Anne King, Fellow

Low income families were a little-noticed casualty of the 2011 budget battles in Sacramento, losing a benefit worth $70 million. With the passage of Senate Bill 86, California's legislature took away a key feature of California's Tax Credit for Child and Dependent Care Expenses — its refundability — by simply deleting a few words in the state tax code.

Tax credits like California's are an essential support for working families. For families with children, child care is a necessary outlay in order to work and earn income. But child care is very expensive — a recent report by the National Association of Child Care Resource and Referral Agencies found that, in 2009, center-based care in California cost on average $11,580 per year for infants and $8,234 for four-year olds. That's why the federal government and over half the states offer a credit or deduction to help defray the cost of employment-related child care expenses.

Refundable credits, offered in 12 states — 13 before California's S.B. 86 — are particularly valuable for poor families. Many low-income families don't owe state income taxes or owe very little because their income falls below the taxable threshold after standard deductions and exemptions. If the state offers a refundable child and dependent care credit, such a family may receive a refund to defray the cost of child care. But if the state credit is non-refundable, that family receives little or no benefit, because a non-refundable credit only reduces the amount of tax due. Refundability is critical to ensuring that a tax credit for employment-related child care expenses provides meaningful assistance to low-income families.