Using Tax Credits to Promote High Quality Early Care and Education Services

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Using Tax Credits to Promote High Quality Early
Care and Education Services

• Louise Stoney and Anne Mitchell
• Alliance for Early Childhood Finance
• 2009 National Smart Start Conference
• May 7, 2009

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• This paper explores the feasibility of using a
  market intervention--tax credits, linked to a
  quality rating and improvement system (QRIS) --
  to help promote and finance higher quality early
  care and education services.

http//www.partnershipforsuccess.org/uploads/20071
2_StoneyMitchellpaper.pdf
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ECE is Essentially Market-Based

• 300,000 regulated centers and homes. Most are
  proprietary
• Public agencies providing ECE represent a small
  fraction probably less than 6 of total
  services
• Consumers are the primary funder of ECE (approx
  46 billion a year)
• A significant percentage public ECE funds are
  portable certificates
• A range of ECE providers offer services for a
  price consumers choose among them and pay the
  price.

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Why use the Tax System?

• Salience Tax policy essentially defines
  American values and touches nearly every
  American. Taxes influence how citizens consume,
  work, save and invest.
• Stability Tax credits and deductions are
  available to all eligible families and typically
  remain in effect unless they are repealed. In
  some states a 2/3 majority vote is required to
  repeal a tax policy.
• Efficiency Tax credits use an existing
  administrative infrastructure to administer
  funds.
• Equity and Flexibility Tax credits support parent
  choice and, if well-crafted linked to quality,
  could function as a market-based strategy to
  reinforce a merit good.

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Tax Credits vs Tax Deductions

• A tax credit is more valuable to a taxpayer than
  a tax deduction of the same amount.
• A tax credit reduces the taxes paid,
  dollar-for-dollar.
• A tax deduction lowers taxable income, and is
  worth more to a taxpayer in a higher tax bracket
  than to one in a lower tax bracket.
• Example for a taxpayer in 35 tax bracket, a
  100 tax deduction reduces taxes owed by 35 (35
  of the amount spent). But a 100 tax credit
  reduces taxes owed by 100 (100 of the amount
  spent).

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Refundable Tax Credits

• A credit isnt worth anything to a taxpayer who
  owes no tax unless the credit is refundable.
• Example a taxpayer who is eligible for a tax
  credit worth 500 and who owes only 100 in taxes
  can only claim 100 of the credit. If the same
  tax credit were refundable, the taxpayer could
  claim the full 500.

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Types of Tax Credits

• Consumer Tax Credits - reduce tax liability of
  an individual who purchases (consumes) a
  particular product or service.
• Business Investment Tax Credits - reduce tax
  liability of a sole proprietor or corporation to
  offset cost of investing in the business.
• Contribution and Community Investment Tax Credits
  - reduces tax liability of an individual or
  business that makes contribution/investment in
  another business.
• Occupational Tax Credits - reduce tax liability
  of businesses that employ particular individuals
  (e.g. former welfare recipients) or in particular
  areas (e.g. empowerment zones) OR reduces tax
  liability of taxpayer (employee) who works in a
  targeted industry.

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Example of Consumer Tax Credit Louisiana
School Readiness Tax Credit for Parents
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Louisiana School ReadinessTax Credit for Parents

• Builds on the existing state child care tax
  credit.
• Families are eligible for an increased tax credit
  based upon the quality rating of the center.
• Tax credit is refundable

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LA School Readiness Tax Credit for Parents
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Example of Business Investment Tax Credit
Louisiana ECE Provider Tax Credit
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LA ECE Provider Tax Credit

• Centers will receive a tax credit based on the
  number of children they serve in the Child Care
  Assistance Program or who are in foster care.
• Both for-profit and non-profit centers are
  eligible
• Tax credit is refundable

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LA ECE Provider Tax Credit
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Two Examples of Contribution or Community
Investment Tax CreditsColoradoOregon
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Colorado Child Care Contributions Credit

• A 50 tax credit is available to taxpayers that
  contribute up to 100,000 per year to "promote
  child care in the State
• The credit is not refundable but may be carried
  forward for up to 5 years.
• The contribution may be made to a wide range of
  child care facilities, programs or services but
  cannot be made by someone who has a financial
  interest in the organization.

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OregonChild Care Contribution Tax Credit

• State agrees to allocate 500,000 annually (in
  forgone revenue) to fund the credit
• Investors may purchase state tax credit
  certificates worth .75 for every 1 contributed.
• In addition, investors may claim the contribution
  as a charitable deduction.
• Proceeds from the credits are placed into a
  pooled fund, which supports several
  community-based demonstration projects.

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Example of Occupational Tax Credit Louisiana
Tax Creditfor ECE Teachers and Directors
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LA Tax Credit for ECE Directors and Teachers

• Based on the level of education of the director
  and staff
• Must be working at a center participating in
  Quality Start
• Must work at center for at least 6 months
• The star rating of the center does not impact
  this credit
• Tax credit is refundable

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LA Tax Credits to Directors and Teachers
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Tax Credits Have Serious Limitations

• Lessons from other fields suggest that to be
  effective, tax policy must be designed to
  augment andcoordinate with but not replace
  existing direct subsidies.
• Tax credits alone are not likely to produce the
  results we desire for children.

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Lessons From Other Fields

• Quality Assurance - to have a real impact on
  consumer behavior, tax benefits must be linked to
  product/service that produces desired results
• Product Differentiation - tax credits can help
  create the market pull for consumers but there
  must be an easy way for them to identify which
  products meet quality standards
• Strong Industry Support - effective tax benefits
  are widely marketed by the industry they seek to
  engage.
• Administrative Simplicity - credits must be
  simple to understand and have minimal paperwork
• Infrastructure - technology to track compliance
  an industry-wide system of training and
  technical assistance for service providers are
  key to effective implementation

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Lessons From Other Fields

• Linkages - Tax credits cannot stand alone they
  must be embedded in a package of policies
  designed to stimulate sustain quality services.
• Alternatives for Low-Income Families - Tax
  credits have little or no value for many
  low-income families.
• Alternatives for Non-Profit Providers - Tax
  credits have little or no value for ECE
  businesses that do not owe taxes. Engaging the
  non-profit sector is not only possible but
  productive
• Time - To be effective and reach wide-scale use,
  tax credits are at least a five-year and often a
  ten-year effort.

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Quality Start/School Readiness Tax Credits
Marketing Plan

• Awareness/Understanding ? Enrolling ? Expanding
• Participation ? Advocating
• Awareness/Understanding - Centers need to
• understand the relationship between Quality Start
  and School Readiness Tax Credits
• know that professional resources and business
  investments are available
• understand that even if money does not come
  directly into their pocket, it will help improve
  the center and drive traffic to it.

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Quality Start/School Readiness Tax Credits
Marketing Plan

• Enrolling
• Centers must take full advantage of SRTC/Quality
  Start.
• Messaging focused on the ease and support of
  enrolling
• Expanding Participation
• Child care centers encouraged to get more stars
• RRs encouraged to recruit businesses to invest
  in Quality Start TA and facilities (to get tax
  credits)
• Parents more engaged as market levers
• Advocating
• Centers who have experienced the benefits of
  Quality Start and SRTC will share their success
  stories with colleagues, policymakers and the
  public at large.

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Quality Start/School Readiness Tax Credits
Marketing Plan

• Primary Targets
• Child Care Centers
• CCRRs
• Secondary Targets
• Parents/Caregivers (but they will eventually
  become a primary target)
• Businesses
• Tertiary Target
• Policy Makers

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Results Louisiana SRTC worth 3.75 million in
2008

• 2.1 million to teachers/directors
• 1.55 million to providers
• 100,000 to CCRRs
• These data represent first year use of the tax
  credit.  

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For more information.

• Alliance for Early Childhood Finance
• www.earlychildhoodfinance.org
• Louise Stoney
• louise.stoney_at_gmail.com
• Anne Mitchell
• awmitchell_at_aol.com