Childcare Expense Tax Breaks Need New Approach

CDHoweInst.org – Media Releases – A new approach to childcare tax breaks is needed in order to relieve the financial stress caused by the increasing costs of raising young children.
May 31, 2017.    KEVIN MILLIGAN and ALEXANDRE LAURIN

A new approach to childcare tax breaks is needed in order to relieve the financial stress caused by the increasing costs of raising young children, finds a new report from the C.D. Howe Institute. In Tax Options for Childcare that Encourage Work, Flexibility, Choice, Fairness and Quality, authors Alexandre Laurin and Kevin Milligan recommend that moving towards a new refundable tax credit for childcare would generate the social benefits of increased labour-force participation, benefit lower-income parents, and allow for flexible and decentralized childcare choices.

Childcare expenses present a challenging issue in the budgets of many Canadian families with young children, and the tax system helps alleviate some of that burden. To help reduce the burden on Canadian families, Laurin and Milligan examine the cost side of the childcare equation, looking at the impact of changing the tax treatment of childcare expenses on maternal employment and on public finances.

“Looking at Quebec, we see that analysis of that province’s reduced-fee universal childcare program yields clear and consistent evidence on the effect of childcare subsidization on maternal work decisions: more women are working than would otherwise be the case,” states Milligan. “This extra employment, in turn, has an impact on public finances, as the additional household income generates more tax revenue for governments,” adds Laurin. This phenomenon raises the tantalizing possibility that some of the direct cost of a childcare subsidy might be recouped through higher tax revenues on the extra work that the subsidy induces.

Hence the report proposes switching from the current tax deduction to a generous federal refundable tax credit model – along the lines of Quebec’s existing tax credit – that would considerably lower the effective price of childcare for low- to middle-income families, with the net gains from the credit slowly vanishing at higher income levels.

“We find that the static cost of a refundable childcare credit – again, outside Quebec – would exceed $1 billion. This cost, however, could be cut substantially by the large employment response of mothers: as many as 13 to 19 percent of mothers who currently do not work could be induced into the labour force, which would generate hundreds of millions of new tax revenue as well as reduce income tested government benefit payments to families.” The authors go on to suggest that, for the federal government, which would be instituting the childcare fiscal subsidy, induced tax revenues would reduce the cost of financing the program. For provincial governments, new tax revenues generated by extra maternal work would be a windfall that could be used to fund other priorities.

In addition to increased revenues, three clear advantages of a refundable tax credit emerge from the report’s analysis:

  1. Such a credit system would improve fairness by providing childcare cost relief to the many families of modest income now left out by the existing income tests.
  2. Families would retain choice, which would enliven the ability of the marketplace to innovate with respect to flexible hours, staffing and facilities.
  3. A generous refundable credit would improve the environment for quality childcare by providing an incentive to move from informal to more formal care. Moreover, if the provider were mandated to meet quality markers to be able to issue tax receipts, governments could enforce the quality standards they desire.

“In light of these advantages, the federal government should consider changing its tax treatment of childcare expenses from the current tax deduction to a refundable tax subsidy,” conclude the authors.

Click here for the full report.

For more information contact: Kevin Milligan, Professor, Vancouver School of Economics at the University of British Columbia and a Fellow-in-Residence at the C.D. Howe Institute; or Alexandre Laurin, Director of Research, C.D. Howe Institute: 416-865-1904 or email: amcbrien@cdhowe.org.

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