Report: Expanding childcare tax credit could boost workforce – Hawaii Tribune-Herald

A new report from the University of Hawaii Economic Research Organization argues that expanding Hawaii’s childcare tax credit could partially pay for itself by helping more parents stay in — or return to — the workforce, even as the state faces mounting concerns over childcare affordability, shrinking provider capacity and staffing shortages.

The report arrives as Hawaii lawmakers continue debating proposals to expand the state’s Child and Dependent Care Tax Credit, or CDCC, amid broader cost-of-living pressures and a childcare system many providers and advocates say is already stretched thin.

“This is something that is a recurring issue at the (Legislature) every year,” UHERO researcher Dylan Moore said. “There’s been some talk in recent years about this particular tax credit, so I think that’s one reason we wanted to focus on it — to sort of bring some maybe non-obvious insights to the conversation.”

The report examines two competing proposals to expand the CDCC. House Bill 2306 would raise the maximum credit to $5,000 per child while targeting lower- and middle-­income households through a steeper income phaseout. The bill stalled this session, but a companion measure with similar provisions was submitted to Gov. Josh Green after clearing both chambers. A separate proposal, SB 2683, would have preserved broader eligibility at higher income levels but failed to pass.

For Pearl City resident Janel Correia, childcare has become one of the largest recurring expenses for her family as they raise their 4-year-old daughter, who attends Keiki Care Center of Hawaii.

The 37-year-old said her family currently spends about $990 a month on childcare and has had to carefully budget around the cost alongside housing, groceries and other bills. Although the family received assistance through the state’s Preschool Open Doors program during their daughter’s final year of preschool, Correia said the expense still significantly affects their financial flexibility.

“Reliable childcare has been essential for our work schedule and our daughter’s development, but it definitely impacts our overall financial flexibility,” Correia said.

Correia said balancing work schedules and childcare arrangements remains difficult, citing both affordability and availability remain major challenges for working families, particularly when families face long waitlists and limited options that fit their schedules and budgets.

“There have been times where finding an open childcare slot was difficult due to long waitlists and limited options, especially for programs that fit our schedule and budget,” she said.

Correia said expanded tax credits or subsidies could ease financial strain and provide families with greater flexibility around work hours, scheduling and career opportunities.

“When childcare takes up such a large portion of a family’s budget, financial support can have a meaningful impact on both affordability and workforce participation,” she said.

Under current law, Hawaii families can claim up to $2,500 per child for up to two children, though benefits decrease for households earning above $50,000 annually.

Moore said policymakers should look beyond the immediate cost of childcare subsidies and consider how lower childcare expenses could influence parents’ decisions about whether to remain in or reenter the workforce. He said expanded childcare support may enable some parents who otherwise would not work to take jobs or stay employed, potentially generating additional tax revenue for the state over time.

The report argues that expanded credits could partially offset their costs by increasing workforce participation and generating additional state income and general excise tax revenue.

Moore said middle-income households may be most responsive to expanded childcare credits because they often earn enough additional income to offset childcare costs and taxes without losing substantial public benefits.

For lower-income households, however, the report found that “benefit cliffs” tied to programs such as SNAP, Medicaid and other assistance can create situations where taking a job or increasing work hours actually leaves families financially worse off.

“It’s not because there’s anything about low-income households that we would think makes them not responsive in principle,” Moore said. “It’s that you’re fighting a bit of an uphill battle because the childcare subsidy policy is not the only policy that affects these households.”

He said some modeled households in the report increased income dramatically but still lost disposable income after accounting for childcare expenses and reductions in benefits.

“I think there’s something fundamentally surprising about the idea that you could have a household … that increases household income by 80% and that they could end up worse off in terms of their amount of disposable income than before,” Moore said.

At the same time, UHERO researchers warned that expanded subsidies alone may not solve Hawaii’s childcare crisis if provider capacity cannot expand alongside demand.

“Maybe you can’t solve this by just providing people with money,” Moore said. “Maybe money is not enough — at least money given to the parents to pay for the cost of the program is not enough if there aren’t enough spaces to go around.”

That concern mirrors what providers and advocates across Hawaii are already seeing.

Lt. Gov. Sylvia Luke, who is on indefinite leave, has led the state’s Ready Keiki initiative since 2023. She said Thursday over the phone that Hawaii has taken a “multifaceted approach” combining public preschool expansion with subsidies aimed at helping working families afford care. The state also has expanded eligibility for its subsidy program to families earning about $180,000 for a household of four and plans to extend coverage to 2-year-olds.

Still, providers and advocates say major gaps remain, particularly for infant and toddler care, workforce recruitment and full-day services.

Kerrie Urosevich, executive director of the Early Childhood Action Strategy, said tax credits alone are not enough to address the state’s affordability challenges. She pointed to timing and structure, noting that families typically pay childcare costs upfront and only receive credits later at tax time, limiting their impact for households already under financial strain. She also said eligibility rules and filing requirements can be barriers for some families.

Urosevich said tax credits can help offset costs but should supplement, not replace, direct subsidy programs like Preschool Open Doors or the Child Care &Development Fund, which reduce or eliminate upfront expenses.

Advocates also point to workforce shortages, which have intensified as public preschool programs offer higher pay than many private providers can match.

“The providers who are equally as trained in our private sector, they’re opting to go to the public pre-K program because it’s higher pay,” Urosevich said.

Cheryl Cudiamat, director of Keiki Care Center of Hawaii, said her preschool is licensed for five classrooms but currently operates only three because of staffing shortages.

“It is definitely harder to find lead qualified teachers or good staff in general,” Cudiamat said.

She said private centers frequently lose workers to the state Department of Education because public schools offer stronger salaries and benefits.

The UHERO report points to those same structural issues as a major factor that could limit the effectiveness of expanded childcare tax credits.

Moore said expanding subsidies without simultaneously increasing childcare capacity risks driving up tuition costs rather than meaningfully expanding access.

“I think it would be naive to only pursue this subsidy-based solution without trying to simultaneously tackle those other issues,” he said.

Still, both the UHERO report and childcare advocates emphasized that improving childcare access has broader long-term economic benefits beyond immediate affordability.

Research increasingly links affordable, high-quality childcare to stronger workforce participation, particularly among women, as well as better long-term educational outcomes for children.

“You want to think about how this policy that’s being proposed will change people’s behavior,” Moore said. “If you don’t account for that sort of benefit, you can really make a mistake when you’re thinking about the costs and benefits of different policies.”

Luke said the state’s childcare and preschool expansion efforts are intended to outlast her tenure, with Ready Keiki serving as a long-term framework embedded in Hawaii’s budget and school planning rather than a single-term initiative. She said core components — including subsidy programs and new classroom development — are already funded and expected to continue beyond the current administration.

Those efforts, she added, are already underway and advancing through the Legislature, including ongoing Preschool Open Doors funding and planned classroom expansion. About 20 additional classrooms are expected to open in the coming school year, with more in development through public schools, charter schools and university partnerships.