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Federal Childcare Tax Credits Encouraged by MI Chamber

Advocacy News – Sept. 15, 2023

The Michigan Chamber of Commerce recently signed onto a letter with leading business organizations and childcare advocates from across the country to emphasize the need for the federal government to expand or improve upon three leading childcare tax credits: the Child and Dependent Care Tax Credit (CDCTC), the Dependent Care Assistance Program (DCAP), and the Employer Provided Child Tax Credit (45F).

Why it Matters:
The Michigan Chamber just recently released a report in – Untapped Potential in MI – in consultation with the U.S. Chamber Foundation and other Michigan-based stakeholders. It studied the impact the lack of accessible and affordable childcare has had on our state’s working parents, job providers and economy.

The result?
Michigan is losing nearly $3 billion annually with immense strain on working parents and job providers.

What’s Happening:
Here’s a breakdown of the letter sent to Congress and what the Michigan Chamber is advocating for at the federal level to address our Great Lakes State’s childcare crisis.

CDCTC
The only tax credit that all working parents can access to offset the cost of child care necessary for work. We recommend Congress consider the following changes to the CDCTC:

  • Make the credit fully refundable.
  • Increase the credit rate for the lowest-earning families.
  • Make the CDCTC advanceable so taxpayers have the ability to pay for the child care they actually need throughout the year.
  • Index increases to CDCTC maximum eligible expenses to inflation.

DCAP
Allows working parents to exclude up to $5,000 in childcare assistance provided by their employer from their gross income. Unlike the CDCTC, not all working parents can access DCAP benefits; only those with a sponsoring employer. We recommend that Congress consider the following changes to the DCAP:

  • Increase the exclusion maximum to better reflect the cost of child care.
  • Decouple DCAP exclusions from CDCTC expenditures, allowing taxpayers to claim the CDCTC up to the maximum allowable expenses for any out- of-pocket child care expenses, regardless of employer DCAP contribution.

Employer-Provided Childcare Tax Credit (45F)
To help increase childcare supply, these credits would incentivize businesses to help their employees locate childcare and increase the number of slots available in their community. Current law provides employers a nonrefundable tax credit of up to 25% of qualified child care expenditures and 10% of qualified child care resource and referral expenditures. The credit maximum is $150,000, meaning businesses must spend $600,000 to receive the full credit. The low credit rate is especially prohibitive for small businesses that often do not have the profit margins to make significant investments in child care. Plus, because the credit is nonrefundable, non-profits and other businesses without federal tax liability are not eligible to claim the credit. To make the credit more accessible to employers, we recommend Congress consider the following changes to 45F:

  • Make the tax credit fully refundable.
  • Increase the maximum credit and credit rate.
  • Develop a tiered system with a greater credit rate and maximum credit for small employers and employers in rural areas to make it more financially feasible to claim the credit.
  • Simplify the process for multiple employers to jointly enter a contract with a qualified childcare provider for childcare services to claim the credit.

To read the entire letter, click here.  For questions or more information, please contact Leah Robinson at lrobinson@michamber.com.