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«OVERTAXING THE WORKING FAMILY: UNCLE SAM AND THE CHILDCARE SQUEEZE Shannon Weeks McCormack* Today, many working parents are caught in a “childcare ...»

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Second, together §§ 21 and 129 create an odd situation in which two taxpayers in identical economic situations are taxed differently.66 Using current § 21’s phaseouts, when the Smiths paid for day care directly, they could claim a credit equal to 20% of their $3,000 expenses, reducing their tax liability by $600. If, however, they decided to use a dependent-care FSA to pay the $3,000, they would reduce their tax liability by $900 as a result of § 129’s exclusion. Whether it is preferable to pay for working childcare expenses directly (so that one may claim the § 21 credit) or to use a dependent-care FSA (so that one may claim the § 129 exclusion) depends, among other things, on one’s marginal tax bracket. To the extent that taxpayers can choose how to fund childcare, this is at best silly and at worst a trap for the unwary. The situation is more troubling, however, since some taxpayers may

63. I.R.C. § 129(a)(2)(A). See infra notes 209–223 and accompanying text for a more detailed illustration that shows, among other things, that some taxpayers may be entitled to both a § 129 exclusion and § 21 credit. This additional detail does not affect the substantive points of this Section.

64. IRS, Instructions for Form 2441: Child and Dependent Care Expenses (2014), http://www.irs.gov/pub/irs-pdf/i2441.pdf [http://perma.cc/7DQJ-ZMMC].

65. See supra notes 47–50 and accompanying text.

66. See infra Section IV.B for a more detailed illustration.

572 Michigan Law Review [Vol. 114:559 not work for employers that have established dependent-care FSAs. Nevertheless, the discrepant treatment of economically identical taxpayers is unavoidable so long as the Code uses different mechanisms to provide tax relief in §§ 21 and 129—that is, a phased-out percentage credit and an exclusion from taxable income.

Finally, and of critical import for the analysis of this Article, the hypothetical above illustrates that § 21’s working childcare credit and § 129’s exclusion for income diverted to a dependent-care FSA (hereinafter the FSA exclusion) should be analyzed in exactly the same manner. There is no economic difference between a taxpayer directly paying her caregiver and a taxpayer diverting amounts to a dependent-care FSA, which is then used to pay that caregiver. While the Code currently uses two different mechanisms to provide tax relief for these economically identical transactions—namely, a credit for the former transaction and exclusion in the latter—there is no reason why these transactions should not be taxed the same. Thus, if one were to conclude that § 21’s credit does not offer adequate tax relief for working families, one would also need to apply that reasoning to determine the adequacy of the FSA exclusion allowed by § 129. In light of this, the remainder of this Article will refer collectively to § 21’s percentage credit and § 129’s FSA exclusion as the working childcare provisions and to the relief provided by those sections—that is, the percentage credit and FSA exclusion—as working childcare relief.67 C. The Reality Faced by Working Families: What Is the Effect (or Lack Thereof) of the Working Childcare Provisions?

Just as all families look different from one another, the ways in which families earn income and care for their children vary dramatically. In twoparent families, one parent may earn all of the income while the other provides childcare; alternatively, both parents may work. But the dual-earner family is extremely likely to incur significant additional expenses to provide childcare during working hours, especially in families with preschool-aged children.68 And the significance of these expenses magnifies for single parents, who may alone bear the primary responsibilities of producing income and caring for their children.

67. Section 129 also allows taxpayers to exclude from their taxable income up to $5,000 worth of childcare services provided by their employers—for example, day care provided by an employer. I.R.C. § 129(a)(2)(A). I do not see any reason why the analysis of this Article would not also extend to the exclusion of these in-kind benefits.

68. Census data shows that in families in which the mother is employed and children are younger than five years of age, roughly 88 percent of families require some regular childcare.

See Lynda Laughlin, U.S. Census Bureau, No. P70-135, Who’s Minding the Kids? Child Care Arrangements: Spring 2011, at 5 (2013), http://www.census.gov/content/dam/Census/ library/publications/2013/demo/p70-135.pdf [http://perma.cc/QW8A-W88Z] (“In the spring of 2011, 88 percent of the 10.9 million preschoolers of employed mothers... were in at least one child care arrangement on a regular basis.”).

Uncle Sam and the Childcare Squeeze 573 February 2016] Childcare is very costly in the United States and represents one of the highest household costs families incur. 69 Childcare “often exceeds the cost of housing, college tuition, transportation or food.” And these expenses tend to be incurred “at a time when families can least afford them.” 70 The cost of childcare varies significantly by state71 and by whether the care is provided in an urban or rural environment, with the former being far costlier.72 The cost also depends greatly on the age of the children; care for infants and preschool-aged children is appreciably more expensive than care for school-aged children.73 One of the most common options available to working parents is the “child care center,”74 a day-care facility defined formally by a leading study on childcare costs as “[a]n early care and education facility that is licensed/ licensed exempt by the state and operates under a proprietary or not-forprofit status, independently, or as part of a large chain of facilities or a faithbased organization.”75 In the ten most expensive states, the cost of caring for one infant—that is, a child under one year of age—in a childcare center ranged from $10,787 to $14,508 per year, representing between 47.1% and 56.0% of the median salary of a single parent in those states, and between 13.8% and 15.9% of the median salary of a married couple.76 In Washington D.C., the cost of similar care is $21,948, representing a staggering 83.4% of the median salary of a single parent in the District77 and a still-high 13.5% of the median salary of couples.





And that is just for one child. In New York, the state with the highest cost of childcare by reference to median salary, parents pay $26,788 per year to provide care for an infant and preschool-aged child in a childcare center.78 In Washington State and Minnesota, a day-care center for two young children costs over $21,000 and $24,000, respectively.79 In Washington, D.C., parents with two preschool-aged children pay the highest costs in the country—around $34,000.80 Even in the most affordable states, care in a childcare

69. Childcare Aware of Am., supra note 10; see also Bernard, supra note 10.

70. Childcare Aware of Am., supra note 10, at 4 (quoting Lynette M. Fraga, Executive Director, Childcare Aware of America).

71. Id. at 14.

72. See id.

73. Id. apps. 2–4 at 42–47.

74. Approximately 25 percent of childcare arrangements for children under five are made through childcare centers. Laughlin, supra note 68, at 9 tbl.3. This represents, by far, the largest percentage of nonrelative arrangements.

75. ChildCare Aware of Am., supra note 10, at 39.

76. Id. at 16 tbl.2.

77. Id. app. 2 at 42. The unusual figures for the District of Columbia are because it is an exclusively urban area, with large income disparities between single-parent and two-parent families. Id. at 19.

78. See id. app. 1 at 40.

79. See id. app. 1 at 40–41.

80. See id. app. 3 at 44.

574 Michigan Law Review [Vol. 114:559 center costs slightly over $10,000 for an infant and a toddler, and prices range between these points in other states.81 Of course, “child care centers” are not the only form of childcare, though they are the most common form of paid care.82 Popular mostly in rural areas, “family child care homes”—that is, “[c]hild care offered in a caregiver’s own home [that], depending on the state’s licensing regulations, may be licensed or exempt from licensing”—carries with it lower costs than day-care arrangements.83 It is also common for working parents to hire a “nanny,” an individual who will provide care for children in the home of the parent, a friend, or a neighbor.84 This option is often more expensive than the childcare center.

One recent report estimates that parents pay around $37,000 per year for a full-time nanny.85 This estimate is a logical one. Suppose a dual-earner couple or single parent works forty hours each week and therefore needs care for forty-five hours each week to account for commuting time. Even if parents paid the caregiver $10 an hour, since five hours would be considered overtime and payable at time and a half,86 the caregiver’s yearly salary would be $24,700. In reality, an individual caregiver caring for two children will (and should) require much more than $10 per hour, which is barely the minimum wage in many states.87 If parents paid an individual caregiver $15 per hour, for instance, her salary would be well over $35,000.

There are various reasons why parents might choose or need to use this more expensive option. The wait-lists at many day-care facilities are notoriously long.88 Further, day-care facilities will often refuse care for infants89

81. See id. apps. 2–3 at 42–45.

82. Laughlin, supra note 68, at 9 tbl.3.

83. ChildCare Aware of Am., supra note 10, at 39.

84. Nanny care provided either in a parent’s home or the nanny’s home is a popular paid childcare option, representing 12.9 percent of arrangements. Laughlin, supra note 68, at 9 tbl.3.

85. Hannah Seligson, The True Cost of Leaning In, Daily Beast (Mar. 22, 2013, 4:45 AM), http://www.thedailybeast.com/articles/2013/03/22/the-true-cost-of-leaning-in.html [http://perma.cc/JW2Z-7B85].

86. Overtime Pay, U.S. Dep’t Lab., http://www.dol.gov/whd/overtime_pay.htm [http:// perma.cc/YD46-MDWX].

87. See Minimum Wage Laws in the States—January 1, 2015, U.S. Dep’t Lab., http://www.dol.gov/whd/minwage/america.htm [http://perma.cc/5ACC-ZSJZ]. In Washington State, the minimum wage is $9.47. Minimum Wage, Wash. St. Dep’t Lab. & Industries, http://www.lni.wa.gov/WORKPLACERIGHTS/WAGES/MINIMUM/DEFAULT.ASP [http://perma.cc/ 5RZL-UH76 ].

88. Sue Shellenbarger, Day Care? Take a Number, Baby, Wall Street J. (June 9, 2010, 12:01 AM), http://www.wsj.com/articles/SB10001424052748704256604575294523680479314 [http://perma.cc/HWL6-GF2S]; see also Alissa Quart, Opinion, Crushed by the Cost of Child Care, N.Y. Times (Aug. 17, 2013, 2:30 PM), http://opinionator.blogs.nytimes.com/2013/08/17/ crushed-by-the-cost-of-child-care/ [http://perma.cc/LX9Q-VFTM] (“Among the mothers I spoke to, one... signed up for a slot at a local day care when she was newly pregnant. Her daughter is now 5, and she is still on the wait list.”).

89. See Shellenbarger, supra note 88. This is likely due, at least in significant part, to more stringent limitations being placed on infant-care facilities (as opposed to facilities that Uncle Sam and the Childcare Squeeze 575 February 2016] and almost all (if not all) facilities will not care for ill children.90 Considering how frequently small children are sick—the average child will catch anywhere from six to ten colds each year91—parents using day-care options will often need to miss (or be late to) work to tend to their sick children.92 In fact, one study that chronicled cases in which parents were fired for missing or being tardy to work because they were caring for their ill children concluded that many parents are only “one sick child away from being fired.”93 An individual caretaker, by contrast, can provide care even when children are ill. Finally, parents may simply feel more comfortable having one individual care for their children in a home environment, rather than transporting children to what might be seen as a more impersonal setting with rotating caregivers.

What this data make clear is that the relief provided by § 21 and 129 does not do much to relieve working parents of the financial burdens of childcare. The percentage credit in § 21 and the FSA exclusion in § 129 allow parents to credit or exclude a mere fraction of the costs actually incurred for employment-related childcare. Furthermore, this data makes clear that § 21’s phaseouts are astonishingly steep. The relief provided by § 21 begins to phase out once a parent’s income exceeds $15,000.94 In many states, this falls short—often far short—of the amount needed just to provide care for two young children while working full-time hours.95 Furthermore, the percentage credit phases down to its lowest level of 20 percent of childcare costs (subject to dollar limitations) once a taxpayer’s income reaches $43,000.96 In Washington, D.C., the cost of caring for an infant and a four year old in a care only for older children) that wish to maintain their state certifications. For instance, legally required infant-to-caregiver ratios are far lower than the noninfant-to-caregiver ratios.

E.g., Ark. Dep’t of Human Servs., Div. of Child Care & Early Childhood Educ., Minimum Licensing Requirements for Child Care Centers 22 (rev. 2015), http://humanservi ces.arkansas.gov/dccece/licensing_docs/2014%20A1%20CCC%20Clean%20Copy%20Final% 20Filing.pdf [http://perma.cc/MME5-YG6X] (requiring infant-to-caregiver ratio of 1:6 for infants less than eighteen months; 1:9 for children between eighteen and thirty-six months; 1:12 for ages two-and-a-half through three years; 1:15 for four years; 1:18 for five years to kindergarten; and 1:20 for kindergarten and above).

90. Julie Revelant, Too Sick for Daycare? Experts Weigh In, Fox News (Sept. 5, 2012), http://www.foxnews.com/health/2012/09/04/too-sick-for-day-care-experts-weigh-in/ [http:// perma.cc/MGN9-CT3L] (“Most daycare centers have a sick child policy which outlines when kids should stay home. And although it’s not always feasible to take a day off of work, it’s a good idea to take into account the other children as well.”).



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