Boom in day care industry the result of many social changes

Monthly Labor Review, August, 1995 by William Goodman

Tax breaks. In addition to explicit Federal spending, several U.S. tax provisions help bring day care in reach of many families. Perhaps the most important tax change was the initiation and expansion of the Earned Income Credit, which began in 1975 and was increased to a major extent in 1990 and again in 1993. Although a small amount of this credit can be claimed by low-income taxpayers with no children, it benefits primarily lower-income families with children. A credit of up to about $2,500 goes to taxpayers with earnings of $11,000 or less. The Earned Income Credit is different among such credits because when the amount claimed by a taxpayer exceeds the income tax liability, he or she is reimbursed for the balance. The total amount claimed each year under this credit has increased more than five-fold since 1975, even after inflation, partially because of numerous revisions in the applicable tax rules, particularly in 1987, 1990, and 1993. (See chart 2.)

While the credit does not specifically provide for day care, the credit is often cited in literature concerning the financing of the care of young children. Low-income families use day care facilities; among children in families below the poverty line in which the mother works, 18 percent attended organized day care facilities in 1991.(18)

The Dependent Care Tax Credit benefits primarily a mare middle-income group of families; in 1992, this credit was claimed to the greatest extent by families with incomes between $20,000 and $50,000. The credit can be claimed for expenses incurred for the care of dependents if the care is necessary for the taxpayer to be employed. After adjustment for inflation, the annual amount claimed by taxpayers about tripled from 1976 to 1988 In 1988, tax law changes removed credit for the care of children over 13 and reduced the amount of expenses that could be claimed; the aggregate annual amount claimed by taxpayers suddenly dropped and remained at roughly the same level through 1994, according to proJections. But the amount claimed in 1994 was still 85 percent above the 1976 level after adjustment for inflation.(19) (See chart 2.)

Since 1981, certain employer-provided dependent care has been excluded from an employee's gross income for Federal income tax purposes. Such dependent care may be provided in the form of on-site or nearby child care facilities, reimbursement of employees for child care expenses, or reimbursement accounts that are also usable for other nontaxable employee benefits. Many employers offer such benefits; in 1993, 40 percent of full-time employees of medium and large private establishments were eligible for reimbursement accounts that could be used for dependent care.(20)

Private initiatives. Corporate and nonprofit organizations have made significant efforts to provide day care. The organizations represent a diverse group, including major corporations and religious and other nonprofit organizations.

Employers sometimes operate their own day care centers for employees and in other cases contract with a for-profit or nonprofit child care organization. In at least a few cases, the service also is made available to nonemployee community members. Other companies reimburse parents, expenditures on day care or arrange discounts. Consortiums of employers, in some cases also including labor unions, have started day care centers that are located near several places of work.(21)