Relating to the child and dependent care and early childhood development tax credits, and including applicability provisions

Description

House File 771 increases the maximum net income amount used in determining eligibility for the Early Childhood Development (ECD) and Child and Dependent Care (CDC) Tax Credits. The maximum is increased from the current $45,000 to $90,000. The change is retroactive to tax years beginning on or after January 1, 2019.

Background

The federal CDC Tax Credit is equal to up to 35.0% of eligible child care expenses for qualified children and dependents. The Iowa CDC Tax Credit is calculated as a percentage of the federal CDC Tax Credit. The Iowa CDC Tax Credit ranges from 75.0% of the federal credit for taxpayers with net income of less than $10,000, to 30.0% for taxpayers with net income of $40,000 to $44,999. The Iowa CDC Tax Credit is not available to taxpayers with net income of $45,000 or more. The Iowa credit is refundable.

The Iowa ECD Tax Credit equals 25.0% of up to $1,000 (a maximum tax credit of $250) in eligible early childhood expenses incurred by households with children aged 3 to 5 and net income under $45,000. The Iowa ECD Tax Credit is also refundable.

Under this proposal, the top income eligibility limit for the Iowa CDC Tax Credit would be increased such that taxpayers with net income above $39,999 but less than $90,000 would be eligible to claim an Iowa CDC Tax Credit equal to 30.0% of their federal CDC Tax Credit. Taxpayers with eligible early childhood expenses and net income below $90,000 would be eligible to claim a tax credit of up to $250. Under current law and under the Bill, households may only claim one of the two tax credits (ECD or CDC) in each tax year (TY).

Assumptions

The number of taxpayers benefiting from the increase in the maximum net income amount for the CDC and ECD Tax Credits, as well as the tax credit value, was estimated by the Department of Revenue using the Department’s computer model of Iowa income tax returns. That model utilizes actual State and federal tax return data from TY 2017 to simulate tax returns filed for future tax years. The model gives the Department the ability to change tax parameters and determine the estimated fiscal impact of those changes on tax liability and State General Fund revenue.

The model results, by tax year, are shown in Table 1. The model simulation assumes that the contingent income tax system established in SF 2417 (2018 Tax Modifications Act) will be put in place the first tax year possible (TY 2023). The contingent tax system redefines Iowa net income and that redefinition results in the TY 2023 increase in taxpayers benefiting from the changes contained in this Bill.

To convert tax year impacts to fiscal year impacts, the following timing assumptions are made:

• Fiscal year 2019 ends June 30, 2019. Given the retroactive application to TY 2019, 5.0% of the TY 2019 impact is assumed to fall in FY 2019 and 95.0% in FY 2020.
• Tax year 2020 and after impacts are assumed to fall 30.0% in the first fiscal year and 70.0% in the second fiscal year.

Fiscal Impact

The changes to the Iowa CDC and ECD Tax Credits contained in the Bill are projected to reduce net General Fund revenue by the following amounts:

• FY 2019 = $0.2 million
• FY 2020 = $5.8 million
• FY 2021 = $4.5 million
• FY 2022 = $4.5 million
• FY 2023 = $4.7 million
• FY 2024 and after = $5.2 million

As refundable tax credits, the changes do not impact the calculation of the local option income surtax for schools. Expected implementation costs for the Department of Revenue are assumed to be minimal. Given the expanded number of taxpayers projected to claim the credits, enforcement costs for the Department will increase.

Source

• Department of Revenue