Landscape of Early Care and Education Financing

1. Early childhood education is funded in a piecemeal approach, primarily through family payments and public provisions that fuel inequity. Families with low incomes spend a greater portion of their discretionary income on child care, and public subsidies allow only a fraction of eligible families to access the services they need.
2. Despite the many programs that may be used for early care and education, only nine programs are designated specifically for the care and education of young children, the largest of which are Head Start and the Child Care and Development Block Grant (CCDBG).
3. Though the body of research on child development and public interest has been continuously growing, ECE still lacks support to fund programs at the levels that would allow all eligible children to receive high-quality care from an appropriately compensated workforce.

While primary and secondary education is free and provided as a public good, early childhood education costs largely fall upon families. Families shoulder 52 percent, the public sector covers 46 percent, and private and philanthropic entities cover 2 percent of total costs for early education and care. Nearly 70 percent of families with children below the age of five use some type of non-parental care, typically averaging $130 per child each week, with 25 percent of families paying over $180 per week. Families with lower incomes pay a higher portion of their income on these costs.

In 2015, the Government Accountability Office identified 44 programs related to providing care for young children, though only nine programs have child care as their explicit focus. The same year, the federal government spent $15 billion on ECE. Most of that funding was channeled towards four- and five-year-old children, despite the fact that infancy to the age of three is the most influential period of child development, and infants and toddlers incurring higher costs with fewer provider options.

Of the $15 billion in federal funding being earmarked for young children’s learning and care, $9.2 billion was allocated to Head Start. Head Start serves roughly one million children annually through 1,700 public agencies, private organizations, tribal governments, and school systems. In 2016, its appropriation resulted in $9,000 of funding per child, and grantees were responsible for matching federal funds at a rate of 20 percent.

The Child Care and Development Block Grant (CCDBG), a provision of the Child Care and Development Fund (CCDF), was appropriated at $8.1 billion in 2019. States are obligated to contribute to CCDBG and may choose to transfer funds from the Temporary Assistance for Needy Families (TANF) to CCDF. CCDBG is similar to a voucher program, in that parents choose the facility and the state subsidizes the selected provider. A portion of CCDBG funds are intended for program improvements, and specific improvements for infants and toddlers.

Two federal tax income benefits are designed to assist with early care costs. The Child Care and Dependent Tax Credit (CDCTC) allows families to claim a tax credit for 20 to 35 percent for the first $3,000 spent on care per child, or $6,000 for two children. The credit is determined on a sliding scale and only available for families who pay federal taxes and use ECE services to work or attend school. The Dependent Care Assistance Program (DCAP) permits families to reserve up to $5,000 in pre-tax funds in a flexible spending account to reduce their overall tax burden. The foregone federal tax revenue from CDCTC and DCAP are $4.6 billion and $1.0 billion, respectively. These tax credits mostly benefit wealthier families, as families with incomes over $100,000 receive 52 percent of benefits and families with incomes below $40,000 receive 15 percent of benefits.

States are significant funding partners in early childhood education. Many states offer state-funded pre-K, give state-level tax credits to employers and families, and contribute heavily to CCDBG. For state-funded pre-K, states contributed $7.4 billion in 2016, which was supplemented by $434 million from the federal government and $634 million from local governments, to educate 1.5 million children. Twenty-three states offer child and dependent care tax credits, many structured similarly to the CDCTC credits. Twelve of these states made the credit fully or partially refundable, so families weren’t required to pay state taxes to be eligible.

Employers may contribute to child care costs through the federal employer-provided care Credit and employee incentives. Using the credit, employers can deduct 25 percent of qualified child care expenses and 10 percent of resource and referral fees, for up to $150,000 annually. Forgone revenue from this credit totals roughly $10 million. Employers may also offer employee benefits or incentives, like on-site child care centers and paid family leave. Fifty-six percent of employers offer DCAP plans that allow families to pay ECE with pre-tax income and 41 percent of employers offer resource and referral services. A major concern with this strategy is that associated benefits may lower employees’ overall cash compensation (even for those without children), so the actual benefit may be negligible.

Private institutions contribute a small fraction of the total ECE system costs. Private agencies and philanthropies support ECE by piloting innovation, building systems, and establishing public-private partnerships that include pay-for-success models and Shared Services Alliances (SSAs).

See National Academies report: Table 2-2 – Major Sources of Federal and State ECE Funding in Fiscal 2016.

Key quotes from the report:

1. “Unlike kindergarten through 12th grade (K–12) education, the early care and education (ECE) ‘system’ is a hodgepodge of different programs with different goals, constituencies, and requirements, implemented with great variation across states and localities.” (p. 45)
2. “Historically, early care and education in the United States has been delivered through multiple systems with multiple goals, with the most marked bifurcation being between programs for middle- to upper-class children and programs for poor children.” (p. 46)
3. “Early care and education provides care and supervision of children so that parents can work, go to school, get a respite from parenting, or complete a myriad of other tasks. For children, it provides learning, positive development, socialization, nurturing, play, and—particularly as they near kindergarten—a bridge to formal education. For society at large, high-quality early care and education can play an important role in preparing the next generation to be productive and educated citizens.” (p. 56)

Questions for federal policymakers:

• How can we garner support to fully fund existing programs such as CCDBG and TANF?
• What would be the impact of discontinuing tax credits for child care, and channeling those funds ($5.61 billion) into public options?

Questions for higher education:

• How are current and future early childhood educators financially supported to obtain degrees?
• What role do institutions have in supporting student degree attainment?
• How do child care costs and the current landscape of child care impact ECE educators enrolled in higher education?

Questions for the workforce:

• Are you eligible to participate in tax credit programs, and if so, how have these programs impacted your life as a parent and professional?
• How can the importance of much tax revenue that is lost when parents leave the workforce to care for their children be better communicated?
• What would be most helpful as you pursue a degree? Scholarship, loan forgiveness, wage supplement, compensation increase, academic support, or is something else needed?

See the Glossary for key word definitions.