Supporting Working Families Through the Tax Code

Several tax provisions—such as the Child Tax Credit, the Earned Income Tax Credit, the Child and Dependent Care Tax Credit, the Employer-Provided Child Care Credit (45F), and the Employer Credit for Paid Family and Medical Leave (45S)—help parents in the U.S. offset the costs of juggling work and kids. Americans often favor income support delivered as tax credits because they afford families and business owners the flexibility to meet multiple needs.

As Congress continues to consider modifications to the tax code, BPC encourages policymakers to balance promoting financial stability for families with incentivizing workforce participation, better targeting benefits toward the most vulnerable families and businesses, and offering complementary—not conflicting—benefits.

Key tax credits for working families and BPC’s reform suggestions:

• Child Tax Credit: The CTC is designed to help parents offset the high cost of raising children. Despite its success in curbing child poverty, nearly 35% of low-income households remain ineligible for the full credit in its current form. BPC has outlined a path that makes a portion of the credit fully available regardless of earnings while phasing in the remainder of the credit starting with the first dollar earned. This maintains work incentives that can help strengthen financial security in the near-term while improving earnings and childhood outcomes in the long-term.
• Earned Income Tax Credit: The EITC is designed to raise after-tax income for low-income workers by supplementing wages and incentivizing increased earnings. Not only does the EITC pull nearly five million people out of poverty each year, it dramatically boosts employment rates, particularly for unmarried women. Notably, the EITC is disproportionately more generous for working parents with multiple children. BPC suggests several reforms to enhance the EITC, such as increasing it for workers with one or no children (making it proportionally similar to the EITC currently available for two- and three-child households) and improving the compliance process to reduce erroneous claims.
• Child and Dependent Care Tax Credit: The CDCTC is designed to help offset a portion of families’ child or dependent care expenses. Working parents may receive a nonrefundable tax credit for eligible child care expenses. However, the CDCTC’s current structure has failed to support those with little to no tax liability who are excluded from its benefits. BPC recommends making the CDCTC refundable, advanceable, and phasing out the credit for higher-income families. Additionally, decoupling Dependent Care Assistance Program (DCAP) exclusions from CDCTC expenditures would enable low- and middle-income workers to set aside money for child care without reducing the maximum expenses they can claim for the CDCTC.
• Employer-Provided Child Care Credit (45F): To incentivize business owners to provide child care for their employees, 45F offers a tax credit of up to 25% of qualified child care expenditures and 10% of qualified child care resource and referral expenditures. Each year, limited access to child care causes businesses to lose upwards of $1,500 per working parent due to decreased productivity, less time working, and increased recruitment expenses. Despite the tax relief that the 45F credit provides, relatively few businesses have taken advantage of it. BPC supports recommendations from the Government Accountability Office to expand the maximum allowable expenses and the credit, extend eligibility to employers with no tax liability like nonprofits, and broaden the definition of eligible services. BPC also supports making the credit fully refundable, enhancing the credit for smaller businesses, and allowing employers to claim the credit when jointly offering services.
• Employer Credit for Paid Family and Medical Leave (45S): The 45S tax credit offsets up to 25% of the costs to employers for providing eligible paid family and medical leave benefits, which help working parents—particularly working moms—remain in the workforce. Most Americans would prefer to have benefits like paid leave offered through their employers rather than the government, making enhancements to 45S an appealing solution. BPC offers a menu of options to improve the credit, such as making the tax credit permanent, increasing awareness and take-up of the credit, making it more appealing to small businesses, and expanding the types of costs to which employers can apply the credit.

In sum, BPC’s reforms not only will strengthen support for American workers and their families, but do so in fiscally responsible manner, ensuring benefits are targeted towards those most in need.