Child Care Platforms: Direct Funding vs. Refundable Tax Credits

Of all of the “top of mind” issues in the 2021 federal election campaign, the issue with the starkest contrast between the parties is early learning and child care. More specifically, the Conservative’s plan differs from the other parties’ plans, in proposing that the direct funding approach laid out in the spring 2021 budget by the Liberal government be scrapped, and replaced with a funding model of refundable tax credits to parents who pay for child care to support their employment.

What is the Direct Funding Approach?

The federal government would provide funding to provinces to be used to directly fund the services provided by licensed facilities, both centres and family child care homes. Between 2021 and 2026, the federal government has budgeted $30 billion, increasing each year and reaching $9.2 billion at the end of five years, to be continued at that level permanently.

To receive this funding, each province and territory negotiates bilateral agreements (eight completed and signed so far) that address each jurisdiction’s particular needs, but are also legally binding around certain fundamental principles for building a publicly funded and managed early learning and child care system in Canada. These principles include affordability, accessibility, flexibility, diversity, and high quality. Thus, the direct funding model addresses a whole range of system goals beyond affordability, including increasing the number of spaces, expanding the child care workforce, addressing low remuneration and lack of staff benefits, increasing equitable access to child care for various underserved families (e.g., children with special needs, care in rural areas), and increasing the capacity to monitor and report on progress towards these goals.

On affordability in particular, the Liberal plan is for direct funding to result in a drop in fees to half of the current levels by the end of 2022, and to reach $10 a day by 2026. Achieving these goals will take a number of years, and will be expensive, but the end result will be the creation of a new public good, much like public education and health care.

What is the Refundable Tax Credit Approach?

This approach would use the tax system to refund parents who pay for child care, rather than fund child care services directly. Parents would be able to claim up to $8,000 per year in child care spending, regardless of the type of care being used, as long as parents paid for it. The maximum credit would be 75% of the $8,000 (i.e., $6,000), with this percentage getting steadily smaller as family income increases, reaching 0% for families with incomes approximately $150,000 and above. The cost of this approach is estimated at approximately $2.6 billion over five years and would replace the current Child Care Expense Deduction. The tax credit approach could be implemented quickly. And, although the Conservative leader has promised to honour the 2021/22 direct funding that was already negotiated and signed with eight of the provinces and territories before the election call, it would mean the end of a move toward a national early learning and child care system.

Comparing the Two Approaches

With the refundable tax credit approach, even with a maximum credit of $6,000, the average family would get a much smaller amount. Analyses done by economist David Macdonald for the Canadian Centre for Policy Alternatives has found that the average yearly benefit would amount to less than $1,000, for families across the range of incomes, except for those in the bottom 10% of income – where the average benefit would be $1,540, and the top 20% of family incomes, where the benefit would be near $0. According to his estimates, only an additional 3,500 families across Canada would get the full $6,000 benefit, that weren’t already getting this amount through provincial tax credits. Moreover, research from other countries with tax credit policies has shown that families tend to experience increases in fees, faster than inflation. The result is that parents’ tax credit savings go down over time.

By contrast, depending on where families live, and the associated cost of child care, the direct funding approach would save families between $5,000 and $10,000 more than the tax credit approach. In an expensive city like Toronto, once fees are reduced to $10 a day, the annual savings are closer to $20,000.

Tax credits do not increase the availability of child care spaces. In fact, while proponents emphasize “increased choice” for families through the tax credit approach, without increases in quality, affordable child care spaces, child care will continue to be a “choice” out of reach for many families with young children.

Finally, as a market-based approach to child care, tax credits do not support a more stable and well-compensated workforce nor do they support the monitoring of the quality of care available. Tax credits can be applied to any sort of paid child care – including unlicensed care. Families prefer licensed child care, as it is subject to government regulations that can be monitored. In Quebec, the introduction of tax credits has resulted in the relative growth of for-profit centre-based and family child care; research has shown that the quality of care in the for-profit sector is much inferior to that in the directly funded non-profit early childhood centres, which are still in too-short supply to meet parent demand.

 

Generation Squeeze has released their Family Affordability Voter’s Guide! Learn more about how the party platforms stack up against each other on issues of child care, parental leave and work-life balance: https://www.gensqueeze.ca/2021-family-analysis.  Briefly, three of the four political parties (Liberals, NDP and the Green Party) support a direct funding approach to child care. Decades of research suggest that quality, accessible and affordable child care benefits children, women’s labour force participation and the economy. In this election, child care is a key issue – make sure you get out to vote!

Links to sources used in this post.
https://www.gensqueeze.ca/tax-credits-vs-direct-funding-child-care
https://monitormag.ca/articles/families-would-save-more-with-10-a-day-child-care-fees-than-with-tax-credits
https://childcarepolicy.net/faq-whats-wrong-with-for-profit-child-care/
https://policyoptions.irpp.org/magazines/february-2021/what-is-the-quebec-model-of-early-learning-and-child-care/

The B.C. government has committed to moving toward a universal child care system – with $10 per day child care as the goal. Starting in 2018, the B.C. piloted $10 per day child care in over 50 sites across the province. Learn more about the “life-changing” impacts for the families involved in this Childcare Resource and Research Unit post: https://childcarecanada.org/documents/research-policy-practice/21/09/10aday-child-care-life-changing-impacts-bc-families