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Dems Struggle With How To Expand Child Care Tax Incentives

By Alan K. Ota · March 10, 2020, 5:58 PM EDT

House Democrats face rectifying critical differences in competing proposals to expand the child and dependent care tax credit as they try to counter President Donald Trump's call for tax cuts to address the ripple effects of the new coronavirus.  

Democrats have pushed back against ideas floated by the White House as part of Trump's emerging plan to help middle-class families — and spur the economy — such as a payroll tax cut or income tax rate cut, questioning whether they would be effective in stimulating consumer spending or be tilted toward wealthy families.

In lieu of Trump's proposals, Ways and Means Chairman Richard Neal and other senior Democrats said they were focused on trying to resolve gaps between different proposals to broaden the child and dependent care tax credit for working families, including some with higher incomes.

Many Democrats agree on the need to update and expand the current tax credit of 20%, for those earning more than $43,000, on up to $3,000 in expenses for one child age 16 or younger and up to $6,000 for two or more qualifying children. They also agree on increasing the credit rate at lower income levels, which currently rises to 35% for those earning $15,000 or less.

But they are divided on whether to rally behind H.R. 1967, an ambitious proposal by Rep. Danny Davis, D-Ill., to make the incentive refundable and provide big increases in the credit rate and in income thresholds.

"We are working on that now. I'm not sure how we would pair it, or if we would pair it," Neal told Law360.

Neal said he was leaning toward the approach in the Davis bill, which would provide a 50% tax credit on expenses up to $6,000 for one qualifying child or dependent adult and up to $12,000 for two or more qualifying individuals for those earning $120,000 or less. The tax credit would be 20% on similar expenses for taxpayers earning more than $178,000.

"I don't think it would be anything radically different," Neal said, referring to the framework in the Davis bill. But he left the door open to potential changes to build support among Democrats.

Elaine Maag, a principal research associate at the Urban-Brookings Tax Policy Center, said both parties were under pressure to respond to voters' concerns that high child care costs pose a hurdle to working parents and "reduce their ability to work."

"Lawmakers want to be responsive to the fact that people are hurting," Maag said.

With such needs in mind, Neal has tried to deal with some moderates' criticism of the lack of revenue-raising offsets to cover the more than $100 billion cost of the committee-approved Economic Mobility Act, H.R. 3300. It combined a two-year version of the Davis bill, a rough doubling of the $5,000 cap on employer-provided child care assistance and several other items, including an expanded earned income tax credit for workers without children and Treasury payments to help U.S. territories such as Puerto Rico and American Samoa pay for an earned income tax credit.

One option would be to move a stand-alone, two-year version of the Davis proposal plus the higher exclusion for employer-provided child care assistance, which the Joint Committee on Taxation estimated would cost about $19 billion over 10 years. By moving such a proposal, Neal would put it into position for consideration as part of a potential package of extensions for 33 temporary tax incentives expiring at the end of 2020.

For their part, some Republicans have argued for a more modest expansion of the child care tax credit or for a proposal by Rep. Jason Smith, R-Mo., H.R. 217, to make permanent the Tax Cuts and Jobs Act's  doubling of the child tax credit to $2,000, which expires at the end of 2025. Democrats have supported the bigger child tax credit, but have argued a rifle-shot proposal for permanency should be part of a broader debate of potential changes to the 2017 law.

Trump voiced some support early in his term for targeted incentives to cover child care expenses, but since has pivoted to explore broad tax cuts for middle-class families, such as a payroll tax cut or a reduction of the 22% individual income tax rate to 15%.

Instead of such tax cuts, Davis told Law360 he believed a two-year version of his proposal would draw strong support in the Democratic caucus because it would help working families and had a relatively modest cost.

"I think we can get the votes. I think with the election coming up, you know, that this is just a good time to do it," Davis said.

But Davis and Neal face pushback from some moderates including Rep. Stephanie Murphy, D-Fla., a co-chair of the Blue Dog Coalition, a centrist faction of the Democratic caucus. They question whether the Davis bill can attract GOP support, since it has only eight co-sponsors, all of them Democrats.

"When it comes to child care, too many families need a solution today. They can't wait for a perfect solution," Murphy told Law360.

She argued for developing a proposal based on her own bipartisan bill, H.R. 1696, which has 31 co-sponsors including Smith and 11 other Republicans. Smith said the bill would "go a long way toward helping lower-income and working families provide quality care for their children."

Like the Davis bill, the Murphy bill would make the incentive refundable and lift credit rates, but it would only slightly raise income thresholds through inflation adjustments. It would raise from $5,000 to $7,500 the exclusion cap for employer-provided child care assistance. Sen. Angus King, I-Maine, has backed a similar bipartisan measure, S. 749, with five co-sponsors, including three Republicans.

Some Republicans have pushed back against expanding refundable tax credits by raising concerns about potential fraudulent claims. In his fiscal 2021 budget, Trump called for legislation to require a taxpayer to provide a Social Security number in order to claim refundable tax credits.

Despite such concerns, Maag said both the Davis and Murphy bills would help low- and moderate-income families by making the credit refundable, but questioned whether Davis' proposal to sharply increase income thresholds would give an unnecessary subsidy to some families earning more than $100,000.

The child and dependent care tax credit was created by a 1976 law  under President Gerald Ford and was reshaped to expand benefits for low- and moderate income families in 1981 . It was expanded temporarily in 2001  and in 2010 , and then permanently in the 2012 fiscal cliff deal .

The exclusion for employer-provided child care assistance was created by a 1981 law  under President Ronald Reagan and capped at $5,000 by the 1986 tax overhaul .

If House Democrats can resolve differences among themselves on a short-term expansion of the child care credit, Maag said it could lead to bicameral talks on a proposal with bipartisan support.

"It's always easier to pass short-term legislation rather than long-term legislation. It has a shot as much as anything," Maag told Law360.

--Editing by Tim Ruel and Robert Rudinger.

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