Congress Eyes Tax Code for Workplace Family-Friendly Benefits

Expanding tax credits for employers that provide family-friendly benefits has emerged as a rare point of compromise on Capitol Hill to advance policy that has long divided Democrats and Republicans.

Members on both sides of the aisle—such as Sens. Tim Kaine (D-Va.) and Deb Fischer (R-Neb.)—propose boosting existing tax incentives to employers providing paid parental and medical leave and child care benefits to workers. While on the books for a few years, some of these tax breaks haven’t been used to their full capacity and leave out many businesses that may be interested in providing those benefits, the lawmakers say.

Tax policy will be at the top of the legislative agenda next year, regardless of how the November elections turn out, as much of the Trump-era’s tax changes are set to expire and lawmakers want their priorities attached.

“The idea is to get this into the bloodstream of discussion before we are doing tax reform in 2025,” Kaine, who has introduced legislation to expand the child care tax credit, told Bloomberg Law. “So that when everybody has their priorities at the table, we come out of the gate strong.”

The US has long lagged its sister industrialized nations in providing paid leave and child care. But as workers increasingly call out the need for policies that make family-building more affordable, lawmakers are looking for ways to encourage employers to make these benefits widely available.

Attractive Alternative

The tax code has historically been seen as a tool to shape behavior and reward certain practices for employers. While lawmakers have often deployed them for areas of bipartisan agreement, they’re now proposing using the code to find compromise on more contentious areas.

Tax credits are appealing because it’s an easier sell with constituents and can be cheaper than starting new government programs that require large spending, said Rachel Snyderman, managing director of economic policy at the Bipartisan Policy Center. They also can help businesses attract more workers with more generous benefits packages as companies are looking to fill vacancies, she added.

Expanding existing tax credits that have already cleared Congress means the idea has built-in bipartisan support. The employer credit for paid family and medical leave—originally sponsored by Fischer—was enacted through the GOP’s 2017 law and expires at the end of 2025, while the employer-provided child care tax credit has been on the books since a 2001 Bush-era tax package.

Since these tax incentives tend to pass inside massive legislative packages, that can ease offsets as lawmakers usually come up with large pay-for provisions that take care for the entire package. Given these are existing tax credits, the price tag for an expansion will also be lower as some of the costs are already “baked in,” Snyderman said.

It “gives lawmakers a runway with which to begin those negotiations in earnest and implement policy that benefits the American people,” she said. “It’s a lot easier to tweak, and especially, think about the budgetary costs.”

Finding Compromise

Federal paid leave laws allow employers to claim a 12.5% tax credit if they offer paid leave at 50% wage replacement, and a 25% credit if the worker receives their full wage during leave. But the credit has several limitations on eligible employers and has flown somewhat under the radar, according to lawmakers and tax policy observers.

Employers aren’t eligible if they’re mandated by one state to provide paid leave but not in another state where they do business. Another issue is that employers must offer the program to employees who work less than 20 hours a week, even if they work only a few hours, which can discourage businesses from establishing the benefit.

Fischer wants to boost that credit, expanding its eligibility and increasing marketing and awareness through the IRS and the Small Business Administration. The idea was also part of a four-part framework from a bipartisan House paid leave working group.

While US workers have been able to take up to 12 weeks of unpaid parental and medical leave since 1993, a federal program that guarantees them some wage replacement during that leave has remained elusive. Democrats have long supported a comprehensive national approach—part of Vice President Kamala Harris’s platform—while Republicans have been skeptical of launching a massive and costly new program.

But doing something within the tax code could help break the logjam to make some incremental progress, said Curran McSwigan, an economic policy adviser at the Third Way think tank.

“You’re seeing that Democrats are not letting perfect be the enemy of the good, and are attempting to make progress in the places where they might get Republican buy-in, which seems to be tax credits in this case,” she said. “There seems to be a kind of recognition by Democratic lawmakers that even if some of these tax credit policies are not a fully comprehensive solution, many working families will be better off than they are right now.”

Beyond paid leave, there have also been some bipartisan proposals to boost the child care tax credit for employers. Employers can claim a credit of up to 25% of qualifying childcare expenses, to a maximum of $150,000.

Sens. Kaine and Katie Britt (R-Ala.) are proposing lifting those caps to 50% and $500,000, respectively, as they say employers should get a bigger tax break if they’re providing workers with childcare benefits. Reps. Salud Carbajal (D-Calif.) and Lori Chavez-DeRemer (R-Ore.) have introduced similar legislation, as momentum to tackle this area of the tax code appears in both chambers.

Their bill would also establish a pilot grant program for states, localities, and tribes to increase funds for childcare providers to boost worker and reduce turnover. They’re also proposing increasing the size of the Child and Dependent Care Tax Credit to $2,500 for single-child families and $4,000 for those with two or more. That credit would be refundable, which it currently isn’t, allowing lower-income households to participate.

“When you talk about more systemic reforms, the Dems and the Rs have very different ideas about what to do with those programs,” Kaine said. “We come out through this at different angles—these are policies that have been in the tax code for a number of years that just haven’t been utilized enough.”