Using Tax Credits to Promote High Quality Early Care and Education

by Louise Stoney and Anne Mitchell

Tax credits have been used in a variety of policy areas to encourage
increased investments in programs seen as "social goods," such as clean
energy and charitable donations. This paper explores financing
strategies for early childhood programs by examining whether carefully
crafted individual or business tax credits/deductions could 1) help
finance early care and education; 2) spur additional private investment;
and 3) create incentives for families to use, and early childhood
program to offer, high-quality services. The researchers examine a range
of tax incentives that have been used in other fields and could serve as
models for early care and education finance, such as consumer/individual
tax credits and deductions; occupational tax credits and deductions; and
investment tax credits, deductions and abatements for firms. The
findings suggest several recommendations about how to best structure and
use tax credits. Among the key points: cost and stability of credits are
critical; tax credits must be well linked to high quality "products," in
this case early childhood programs; if high quality programs are
desired, parents must have ways to distinguish them, thereby making
public education about quality important; and, for the tax credits to be
effective, administration should be simple and infrastructure in place.

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