America's (d)evolving Childcare Tax Laws

• Publication year: 2019

America's (D)evolving Childcare Tax Laws

Shannon W. McCormack
University of Washington School of Law

AMERICA'S (D)EVOLVING CHILDCARE TAX LAWS

Shannon Weeks McCormack^*

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Proponents touted the Tax Cuts and Jobs Act (the TCJA)—enacted in the twilight of 2017—by claiming it would help American working families. But while the TCJA expanded some benefits available to parents with dependent children, these parental tax benefits may be claimed regardless of whether or to what extent childcare costs are incurred to work outside the home. To help working parents with these (often significant) costs, Congress might have turned to two other mechanisms in the tax law—the "child and dependent care credit" and the "dependent care exclusion." While these childcare tax benefits are only available to working parents that pay for childcare, stringent limitations have kept many from recovering anything near their actual costs, particularly in the critical years before children reach school-age. As a result, the Code was taxing families with different childcare needs inequitably. And because the TCJA left these childcare tax laws untouched, it did nothing to address this problem. By exploring critical junctures in their development, this Article seeks to understand how America's tax laws have (d)evolved in this manner and, in doing so, situates some of the TCJA's alleged reforms into their historical context.
America's childcare tax laws have not always been so limiting. In the seventies and eighties, the Code evolved significantly to allow working parents to claim relief for

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a relatively substantial portion of their childcare costs, resulting in more equitable taxation of family models. But in the decades following this evolution, Congress generally failed to adjust childcare tax benefits—even for inflation—allowing them to devolve in real value as childcare costs rose. Meanwhile, Congress created new and expanded existing tax benefits available to all parents even if they did not need childcare. Thus, over the past several decades, Congress not only restored but also perpetuated the inequitable taxation of different family models that had been remedied by earlier reforms. The changes made by the TCJA are, therefore, just the latest iteration of a decades-old trend.
In addition to revealing that the TCJA was a tepid if not specious attempt to address the working family's plight, this history raises broader questions of political feasibility. This Article identifies several factors such as increased legal complexity, sophistic political rhetoric and changed normative expectations to explain the electorate's seeming apathy to our childcare tax laws' (d)evolution. Using this context, this Article argues that even modest changes to our childcare tax laws, while incapable of enacting systemic changes on their own, could nevertheless enact historically significant reform and revive dormant debates about the role the American government should play in supporting parents.

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TABLE OF CONTENTS

Introduction............................................................................1096

I. The Childcare Tax Laws' Early History..........................1104

A. PRESENT LAW AND A PRIMER ON BASIC TAX PRINCIPLES1105
B. THE JUDICIARY'S ROLE IN SHAPING OUR CHILDCARE TAX LAWS.....................................................................1110
C. EARLY CONGRESSIONAL ACTION AFTER SMITH..............1113

II. The Childcare Tax Laws' Evolutionary Period............1116

A. BIT ABOUT THE SIXTIES: A LOT OF ACTIVISM, MODEST CHILDCARE TAX REFORM.............................................1116
B. THE SEVENTIES AND EIGHTIES: THE CHILDCARE TAX LAW'S EVOLUTION........................................................1123

III. Decades of Stagnation: The Childcare Tax Law's (D)evolutionary Period...............................................1132

A. THE EROSION OF CHILDCARE TAX BENEFITS: INACTION IS ACTION.....................................................................1133
B. THE EVOLUTION OF OUR PARENTAL TAX LAWS: MAKING ALPHABET SOUP...........................................................1142

1. The Earned Income Tax Credit (EITC)..................1143
2. The Child Tax Credit (CTC) and the Additional Child Tax Credit (ACTC) ...................1145
3. Other Relevant Changes in Parental Taxation Law Pre-TCJA: The Zero Bracket........................1148
4. Shifted Priorities, Perpetuated Inequities..............1149

C. THE TCJA: MORE OF THE SAME.......................................1150

IV. Using the Past to Inform the Future of America's Childcare Tax Laws......................................................1151

A. PUBLIC SENTIMENT: WHERE THERE WAS OUTRAGE, APATHY ........................................................................1152
B. CHILDCARE TAX LAW REFORM: INCREMENTAL, MONUMENTAL CHANGE...............................................1161

Conclusion...............................................................................1166

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Introduction

Increasingly, American working parents find themselves in a "care crisis,"¹ struggling to pay childcare costs, which can exceed rent and college tuition² and are reportedly rising faster than both inflation³ and their salaries.⁴ At least when campaigning, politicians and lawmakers from the left, right and center seem to agree that this problem must be addressed.⁵ There is, of course, far less agreement about how to do so.

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Proponents of the Tax Cuts and Jobs Act (TCJA)⁶ created a sticky narrative, which painted it as a relief measure for working families.⁷ But while the TCJA expanded some benefits available to parents with dependent children, these parental tax benefits do not depend on whether or to what extent childcare costs are incurred to earn income.⁸

To address these expenses, Congress could have reformed two provisions in the Internal Revenue Code (the "Code"), which allow working parents to recover some childcare costs. Due to strict limitations, many working parents—especially those with preschool aged children—were only able to claim tax relief for a fraction of their annual costs.⁹ As a result, the Code was taxing families with different childcare needs inequitably. The TCJA, however, did not alter these "childcare tax laws" and thus failed to address this problem.¹⁰ By exploring critical junctures in the development of these laws, this Article seeks to understand how America came to tax parents in this inequitable manner.

The story starts with a case called Smith v. Commissioner.¹¹ Decided in the 1930s when, according to the Board of Tax Appeals

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(B.T.A.), "the working wife [wa]s a new phenomenon,"¹² the Code did not yet explicitly address whether working parents could recover childcare costs in order to reduce their taxable income.¹³ Instead, the Smiths asked to deduct these costs under general sections of the Code that allow taxpayers to fully deduct expenses "ordinary" to a trade, business, or other profit-seeking venture.¹⁴ The B.T.A. declined, deciding that the expenses were personal.¹⁵ When a "wife has chosen to employ others to discharge her domestic function" in order to venture into the external workplace, she may not, the B.T.A. concluded, deduct the costs of doing so to reduce her federal income taxes.¹⁶

After Smith, lawmakers began to debate the (then explicitly gendered) question of whether working mothers should be able to recover the costs of childcare when calculating their tax liability.¹⁷ In 1954—a year in which the Code was so massively reorganized that it was re-codified in its entirety¹⁸ —this question was the subject of robust debates, which centered on whether the government should provide tax relief only to mothers that needed to work outside the home or also to mothers that participated in the external workplace when financial necessity did not require it. One congressperson, for instance, spoke scornfully of the "women . . . who . . . neglect [their family] obligations . . . to work and earn money which they can spend upon themselves in spite of the fact that their husbands are earning enough for a pretty fair living."¹⁹

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Congress ultimately crafted the 1954 laws to provide tax relief only to mothers that had to enter the paid labor force. Regardless of their means, single mothers and "widowers"²⁰ were entitled to deduct (i.e. subtract from their taxable income) childcare expenses up to a dollar maximum designed to cover most, if not all, of their childcare costs.²¹ But for "working wives," the full deduction was only available if she and her spouse earned less than a designated amount. This amount hovered around the median income for all American families and was slightly less than the median income for two-earner families at the time.²² The deduction was phased out once a family's income exceeded this level and lost completely once it exceeded an amount close to the median income for two-earner families in 1954 (about 120% of the median income for all American

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families that year).²³ The Code, therefore, taxed single parents and widowers rather equitably, as well as married parents of low and moderate means. But by deliberate design, the Code favored the one-breadwinner model for married families of above-moderate means.

Starting in the 1960s, however, some highly visible, feminist groups²⁴ pressured lawmakers for legal reforms that would make childcare affordable for all working mothers, sometimes even identifying tax reform as part of that agenda. In its founding documents, for example, the National Organization for Women (NOW) demanded "[i]mmediate revision of [the] tax laws to permit the deduction of home and child-care expenses for working parents"²⁵ and organized a "Baby Carriage Brigade" outside of the u.S. Tax Court to support a working mother claiming the constitutional right to deduct childcare costs.²⁶ Pushing strollers, demonstrators protested what...