Child Care Tax Credits: substantial pass-thru, over half of every dollar is passed through to care providers in the form of higher prices and wages

Give Credit Where?: The Incidence of Child Care Tax Credits. Luke P. Rodgers. Journal of Urban Economics, https://doi.org/10.1016/j.jue.2018.10.002

Abstract: The cost of child care can affect a family’s employment, location, and commuting decisions. Child care tax credits are intended to relieve the financial burden of child care for working families, yet the benefit incidence may fall on child care providers if they increase prices in response to credit generosity. Using policy-induced variation in the Child and Dependent Care Credit, this paper presents evidence of substantial pass-through: over half of every dollar is passed through to providers in the form of higher prices and wages. Increased non-refundable credit generosity may have the unintended effect of making child care less affordable for low-income families, a result with distributional and spatial implications due to income sorting of families within an urban area.