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Incentives at the Eligibility Threshold: An Examination of Child Care Financial Assistance Policies Open Access

For families with children, employment comes at a price. They must subtract from their wages the cost of someone else caring for their child. Their wage minus the costs of obtaining child care, transportation, and other expenses that may be generated by employment is generally referred to as the effective wage. The Child Care Development Fund (CCDF) child care subsidy voucher, the Earned Income Tax Credit (EITC), and the Child and Dependent Care Credit (CDCC) are all intended to increase the effective wage of parents to support them entering and staying in the workforce. This paper explores the trade-offs between employment and effective wage that parents must make through the lens of three hypothetical North Carolina families facing promotion, bonus, and employer relocation opportunities. Through their eyes we understand why it would be rational to turn down these opportunities due to the potential loss of thousands of dollars in benefits. These situations demonstrate the weaknesses of the current system, where the needs of employers and employees become increasingly opposed as families approach the income eligibility threshold and the portability threshold. This paper proposes a policy to better align the needs of employers and employees by restructuring the incentive system to phase out benefits gradually, guarantee help to anyone who is eligible, make support sensitive to regional changes in child care prices, and administer it through the tax system rather than local social services offices throughout the country. While this paper focuses on the child care benefit system, the framework used to explore the issues of reversed incentives at the eligibility threshold can be applied to any social policy with income eligibility requirements.

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