Ideas for Infusing Capital into Childcare Centers During COVID-19

COVID-19 blog series

As the country has been wrestling with “reopening” the economy over the past month, attention at the local, regional, and national level has grown regarding childcare’s critical and foundational role in the economy. A recent ICS survey of South Carolina childcare providers, performed in April, underscores this concern with nearly 50% of centers closing and two in three children under the age of five living in households where childcare was necessary in order for guardians to hold employment. Further, the average loss per childcare center, at the time of the survey, was $50,000.

Consensus is beginning to coalesce around the idea that without adequate access to childcare, any “reopening” of the economy will be stunted and incomplete; yet, financial capital remains a critical issue for centers to reopen. And with every passing day that centers remain closed, that problem becomes worse, making it less likely that closed centers can reopen (even if they want to). Even more concerning, the number of children in need of childcare far exceeded the available number of spots pre-pandemic, especially in South Carolina. As a result, without intervention, the existing shortage could potentially be made even worse by COVID-19 negatively impacting a generation of young children, their development, and their families’ economic status.

In light of this, the Institute for Child Success brainstormed market-based solutions for infusing capital into childcare centers. They include policy solutions that drive funds to childcare centers directly and indirectly through various mechanisms. All solutions are currently part of existing South Carolina law, and would only need slight amendment and redefinition of terminology. A recording of this webinar, where solutions are explained in depth, is available as is the PowerPoint presentation. In summary, ideas for potential solutions are as follows.

Increase scope of current tax credits to incentivize families’ utilization of childcare

There are three nonrefundable tax credits currently part of tax code that if expanded, increased, and/or made refundable would significantly incentivize utilization of childcare, thereby driving up enrollment. Changes could be implemented for a period of time or even indefinitely. These credits include:

• Federal Child Dependent Care Tax Credit (CDCTC),
• South Carolina Child Dependent Care Tax Credit, and
• SC Child Care Program Credit.

For example, the Federal CDCTC is 20%-35% the amount spent on childcare. If a family earning the maximum income limit ($43,000) spends the average in South Carolina on childcare for one child – $6,300 per year – then the Federal CDCTC comes out to $1,200. This means that $1,200 is deducted from that family’s overall tax burden. Increasing this credit to a higher percentage would reduce tax burdens even further and indirectly put funds in the hands of families and childcare centers – a double win. Making it partially or fully refundable would go even further to boosting the economy.

South Carolina’s Dependent Care Tax Credit is relative to the Federal CDCTC. SC’s credit is 7% of the Federal one. Using the same family as above, SC’s credit would come to $210. And the same logic holds true: increasing this credit to a higher percentage and/or making it refundable has a double effect, putting capital in the hands of families specifically for childcare centers.

Changing definitions of tax credits to include childcare centers

On a separate front, there are two investment tax credits that currently exclude childcare centers but could be amended to benefit the sector: the SC Community Development Tax Credit (CDTC) and the Angel Investor Credit. Both credits incentivize investment into “approved” entities. Expanding the definition of what entities could be “approved” could increase capital directly to childcare centers.

The SC CDTC, for example, is a credit for tax payers that invest in “community development corporations.” Currently, 33% of investments and 50% of donations are tax deductible. Given the economic and child-development importance of childcare, one could easily make the case that childcare facilities fall under “community development.”

Other Opportunities

Two other solutions arose – one aimed at sustainable workforce and the other a public-private endeavor. The first is around student loan forgiveness for childcare workers. An existing program is on the books through the US Department of Education; however, it has not been funded since 2005. As it is written, student loans can be 100% forgiven after five years of service. Funding this program and perhaps even increasing it for childcare workers during COVID-19 could incentivize a return to the workforce for many who were laid off or elected to leave due to health concerns.

Lastly, we discuss a solution that brings together childcare centers, philanthropy, and banks. Grantmakers/philanthropies are often looked to by childcare facilities for capital, yet these funders also have other commitments and often cannot easily come up with significant amounts of cash quickly. However, one mechanism most philanthropic organizations do have at their disposal is their significant endowments which is currently being used parochially. In times of great emergency, as this arguably is, philanthropies could leverage their endowments as collateral and co-sign low-interest loans to childcare facilities from participating banks. This has a way of infusing capital into the market without anyone actually having to come up with new cash. In fact, if paired with the SC CDTC, for example, this could be even more attractive. Risk is mitigated for banks, philanthropies use their wealth to get more money into the childcare sector, and childcare facilities can access low-interest capital in order to reopen.

Even one of these solutions taking hold would help to stabilize the childcare sector and the development of thousands of children in South Carolina. Yet, no singular one will solve the overall problem of access, which existed before COVID-19. Full access to quality and affordable childcare was an issue before the pandemic, and it will continue to be in the years following. It just may be that COVID-19 is the impetus we all need in order to solve this issue in earnest.