HomeMy WebLinkAboutMINUTES - 02281989 - IO.4 TO: BOARD, OF SUPERVISORS 1. 0. 4
INTERNAL OPERATIONS COMMITTEE1. Contra
FROM:
Costa
February 13 , 1989 , a
y: 4o County
DATE: c�rra------
Child Care Tax Credit
SUBJECT:
SPECIFIC REQUEST(S)OR RECOMMENDATION(S)&BACKGROUND AND JUSTIFICATION
RECOMMENDATIONS:
1 . Request the County Administrator to forward his report on
the cost of implementing the child care tax credit to
Congressman George Miller for his information.
2 . Request the County Administrator to forward copies of his
report on the cost of implementing the child care tax credit
to members of the Child Care Task Force and notify them that
the Internal Operations Committee would like to meet with
them on March 13 , 1989 at 8 : 00 A.M. to discuss the status of
several child care related issues.
3 . Leave this item on referral to our Committee.
BACKGROUND-
On December 13 , 1988 , the Board of Supervisors referred to our
Committee the issue of the cost to implement the suggested
changes in the child care tax credit. These included an increase
in the maximum allowable child care costs, an increase in the
percentage of those costs which are deductible and reimbursement
of unused child care credits to low-income households.
The County Administrator' s Office presented us with the attached
report on February 13 , 1989. The report shows that many low-
income households cannot afford to pay large amounts for child
care and, therefore, an increase in the maximum allowable is of
little benefit to them. While an increase in the percentage of
child care costs which can be deducted would be helpful to low-
income families, many do not actually get the benefit of the
child care credit because they owe little or no income tax.
CONTINUED ON ATTACHMENT: X YES SIGNATURE:
RECOMM NDATION OF CO_ TYA MINI TRATOR X RECOMMENDATIO OARD COMMITTEE
X APPROV O HER G"
SIGNATURE(S): om Power Sunne Wright McPeak
ACTION OF BOARD ON February 28. 1989 APPROVED AS RECOMMENDED X OTHER
VOTE OF SUPERVISORS
I HEREBY CERTIFY THAT THIS IS A TRUE
X UNANIMOUS(ABSENT I I I ) AND CORRECT COPY OF AN ACTION TAKEN
AYES: NOES: AND ENTERED ON THE MINUTES OF THE BOARD
ABSENT: ABSTAIN: OF SUPERVISORS ON THE DATE SHOWN.
CC:
County Administrator 078 /989
Director, Community Development ATTESTED
Social Services Director PHIL BATCHELOR LERK OF THE BOARD OF
Members , Child Care Task Force (via CAO) SUPERVISORS AND COUNTY ADMINISTRATOR
Congressman George Miller (via CAO)
BY DEPUTY
M382 (10/88) ff
Page 2
Therefore, , the report concludes that the most beneficial change
for low-income households would be to reimburse them for unused
child care credits which exceed their income tax liability, along
the same lines as the earned income credit which benefits
households with an employed adult, a minor child and an adjusted
gross income below $11, 000. This would be of substantial benefit
to low-income households, with or without an increase in the
percentage of child care costs which can be deducted.
Our Committee would like the report shared with Congressman
Miller. In, addition, our Committee would like to meet with the
Child Care Task Force to discuss this report, plans for
legislation at the State level, and the status of efforts to get
the cities to agree to increase their transient occupancy tax.
OFFICE OF COUNTY ADMINISTRATOR
CONTRA COSTA COUNTY
Administration Building
Martinez, California
Supervisor Tom Powers
To: Supervisor Sunne McPeak Date: February 7, 1989
INTERNAL OPERATIONS
From: Claude L. Van Marter Subject: Child Care Tax Credit
Assistant Administrato
On December 13, 1988, the Board of Supervisors referred to your
Committee the issue of what the Board' s previous child care tax
credit would cost. In an effort to arrive at some. analysis of
this data, our office wrote to Congressman George Miller
requesting information from the Internal Revenue Service. We
received, in response to our request, a detailed analysis of 1985
income tax returns and, in reviewing this income tax information,
have reached the following conclusions:
• In 1985, there were 101.7 million individual income tax
returns filed with the Federal Government.
® Of these, 8.4 million claimed $3 .1 billion in child care
credits. Of this number, 1. 9 million were from individuals
whose adjusted gross income was under $15,000 . These
claims for child care totaled $669.7 million. An
additional 1. 1 million individuals with adjusted gross
incomes between $15,000 and $20,000 claimed $463.7
million in child care costs. These figures, however,
include 957,526 returns claiming $314,324,000 in child
care credits where the individual was classified as
"non-taxable" , meaning that after the application of the
child care tax credit they had . no tax liability.
This data can perhaps better be displayed as follows:
Cum o
Income # of Cum o Credits of
Level Returns of Total Claimed Total
Under $5000 32,734 < to $ 4, 800,000 < to
$5000-$10,000 696,856 8 .70 $ 175,053 ,000 5 .70
$10, 000-$15 ,000 1,153 ,487 22 . 30 $ 489,850,000 21. 40
$15,000-$20,000 , 1,072, 872 35 . 10 $ 463 ,646,000 36 . 20
$20,000-$25 , 000 996, 644 46 . 90 $ 382, 137,000 48 . 40
$25, 000-$30,000 934,722 58 . 0% $ 319 ,187,000 58 . 60
. Above $30, 000 3 ,530, 207 100. 00 $1,293, 028,000 100 . 00
Page 2
In interpreting these figures, one must remember that the maximum
amount of ' child care which could be claimed was $2400 for one
child and $4800 for two or more children. In addition, only a
percentage of that amount could be claimed. For those with
incomes below $10,000, 30o could be claimed. This percentage is
reduced to 20o for those with incomes above $28,000. As an
example, those with incomes between $10,000 and $15 , 000 claimed
an average of $425 . 00 each in child care expenses for the entire
year. However, as will be seen shortly, it is unlikely that most
of the lower income individuals actually received the full
benefit from the child care credit.
Let us take as an example the group making between $5,000 and
$10,000 per year and display their income, deductions, credits,
and taxes as follows:
ANALYSIS OF RETURNS FILED WITH AN ADJUSTED GROSS INCOME BETWEEN
$5,000 AND $10,000
DESCRIPTION RETURNS DOLLAR AMOUNT
Totals $16, 156 ,293
Adjusted Gross Income . $121,857,916,000
Minus Deductions & 35,881,885,000
Exemptions
Taxable Income $ 85,976, 031,000
Deductions & Exemptions 1, 989 , 981
Exceed AGI
Income Tax on Taxable Income
before Credits 14, 166,312 $ 5,722,761,000
Claimed Credits ( including
Child Care Credit) 3,308, 254 $ 653, 414,000
Claimed Credits Eliminate
Tax Liability 2 ,144,848
Income Tax after Credits 12,021,464 $ 5,069, 347, 000
Alternative Minimum Tax 1,596 $ 15,174 ,000
Total Income Tax 12,023, 060 $ 5,084, 521,000
Number of Returns Paying
No Tax 4,133 ,233
Tax as a o of AGI 4 . 2%
Average Income Tax Paid $315
Let us look more carefully at the credits that were claimed,
including the child care credit, and determine what happens to
the child care credit.
. i
Page 3
Average Adjusted Gross Income $7,542
Average Deductions & Exemptions $2,221
Average Taxable Income $5 , 321
Average Income . Tax before Credits $ 404
Average Child Care Credit $ 251
Balance of Tax Liability $ 153
Average Earned Income Credit $ 169
Taxes Due $ 0
We have included the earned credit in these cases because
practically every person with an adjusted gross income under.
$11,000 who has a child in the home and earned income is entitled
to the earned income credit. This credit provides a credit of up
to $550. This credit not only reduces taxes to zero, but if
there is a remaining balance it is rebated to the taxpayer. At
this income level a total of 2,659,056 taxpayers received actual
rebates on their taxes totaling $898,352,000, or an average of
$337 . 80 each. These taxpayers paid no federal income tax and
actually received a rebate from the federal government.
It seems reasonable, therefore, to conclude that families in the
$5000 to $10,000 income bracket are receiving a child care credit
of $251 which directly reduces their taxes and an earned income
credit which eliminates their income tax liability, the balance
of .which is directly rebated to them. The maximum child care
credit for this income group is $720 for one child and $1440 for
two or more children. Of the total returns filed in this income
group, 3 ,880,937 contained an exemption for one or more children
in the home and are probably . the ones more likely to have
received the child care credit and the earned income credit.
This income group also contained 3,095,866 returns which claimed
an exemption for an individual over the age of 65 and are
unlikely to have also received the child care credit or the
earned income credit. Of the 3 ,880,937 returns which claimed an
exemption for one or more children living in the home, only
827,205 had a tax liability. This liability averaged $214.
If we move to the group with incomes between $10,000 and $15,000,
we see a different picture because only those with incomes of
less than $11,000 are entitled to the Earned Income Credit.
Page 4
i
DESCRIPTION RETURNS DOLLAR AMOUNT
Totals 13 ,821,764
Adjusted Gross Income $171 ,940, 239, 000
Minus Deductions and
Exemptions $ 38,755,005,000
Taxable Income $133 ,185,234, 000
Deductions & Exemptions
Exceed AGI 233,745
Income Tax on Taxable Income
before Credits 13,585,713 $ 12,927,133,000
Claimed Credits (including
Child Care Credit) 2,615,854 $ 759,376,000
Claimed Credits Eliminate
Tax Liability 436,786
Income Tax after Credits 13,148,927 $ 12,167,757,000
Alternative Minimum Tax 3,265 $ 7,168,000
Total Income Tax 13 ,152,192 $ 12,724,925,000
Number of Returns Paying
No Tax 669,572
Tax as a o of AGI 7. 10
Average Income Tax Paid $881
Let us again look more carefully at the credits that were
claimed, including the child care credit, and determine what
happens to the child care credit.
Average Adjusted Gross Income . $12,440
Average Deductions & Exemptions $ 2,804
Average Taxable Income $ 9,636
Average Income Tax before Credits $ 952
Average Child Care Credit $ 425
Balance of Tax Liability $ 527
Average Earned Income Credit
(Returns with AGI under $11,000) $ 60
Taxes Due (Incomes $10, 000-$11,000) $ 467
Taxes Due ( Incomes $11,000-$15,000) $ 527
Again, we have included the Earned Income Credit for those
households whose adjusted gross income was under $11,000. At
this income level, 113, 146 taxpayers received actual rebates of
$5, 584,000 or an average of $49 each.
Page 5
i
Again, thel maximum child care credit for this group varied from
$648 to $696 for one child (at 29%, 28%, or 27% of the maximum
allowable of $2400) , and from $1296 to $1392 for two or more
children (at 290, 280, or 270 of the maximum of $4800 for two or
more children) . Of the total returns filed in this income group,
4 ,149,793 contained an exemption for one or more children in the
home. These are felt to be the returns which were most likely to
benefit from the child care credit.
The Board of Supervisors has proposed some combination of three
changes to the child care credit: Increase the maximum
deductible amount from $2400 for one child to $3600, and from
$4800 for 'two or more children to $7200. Second, increase the
percentage of the deductible child care costs which can be
deducted, and third, institute an actual rebate of any unused
child care credits once total tax liability has been eliminated.
Since we have no data on the actual cost of child care, it is
difficult . to estimate how much increases in the maximum .
deductible for child care would cost. However, since the average
child care credit being claimed is well below the maximum
allowable, it appears that simply increasing the amount which can
be deducted may not be of much help. We can probably assume that
the problem at these income levels is that the family does not
have enough money to afford quality child care. Allowing them to
deduct more when they can only claim 300 of their costs probably
will not help. What the group with incomes under $10,000 appear
to need is subsidized child care so that they can improve the
quality of their child care without having to spend any more
money doing so.
This becomes more evident when you see that the group in the
$10,000 to $15,000 incomes are claiming substantially more in
child care credits, even though the maximum amount they can claim
is less than is true with the groups below $10,000 in income.
One might postulate that groups with up to $15,000 in income are
able to spend more of their income on child care, thereby
permitting them to claim more of a credit on their income taxes.
Likewise, given the information we have available, families with
incomes below $15,000 are not going to be helped to any great
extent by increasing the $2400 and $.4800 limits. They simply
cannot afford to pay more than that for child care. Without more
detailed information on the actual claims for child care, it is
impossible to estimate what impact an increase in child care
would accomplish.
Page 6
I
The one suggestion which does seem to be of value to those with
incomes below $15,000 is the idea of rebating allowable child
care credits which are now lost because there is no tax liability
before or during the application of tax credits. In the income
groups with income between $5,000 and $15,000, there are 2 . 2
million returns which had no tax liability after the application
of deductions and exemptions, but before the allowance of any
child care credits. To the extent that these families had child
care credits, a rebate would have been of considerable value.
For instance, there were 3,468,015 returns filed with incomes
between $5,000 and $15, 000, and four or more exemptions other
than for age or blindness. Of these, only 1,716,164 had any tax
liability after the application of these exemptions. Thus, all
child care credits for some 1,751,851 families in this group were
lost because the family had no tax liability. Those with incomes
between $5,000 and $15,000 claimed an average of .$359 each in
child care credits. If these 1,751,851 families could have
claimed the average amount of child care credit, the rebate would
amount to $628 ,914, 509 without doing anything to increase the
maximum allowable credits or the percentage of that maximum which
can be claimed.
Following is a table which demonstrates the value of the rebate
for those who have no tax liability after the application of
deductions and exemptions, but before tax credits like the child
care credit are applied:
RETURNS WITH ZERO COST OF REBATE
INCOME LEVELS TAX LIABILITY AFTER AT AVERAGE CHILD
UNDER $20,000 DEDUCTIONS & EXEMPTIONS CARE CREDIT*
Two Exemptions 3 ,960,619 $1,518,540, 931
Three Exemptions 1,209,385 $ 463 ,690, 303
Four Exemptions 1,503 ,577 $ 576, 486,458
Five or more
Exemptions 1,282,353 $ 491,666 ,964
TOTALS 7, 955, 934 $3 , 0501384 ,656
*A total of 2, 955,949 returns with incomes below
$20, 000 claimed a total of $1,133,349 , 000 in
child care credits for an average of $383 . 41
per return.
J i
Page 7
Therefore, it seems safe to indicate that if a rebate were
instituted for all unused child care credits for families with
two or more exemptions and incomes below $20,000 that did not
have an exemption for age or blindness, the cost of the rebates
might exceed $3 billion on the basis that many people without any
tax liability probably did not bother to claim the credit.
In addition, there were. 2 . 5 million returns which eliminated all
tax liability in the process of applying tax credits, primarily
the child care and earned income credit. Since the child care
credit is applied first to any existing liability and then the
earned income credit is applied to remaining liability with any
remaining balance being rebated, it is more likely that these
groups got full credit for their child care credit. However,
clearly some did not and a rebate of the unused child care credit
would provide much needed cash in their pockets.
A great deal of useful information is available on the
application of the child care credits and additional data can be
provided to your Committee, if you wish. This very preliminary
analysis is only a starting point.
CLVM:clg