainly this was my experience in Washington, DC, where a couple of months before my son was born the well-regarded child care centers with appropriate locations all told me they had waiting lists of a year or more. Pouring more subsidies into a market that is already facing significant capacity constraints could create a socioeconomically fairer outcome, but also seems likely to do at least as much to raise prices as to increase the number of kids able to benefit from high-quality care.