Good morning. I’m Peter Chen and am a Senior Policy Analyst at New Jersey Policy Perspective (NJPP).
I am testifying today in support of A-6071, which expands the child and dependent care tax credit to a wider range of households, many of whom will now see more money back to assist with high child care costs. NJPP commends the Legislature for its commitment to helping families meet the high cost of child care, and for recognizing the critical role child care plays in enabling children, families, and New Jersey’s overall economy to succeed.
However, I would like to highlight a few areas where this legislation could be improved, either in this session or in revisions in a later session. These suggestions focus on four key areas: 1) focusing the credit’s benefits more heavily on low-income families, 2) permitting easier filing for those claiming informal care expenses, 3) ensuring permanent implementation (as opposed to the Senate version which was voted out of committee), and 4) do not sunset the credit after one year.
1. Focus on low-income families’ expenses
Although child-care expenses are high across all income ranges, there is a remarkably high floor for any child care that complies with basic health and safety standards.
The state’s most recent child-care market rate study (required by federal law to help establish appropriate child care subsidy payment rates) indicates that even in the lowest-cost “cluster” of communities, a median infant care provider cost $800 per month, or nearly $10,000 annually.[i]
It should come as no surprise, then, that low-income families pay a much higher percentage of their income towards child care.
| Income relative to federal poverty level |
Average weekly child care expenditures |
Share of families’ income spent on child care |
|
Less than 200% FPL
~$50k for family of four
|
$188 |
35% |
| 200-399% FPL
~$50-100k for family of four |
$197 |
14% |
|
400-599% FPL
~$100-150k for family of four
|
$224 |
10%
|
Source: Rasheed Malik, Center for American Progress, Working Families Are Spending Big Money on Child Care (2019).
The above table shows how low-income families spend a much higher percentage of income on child care, and spend only marginally less on child care than their moderate-income peers.
However, based on the proposed legislation, people in the lowest levels of poverty, earning less than $20,000 annually, would be eligible for the same percentage of the federal credit as they did the year before. Meanwhile, households in the upper-income ranges of eligibility, who would not previously have qualified, could receive substantial benefits, especially with the larger federal credit under the American Rescue Plan.
NJPP acknowledges that middle-income and upper-income families also need state investment in child care in order to manage their high costs, and that these families rarely qualify for other child care assistance. Nonetheless, the harshest impacts of child care costs largely fall on the lowest-income New Jerseyans, who benefit only slightly from this new legislation.
2. Expand coverage of informal care
Because New Jersey’s credit builds on the federal, we rely on the federal definition for child care expenses. Yet these definitions and administrative requirements may leave out home-based, relative, or informal providers, who low-income families disproportionately employ for cost, flexibility, or availability.
For example, in order to claim the federal credit, a household must identify the tax identification number of the child care provider. Failure to furnish a correct number may result in a penalty for the provider.[ii] Additionally, an informal provider is less likely to provide the kinds of receipts and paperwork that licensed centers provide.
A more equitable child and dependent care tax credit should more flexibly define what qualifies as a care-related expense.
3. Build in tax outreach for potentially eligible households
Given extensive provision of family and child benefits through the tax code, the importance of easy tax filing without red tape for low- and moderate-income families has never been higher. Estimates suggest that up to 40 percent of eligible New Jersey families may be missing out on Child Tax Credit benefits, blunting the anti-poverty effects and highlighting the lack of tax filing assistance capacity and outreach for these families.
Even under the current definition of child care expenses, many households may have expenses that they do not realize qualify them for substantial benefits, particularly families who are non-filers or who do not realize that informal care can still qualify for the credit as long as the household can document those expenses.
A robust outreach effort (along the lines of paid family leave, the state health insurance marketplace, and other state-run programs focused on maximum usage) through child care providers and other community-based organizations could increase the impact of the tax credit for low-income families.
4. Do not sunset the credit at one year
Family child care expenses will not end when tax year 2021 ends. Indeed, all signs indicate continued upwards growth in child care expenses. It was therefore disappointing to see the Senate version approve a one-year sunset on these changes. NJPP urges the committee to leave the credit for future years, as part of a broader set of tax credit reforms to help all families succeed.
Thank you for this opportunity to testify today.
[i] Jeounghee Kim & Myungkook Joo, 2017 New Jersey Child Care Market Rate Price Study, at p. 26, available at https://www.childcarenj.gov/getattachment/Resources/Reports-and-Statistics/2017-New-Jersey-Child-Care-Market-Price-Study-pdf.pdf.aspx?lang=en-US
[ii] See Internal Revenue Service, Form W-10, https://www.irs.gov/pub/irs-pdf/fw10.pdf
