Early Childhood Systems Building Resource Guide

Many types of tax credits exist. This section reviews personal income tax credits, business income tax credits, and investment and incentive tax credits.

Personal income tax credits are an amount of money that taxpayers may subtract from the amount of tax they owe the government. The value of a tax credit depends on what the credit is for; certain types of tax credits are granted to individuals or businesses in specific locations, classifications, or industries. The following examples are about personal income tax credits for early childhood:

  • Twenty-six states and the District of Columbia have established a state dependent-care tax credit.[1] For example, New York State and New York City have a refundable dependent-care tax for eligible families. Families will get extra cash back from the state if their New York State and New York City Child and Dependent Care Credits are worth more than the state and city taxes they owe.[2]
  • Louisiana has a school-readiness child care expense tax credit for taxpayers with a qualified dependent under the age of 6 who attended a child care facility that participates in the quality rating program. The school-readiness child care expense tax credit may be used alongside the regular child care expense credit.[3]

Business income tax credits are subsidies that reduce a company's taxes by allowing it to deduct all or part of certain expenses from its income tax bill on a dollar-for-dollar basis. Business tax credits span many areas, including investment, work opportunity, welfare-to-work, alcohol fuels, research and experimentation, low-income housing, and enhanced oil recovery.[4] States have used these subsidies for early childhood programs in the following ways:

  • Twenty-eight states have established some form of an employer tax credit, which typically allows an employer to claim a corporate tax credit for a percentage of the cost of an employee child care benefit. A business may deduct expenditures for child care programs from its corporate income as reasonable and necessary business expenses before taxes are calculated.[5]
  • Maine has a unique tax credit created to improve the quality of child care. If an individual provider spends $10,000 in one year on expenses that significantly improve the quality of care, the provider may take a $1,000 tax credit for the next 10 years and a $10,000 credit at the end of 10 years.[6]

Investment or incentive tax credits are tax deductions for businesses that reflect an amount they reinvest in themselves. Investment tax credits are structured to reward and encourage economic growth. Early childhood examples include the following: 

  • The Colorado child care contribution tax credit, available against both corporate and personal state income tax, has been in place since 1989. Taxpayers receive a credit worth 25 percent of their contribution, up to $100,000.[7]
  • The Oregon child care investment tax credit was designed as an investment strategy that uses tax credits to generate private sector contributions to child care. Like federal low-income housing tax credits, the Oregon credits are marketed and sold to an investor. Invested funds are then drawn into a single pool that is used to help fund the child care industry. Unlike housing tax credits, which are sold at a price negotiated by an intermediary, taxpayers who purchase Oregon child care credits receive a credit of up to $1 for every $1 contributed.[8]
 

[1] Tax Policy Center. (2015). Quick facts: Child and dependent care tax credit [Web page]. Retrieved from https://www.taxpolicycenter.org/search?filter=child+and+dependent+care+tax+credit&sort_by=search_api_relevance&items_per_page=25&=Search.

[2] Tax Credits for Workers and Their Families. (n.d.). New York [Web page]. Retrieved from http://www.taxcreditsforworkersandfamilies.org/state-tax-credits/new-york/.

[3] Louisiana Department of Revenue. (n.d.). School readiness tax credit [Web page]. Retrieved from http://revenue.louisiana.gov/IndividualIncomeTax/SchoolReadinessTaxCredit/Revenue.

[4] Good Jobs First. (2016). Corporate income tax credits. Retrieved from http://www.goodjobsfirst.org/accountable-development/corporate-income-tax-credits.

[5] Prevatt, B. (n.d.). Employer-provided child care tax credit [Internet post]. Savannah, GA: Hancock Askew & Co. Retrieved from http://www.hancockaskew.com/employer-provided-child-care-tax-credit/.

[6] Maine department of Health and Human Services. (n.d.). Child and Family Services homepage [Web site]. Retrieved from http://www.maine.gov/dhhs/ocfs/ec/occhs/taxcredits.htm.

[7] Mitchell, A., Stoney, L., and Dichter, H. (2001.). Financing child care in the United States: An expanded catalog of current Strategies. Kansas City, MO: Ewing Marion Kauffman Foundation.

[8] Friedman, D. (2004). The new economics of preschool: New findings, methods and strategies for increasing economic investments in early care and education. Early Childhood Funders’ Collaborative. Retreived from http://www.earlychildhoodfinance.org/conferencecallarchive/UsingEconImpactStudiesCall_FriedmanArticle.doc