BILL ANALYSIS AND FISCAL IMPACT REPORT	Page 1 of  2

DATE:  February 18, 2001	Submitted by: TAXATION AND REVENUE DEPT.
	T. GLENN ELLINGTON, SECRETARY
BILL NUMBER: SB - 586

SPONSOR: Senator Ingle

BILL SHORT TITLE: Child Care Quality Investment Tax Credit

CONFLICTS, DUPLICATES, COMPANIONS: HB –10 and SB –97 proposes a gross receipts tax deduction, applicable on to for-profit daycare centers (approximately $2.5M); SB – 701 proposes a gross receipts tax deduction for licensed home-daycare facilities that provide lunches under the child nutrition program (substantially less money). 

DESCRIPTION: This bill provides both for-profit and not-for-profit licensed daycare centers an incentive for hiring more workers and improving the skills of the workers currently employed. The basic credit is equal to 80% of an increase in wages paid (including benefits) in order to bring the ratio of children under 24-months of age to child care workers from over four to one to under four to one. A supplemental credit is equal to 80% of the costs of training and educating child care workers currently working in a facility that cares for at least one child subsidized by CYFD and at least one child under age two. This training and education is qualified. These two credits may not exceed $20,000 per year. The bill proposes a third credit to provide an incentive for nationally accredited daycare centers to accept subsidized, low-income children. This credit is equal to 20% of the amount received from CYFD, but the credit may not exceed $20K in a year. This credit is named, “access to quality child care tax credit”. All credits must apply for the credit which, after approval, may be applied prospectively to withholding, gross receipts or compensating tax liability, in the same fashion that manufacturers apply for, and claim, the allowed amount of manufacturers investment credit. CYFD is directed to certify eligibility and provide documentation to TRD.

EFFECTIVE DATE: July 1, 2001

FISCAL IMPACT (Thousands of dollars):  		Note: Parenthesis ( ) indicate a revenue loss:
		Recurring or		
Estimated Impact on Revenues	Nonrecurring	Funds 	
	 FY 2002 	Full Year	     Impact     t     	             Affected          .             	
	(100) to (400)	(100) to (1,700)	Recurring	General Fund	

A portion of this credit is likely to be non-recurring. A daycare center that hires more workers to bring its under 2-year-old children to worker ratio under four to one gets the credit only once (see TECHNICAL ISSUES #1). The numbers above are discussed in the OTHER ISSUES AND IMPACTS section. The first fiscal year impact is substantially less than the full-year impact. Daycare centers must first increase employment to achieve the required ratio of less than four to one. Then, they must sustain this level of wages and ratio for twelve months, then apply for the credit. The Department may take a month or two to approve the prospective credit and then, and only then, will the daycare center be able to claim the credit. For education and training expenses, again the daycare center must pay the expenses, have them certified by CYFD, transmit the certification to TRD, which will approve the credit, and then, and only, then will the daycare center be able to claim prospectively the credit. Even in the case of  accredited daycare centers, the only short term cost is from those that currently have subsidized children. However, the typical facility may only have at most 5 subsidized children and qualify for only about ¼ of the maximum $10K credit. These amounts of credit are insufficient in all cases to stimulate much additional employment (80% for one year is sufficient, but the timing of the credit is so delayed as to be of little incentive to either additional hiring or training). The only cost of this credit may be 20% of the amount CYFD pays accredited child care facilities. In this eventuality, however, the state is “buying the base” with no improvement in quality child care. The $100K figure shown above is this base amount.

ADMINISTRATIVE IMPACT: If a substantial portion of the current 683 child care centers in the state qualify for and claim these credits, the approvals and claim applications must be automated. The new TRIMS CRS system is scheduled for implementation June, 2001. At this time, the cost of modifications has not been determined. In addition to TRD systems problems, this bill imposes an administrative burden on CYFD (small in comparison to the other approvals, payments and accounting accomplished by CYFD) and requires changes to forms, instructions and taxpayer seminar information. In addition, there will be many regulatory headaches.

TECHNICAL ISSUES:
1.	To prevent deliberate abuse of the incentive to reduce child to worker ratio, that portion of the credit should only be allowed once in a five-year period. Daycare centers are permitted under the bill to claim a credit based on an average ratio for the whole year of less than four to one, but then on Jan. 1 lay off the additional workers needed to sustain the four to one ratio. The next year, they can hire extra workers and again claim the credit. This alternate year strategy could be continued indefinitely.

OTHER IMPACTS AND ISSUES:
1.	Child welfare advocates have some provided data on the relationship between educational effectiveness of child care and the ratio of children to workers.

 Total licensed centers 	620	
% of centers that take subsidized kids	70%	
% of centers that take kids under 2	36%	
Maximum credit	20,000	
Maximum fiscal impact part 1	3,124,800	
Maximum recurring fiscal impact	1,562,400	
		
Total accredited centers	63	
% that take subsidized kids+ 15% incentive increase 	81%	
% that take kids under 2	24%	
Maximum credit	10,000	
Number of subsidized kids they'd need to take to get max credit	21	
Fiscal impact part 2	507,150 	
Likely recurring impact based on 5 kids per center	120,750 	
Base amount	98,250 	
		
Total maximum fiscal impact*	      3,631,950 	
Total plausible fiscal impact*	      1,683,150 	

2.	If the problem is low wages in the industry, raising the day care payments by CYFD is a lot more efficient way of subsidizing the industry.  Perverting the tax system to disguise the subsidy is not only more costly, but encourages additional social engineering via the tax code.