ISSUE / CHILD CARE : Some Worry Plan to Cut Tax Credits May Spur New Backlash by Affluent

It’s deja vu on Capitol Hill. Congress, which last year prompted a backlash by trying to make the well-to-do elderly foot most of the bill for catastrophic health care, is following the same pattern in this year’s child-care proposal.

To help pay for costly new child-care benefits, the bill that passed the House last month would wipe out existing tax advantages for families that earn more than $90,000, and phase out those for families with incomes above $70,000.

That change, intended to go into effect next year, would in effect boost taxes for about 2 million families.

Most attention has focused on the bill’s programs to help the poor and some middle-income families with their child-care costs, including an expansion of the tax credit for the working poor. The repeal of tax breaks for affluent families with child-care costs has almost escaped notice.

The House approved the tax benefit cutback without a word of debate on the floor. And the Bush Administration, while opposed to some provisions of the bill, did not object to the fact the bill would hike taxes for some. Indeed, the White House supported restricting the tax breaks in an earlier, defeated version.

Impact of Change

Some lawmakers are worrying that the popular measure--high on the agenda of congressional Democrats in this election year--will generate another political backlash.

“This is not like restricting tax deductions for a Rolls Royce or a Mercedes. A lot of these people don’t think of themselves as rich,” says Rep. Patricia Schroeder (D-Colo.). “In many urban areas, you’re talking about taking away the benefits for families with two teachers or a fireman and a teacher. We’re pitting one group against another again.”

Lawmakers say that the final child-care bill that emerges from Congress is likely to follow the House approach rather than the far different version approved last year by the Senate. Senate-House negotiations are expected to begin next month.

“We’ve been billing the child-care bill as something where Democrats show how they can help the middle class,” said one top congressional staff member. “But once people find out what’s in it, I’m afraid it could come back to haunt us.”

Current Benefits

Under current law, families with above-average income can get a tax credit of up to $480 for child-care expenses for one child, and up to $960 for two or more children. An alternative tax break allows employers to offer flexible-spending accounts that permit workers to exclude up to $5,000 in child-care expenses. That translates into a $1,400 tax savings for a family in the 28% tax bracket.

Under the House bill, the value of the current tax breaks would be reduced by 5% for each $1,000 in earnings above $70,000. And the tax breaks would be eliminated for families with adjusted gross income above $90,000. In addition, parents earning more than $70,000 would start paying taxes on the value of employer-provided day care.

The new child-care benefits for the poor and some middle class would boost cash payments to the working poor, expand Head Start, provide grants for states and help create new after-school programs. The total cost is estimated at about $28 billion over five years.

The reduction of tax breaks for the affluent would raise $1.5 billion over the next five years. Another $13 billion of the program’s cost would be raised by making permanent the 3% telephone tax, which is scheduled to expire this year.

Outlook

Congress “recognizes that pay-as-go-budgeting requires taking away something from some people in order to provide new benefits,” says Barry Bosworth, an economist at the Brookings Institution, a Washington think tank. “It makes sense to impose that burden on those who can more easily afford it.” But those involved in providing child-care benefits don’t see it that way.

For one thing, the plan may cause many companies to eliminate all employer subsidized child care, said Bonnie Whyte, head of the Employers Council on Flexible Compensation.

“In trying to pare back on selective tax benefits for the affluent,” Whyte argues, “Congress could well end up hurting those it is trying to help.”

Last year, lawmakers responded to a storm of protest from business groups by repealing a complex tax provision known as Section 89 that would have required companies to provide health insurance to employees on a more equitable basis. Congress was also forced to repeal the catastrophic care program for the elderly.

Says Whyte: “They’ve come up with something that combines the worst of both Section 89 and the catastrophic health program.”