New Build Back Better childcare entitlement will be costly for states

The House of Representatives passed their Build Back Better (BBB) plan last week, which includes a new childcare entitlement program. As I have written before, the program in its currently imagined state will drive up costs in two ways: It will send more government assistance to a larger share of families across the income scale, and it will increase the overall cost of childcare through wage mandates and added quality requirements for providers.

The Congressional Budget Office (CBO) estimates the program will cost $273.5 billion over the ten-year period ending 2031. However, well-known budget gimmicks and cost-sharing provisions mask the total costs in a few ways.

U.S. Speaker of the House Nancy Pelosi (D-CA) holds the final vote tally as the Build Back Better Act passes. November 19, 2021. REUTERS/Al Drago

As my AEI colleague Matt Weidinger recently pointed out, Democrats used “10 years of tax hikes to cover the cost of often just a few initial years of new benefits.” The new childcare program is a perfect example of this questionable strategy. The BBB plan only authorizes the new childcare program through 2027 even though new taxes and expected revenues extend through 2031. The CBO estimated that the childcare program would cost the federal government $58.8 billion in 2027 when fully implemented; suggesting the actual ten-year cost of the childcare program would be over $500 billion if funded completely. If Congress extends the program beyond 2027, as many progressives believe it will, the additional costs will require either tax hikes or greater deficit spending.

Another way the House hides the full cost is by requiring states to contribute. The bill specifies that states must pay 5 percent of the new childcare benefit costs (they must also cover a share of administrative and other expenses). This may not seem like a large amount, but assuming the annual cost of the program will be about $60 billion, states will need to come up with an additional $3 billion per year to cover their share.

For context, from 2016–2019, states spent $1.2 billion annually in matching funds to administer the current federal childcare subsidy program — also known as the Child Care Development Block Grant (CCDBG) or the Child Care Development Fund (CCDF). Since the BBB plan does not phase out CCDBG, it appears that the new program’s match requirements will stack on top of, rather than replacing, current state obligated spending on childcare, resulting in a two- to three-fold increase in state spending on childcare. This before new state funding requirements to operate the universal pre-K program also included in the BBB plan. The table below breaks down how much each state will be required to contribute on childcare alone under the BBB plan, compared to their current obligations.

Normally, federal and state cost sharing is beneficial because it means that states have a stake in the program, which can improve overall program and cost effectiveness. However, in this case, the federal government is using budgeting gimmicks to create a massive new federal program, leaving states shadowed by uncertainty about its future and raising questions about the long-term financial sustainability of the program. A natural question is: If Congress cannot gain support to fund the childcare program for a full ten years now, how will they fund it later?

These questions about what happens after 2027 should make state officials nervous. The legislation requires that states develop a childcare program that offers higher wages to childcare workers and implements stricter childcare regulations, which will likely drive smaller (and lower-cost) childcare providers out of business. If states implement the childcare program as planned, the costs of childcare will likely skyrocket in response to new requirements and regulations, prompting a greater need for government assistance. If Congress extends the program beyond 2027, states will need to identify new revenues to cover matching funds for an ever-increasing program, while facing no guarantee that Congress will fund the program at the same level for the long-term.

Alternatively, if Congress allows the program to end in 2027 as it currently stands in the legislation, it will put states in a difficult position: find billions of new state dollars to continue funding the childcare program beyond 2027 or let working families cover the new higher costs of childcare. None of these options seems desirable.

Sources: US Department of Health and Human Services, Administration for Children and Families, Office of Childcare, CCDF State and Territory Allocation Tables
National News Tags:, , , , , ,