Will Democrats approve a tax credit to ‘make a dent’ in the cost of child care? It’s a point of contention

To save money, Brian Kao waited to place his daughter in child care until after she was an infant. Now, it’s easy to see why. He said tuition costs for his 1-year-old are roughly $15,000 a year, a price tag that rivals in-state tuition at the University of Minnesota.

“We were lucky to have grandparents who could care for her,” Kao told a Minnesota House committee in January. “But one shouldn’t need luck to afford child care.”

Kao, who is also operations director for the progressive advocacy group ISAIAH,  was testifying in support of a bill that would significantly expand a tax credit that reimburses families for child care costs and the cost of caring for other dependents.

It’s an idea that has won powerful allies in the DFL in recent years, including Gov. Tim Walz, who recently went on a tour to promote the credit in places like Ely and Moorhead. And it’s notable for a few other reasons, too.

One is that it’s meant to reduce costs for families rather than providers. The DFL is planning to funnel cash into Minnesota’s struggling child care industry, but much of the money would be aimed at helping businesses stay afloat. The child care tax credit also has higher income thresholds, making it a rare major DFL tax proposal that could offer a break for a larger slice of the middle class. There was even a little Republican support for the concept during that January hearing.

“The ‘Great Start’ child care tax credit helps to fill a hole for middle class, middle income families that don’t qualify for many of those current public programs,” said Rep. Carlie Kotyza-Witthuhn, a DFLer from Eden Prairie who sponsored the House bill.

A few months later, however, the proposal was left out of the House’s tax plans. 

That means that even as Democrats coalesce around billions in tax cuts and credits — like reducing the number of people who pay a state tax on Social Security benefits — the child care credit is one of a few significant tax differences the House and Senate will need to reconcile as legislators determine how to spend a $17.5 billion surplus.

High child care costs in Minnesota

Kao’s tuition costs living in a St. Paul suburb aren’t unusual in Minnesota. 

Child Care Aware of Minnesota estimated in November that infant care at a center in the Twin Cities metro cost $375 a week, which is more than $19,000 in a year. The estimated prices are somewhat less for smaller in-home providers, and child care is also a bit cheaper in Greater Minnesota, though not by much considering differences in wages and cost of living.

The cost of center-based care for an infant in Greater Minnesota was about $12,100 a year. The number of those cheaper family child care providers has plummeted over the last decade, making centers more prevalent than before across the state.

“You have to be pretty wealthy before you are not slammed with child care costs,” said Rep. Dave Pinto, a St. Paul DFLer who chairs the House’s Children and Families Finance and Policy Committee.

Those prices are part of what Democrats and many in the child care industry say are a broken economic model. Strict limits on child-to-teacher ratios meant to safeguard kids are one reason providers charge expensive tuition that mainly covers worker salaries. At the same time, those workers make measly wages that can often be topped even by the fast food industry.

Generally speaking, Republicans want to slash what they say are onerous regulations on providers in an attempt to make it easier for child care businesses to thrive. And some have questioned if a tax credit like this will really solve the underlying issues plaguing the industry. But a smaller expansion of the credit was included in a compromise tax bill agreed to by both parties last year that fell apart amid other partisan disagreements.

Democrats are also likely to invest in scholarships for kids in low-income families that are aimed at connecting parents with high-quality child care. And DFL legislators are poised to take an unprecedented step by using state money to send ongoing payments to the child care industry that would boost worker pay.

But when it comes to the tuition costs for parents, the main DFL plan is that child care tax credit, and it isn’t clear if there’s enough support for it.

What the credit would do

Confusingly, the DFL is expected to approve something they call the Child Tax Credit. That’s a separate refundable credit entirely, which would grant money to families depending on income and the number of children and isn’t tied to reimbursing child care costs. The anti-poverty measure has wide agreement. House and Senate Republicans even proposed a version of it this year.

The tax plans made by Walz and the legislators have the same premise. A refundable tax credit to reimburse child care and dependent care costs, with higher amounts for kids under 5 years old, when tuition is more expensive.

Under Walz’s proposal, families would get up to $4,000 a year for each kid under the age of five for child care expenses, up to a maximum of $10,500 for three children. It would begin to phase out at $200,000 in total household income. Parents of older children would get some money as well. The total cost would be $538.6 million in the next two years and another $547 million in the two-year budget that follows.

What House and Senate lawmakers proposed initially was more generous, reaching a potential maximum credit of $25,000 for multiple children and phasing out at higher income levels.

This, Kao said, would “at least make a dent” in the price of child care across Minnesota.

With parents armed with more cash, will child care providers simply hike tuition accordingly?

But Sanford said higher costs shouldn’t fall on families, and she hopes an influx of state money to help parents and providers will lead to smaller tuition hikes. 

A March survey of more than 1,000 providers by First Children’s Finance and the Federal Reserve Bank of Minneapolis found 67% of child care centers reported raising tuition this year, along with 40% of in-home providers. Fewer reported tuition increases last year.

About 90% of centers said they raised wages to retain staff but 85% said they’re unsure if they could sustain those increases or know they can’t without additional help from the state.

More than half of family providers and 30% of centers reported financial losses that impacted their own income, and 20% of all providers said they expected to remain in business less than a year.

Clashing House, Senate tax bills

When the House released its tax bill, however, the proposal did not include money to expand the Great Start credit aside from one $3.2 million tweak.

Rep. Aisha Gomez, a Minneapolis DFLer who chairs the House Taxes Committee, told reporters they instead opted for the anti-poverty child tax credit when juggling many priorities. “It’s not because we don’t believe it’s necessary and worthy,” Gomez said of the Great Start credit. “Within our budget reality we made choices and we chose to go with this sort of expanded child tax credit that would cut child poverty by almost one quarter.”

Sanford said the lack of momentum in the House and reactions from Walz officials led her to believe the child care credit could be on the ropes. “The administration seemed to start feeling that it had become kind of a lost cause,” she said.

A week later, however, the Senate released its tax bill that included $450 million for the credit in this two-year budget cycle. Hauschild, from Hermantown, said the bill has lower income thresholds than he initially wanted but a parent making up to $160,000 with three kids under five could get up to $12,500 and couples earning up to $200,000 can get at least a partial credit.

But Hauschild said the tax credit was one of his top priorities because of “a severe child care issue in the Northland.”

There are plenty of similarities between the House and Senate tax bill, including a reduction in the number of people who will pay a state tax on Social Security benefits and the child tax credit. But DFL leaders will have to negotiate over the Great Start credit in the coming weeks before the Legislature is set to adjourn May 22.

“When I’m talking to business leaders, when I’m talking to communities, one of the biggest challenges that they have is trying to recruit businesses or employees to come to our region and the two things that are holding that up most are housing and then child care,” Hauschild said. “I want to make it as easy as possible for people to start families but also to settle in our region and be able to afford the high cost of child care in some of our more rural areas.”