Will The Bigger Childcare Tax Credit Solve America’s Childcare Crisis?
Former JPMorgan Chase Global Chief Economist (PH.D in Economics) & Current Global Keynote Speaker
Getty Images: SDI Productions
During a recent in-person client presentation, I was asked if we are doing enough to address the widespread shortage of childcare services for working parents. My response was that, given the “severe shortage of existing services,” we are not. I also promised to explore what is currently being done and what possible solutions are available from a nonpartisan perspective, because this issue impacts families on both sides of the political spectrum.
As families across the U.S. struggle with only one childcare slot for every 3 to 5 slots needed, the Big Beautiful Bill Act (BBBA), scheduled to be signed by the President into law on July 4, 2025 at 5:00 PM EST, included a provision to expand the Employer-Provided Childcare Tax Credit—known as Section 45F.
The big question on everyone’s mind is whether the most aggressive federal incentives to date will eliminate the widespread shortage of childcare services needed by working families. A 56-page bipartisan study found that for every $1,000.00 increase in a state’s childcare tax credit, the number of childcare slots increases by four per hundred needed. The study also found that if the tax credits were refundable, they would double the number of childcare slots to nine per 100 needed. Unfortunately, the previously enacted employer childcare tax credit and the 2025 BBBA employer tax credits remain non-refundable.
This means that although the BBBA is a step in the right direction, it is likely to fall short of eliminating the childcare shortage for families in need!
State-Funding
A recent survey showed that the average state funding for childcare for children aged 0-5 years was $1,300, which is much less than the $4,600 typically spent on children in grades K-12. This is important because studies show that the highest rate of brain development happens during a child's first five years.
A Generous Upgrade
The original Section 45F tax credit, enacted in 2001, allowed employers to claim up to $150,000 annually for eligible childcare construction expenses and to deduct 25% of qualified childcare costs. However, less than one percent of the 70,000 businesses eligible to claim the credit in the survey used the tax credits.
Why the dismal uptake?
· It was non-refundable, so companies without tax liability couldn’t take advantage of the tax credit.
· Regulatory complexity, including state licensing laws and facility standards, made implementation costly and bureaucratically overwhelming.
The 2025 BBBA aims to address some of these issues. With a higher return on investment in onsite childcare and increased spending caps to $500,000 and $600,000, employers can now cover a larger share of construction and operating costs.
The tax credit for large employers was increased from $150,000 to $500,000 annually, with coverage rising from 25% to 40% of qualified employer childcare expenses. The credit is even more generous for small businesses (with 2025 gross receipts under $31 million), covering up to $600,000 annually, with coverage increasing to 50% of qualified expenses. Small businesses will also be allowed to team up with other small firms to qualify for the credit, lowering the barrier to entry.
These provisions significantly lower the after-tax cost of employer-provided childcare, especially for large firms. When fully utilized, the $500,000 credit can be applied to $1.25 million in eligible expenses for large employers. In comparison, small businesses can use the $600,000 credit to offset $1.2 million in costs—a substantial increase.
Reality Check
In theory, increasing the tax incentive should result in more employer-sponsored childcare options and help alleviate the ongoing shortage of childcare slots that American families face. However, a 2023 survey by the Bipartisan Policy Center found that for every available childcare slot, there are up to three to five children in need.
While the BBBA addresses some of the cost issues of the old Section 45F, adoption is still likely to be insufficient to fully close the childcare gap because the tax credits are non-refundable. Startups, low-margin businesses, and many nonprofits—who often employ a disproportionately high number of women and parents—may not benefit unless they have significant federal tax liabilities.
For many small businesses operating on thin margins, even a 50% credit may not cover the risk or capital expenses. Establishing childcare facilities still involves navigating the regulatory maze of:
State-specific licensing,
Local zoning,
Staffing mandates (often requiring certified early childhood educators),
Liability insurance,
Compliance inspections.
These costs remain prohibitive for small businesses, especially those lacking established HR or legal infrastructures. Therefore, even with higher credits, many firms—particularly those in urban areas or with small footprints—won’t have the space or scale to offer on-site childcare. While the pooling provision shows promise, it requires:
Coordination across firms,
Shared geography,
Legal agreements,
Shared financial commitment.
Winners
Large national childcare providers are well-positioned to partner with large employers or develop branded, co-located facilities. They already have the necessary licensing, HR, and infrastructure in place.
The $500,000 cap makes a significant investment in childcare more appealing for large employers. These companies can justify childcare as a means to attract and keep talent.
The bill’s pooling provision will also enable companies to work together through intermediaries, creating opportunities for childcare co-ops or commercial providers that handle services for multiple small businesses.
Losers
In contrast, small and low-profit employers may still be unable to take advantage of the expanded program. Even with the $600,000 cap and 50% cost coverage, these employers often lack the administrative capacity or physical resources to sponsor childcare.
What About the Separate Employee-Based Childcare Tax Credit?
The good news is that the childcare tax credit will increase to $2,200 for 2025, with a cap of $1,700 on the refundable portion. The credit will be adjusted for inflation starting in 2026. Still, given the shortage of childcare slots, the family childcare tax credit will primarily boost demand and have little impact on addressing the supply shortfalls in the market.
The $1,700 refunding cap gradually applies based on earnings exceeding $2,500, which is why low-income families may not receive the full credit. Families earning $2,500 or more can claim a childcare credit of 15% of their income. As a result, part-time workers earning less than $2,500 may not qualify for any part of the childcare tax credit. For instance, a family with three children would need to earn at least $40,000 to get the full refundable amount. Conversely, families earning up to $400,000 still qualify for the entire childcare tax credit.
With this income formula, the families of up to 22 million children could be excluded from some or all of the family childcare tax credits due to low income levels.
Summary and Concluding Thoughts
The consensus view argues that the recently enacted employer tax credits may be insufficient to address the childcare shortage. It suggests making childcare employer and family tax credits fully refundable, and pairing them with direct subsidies to providers. Currently, only the employee-based childcare tax credits are partially refundable based on a family’s income.
Offering incentives, such as free training or tax incentives, to workers joining the childcare sector workforce, which currently stands at 1.1 million, could help address shortages of 250,000 to 300,000 workers.
Source: U.S. Bureau of Labor Statistics
The BBBA offers a significant improvement over the lower and underutilized Section 45F tax credit. By raising both the cap and the percentage of eligible expenses covered, and permitting pooling arrangements, the revised credit is likely to encourage more investment in childcare services, especially among larger employers.
Still, ongoing barriers—particularly the non-refundable aspect of employer-based tax credits, regulatory challenges, and the difficulty of providing onsite care for smaller businesses—mean that the childcare industry will continue to struggle to meet demand. Currently, the childcare market can satisfy only 20-25% of the demand for childcare services.
While the BBBA’s employer childcare provisions are a promising development, expecting employers alone to solve America’s childcare crisis could lead to disappointment, once again.