In some states, a parent working a full-time minimum wage job can obtain a subsidy and comfortably afford child care. In other states, especially in a locality without enough subsidized slots, almost all of that parent’s income could go to child care. The difference between those two states lies in lawmakers and agency leaders’ intentional decisions.
In the first three posts of this four-part series, we demonstrated how to think about the child care crisis through the economic lens of supply and demand. We discussed child care subsidy policy levers that states can pull to increase subsidized supply, match supply with demand, and expand who benefits from the system.
In this post, we share the experience of a stylized family of three accessing child care in two state contexts. We detail how different state policy decisions can drastically impact family resources, as well as shape child care supply and demand at the state level.
How State Policy Decisions Impact Families
Imagine a family of three: a single mother, Lina, and her two young children, a 3-month-old infant and a 2-year-old. Lina works full time, and her annual earnings are $34,545 (or 150 percent of the federal poverty level for her family). While she works, Lina needs full-time child care.
Lina is eligible for subsidized care for her two children, and she has found a center that accepts subsidies and has space to enroll them both. That child care center charges at the 75th percentile of the market rate. How difficult it is to enroll in subsidized child care, as well as how much that care will cost Lina, varies greatly depending on which state she lives in.
Let’s first imagine that Lina and her family live in Vermont. The total monthly cost of child care (at 75th percentile of the market rate) is $1,257 for Lina’s infant and $1,213 for her toddler, totaling $2,470 per month. If Lina were not making use of the subsidy system—for example, if she was not able to find a subsidized slot for both kids near her home or work, or if none of the subsidy-participating programs had hours that matched her working hours—then Lina would pay 86 percent of her income to purchase child care. This unaffordable cost would make it impossible for her to go to work.
Luckily, Lina can access subsidized care. Even better, Vermont reimburses her child care program at the same rate that they charge private-pay families, meaning that Lina does not face any additional program fees. Vermont also does not charge a copayment for families who earn at or less than 150 percent of the federal poverty level, and so she pays no out-of-pocket costs.
Now we can imagine that Lina’s family moved from Vermont to neighboring New Hampshire. The total monthly cost of care for her two children is almost the same as in Vermont: $1,278 for her infant and $1,186 for her toddler, totaling $2,464 each month.
Though Lina secures subsidy slots for both kids, the state of New Hampshire only pays her provider $1,012 per month for her infant and $925 for her toddler. Lina is responsible for copayments totaling $360 for both children.
And since New Hampshire allows child care programs to charge an additional fee to make up for the difference between the subsidy reimbursement and the private-pay rate, Lina also faces additional monthly charges of $86 and $81 to cover that shortfall. That brings Lina’s total out-of-pocket expenses for child care to $527 every month, which is 18 percent of her income—more than twice what federal guidance considers to be affordable (7% of family income).
Lina’s Experience with Supply and Demand
Policy choices in Vermont and New Hampshire impact the experiences of families accessing care. These choices leave families like Lina’s with vastly different economic resources to afford child care—and those resources influence whether Lina is able to work, as well as the quality of her children’s care if she does. Those same policy choices also influence state-level supply and demand in ways that impact all families’ access to care.
In states where programs can charge a fee to make up the difference between reimbursement rates and private-pay rates, these additional fees may make it too costly to use higher-quality child care. Without caps on out-of-pocket expenses for families, the demand for subsidized child care will be lower and care less affordable overall.
In states where reimbursement rates are too low to cover the cost of providing care, many providers will choose not to serve subsidized families. This is especially true for high-quality facilities, which are costly to run. Without enough supply in the subsidy system, families will struggle to find affordable, high-quality child care.
Legislative Progress in Vermont and New Hampshire
The forces of child care supply and demand do not just impact families like Lina’s. Middle-class families are struggling to access affordable, high-quality child care, too. Expanding subsidy eligibility can bring more families into the child care system. And if reimbursement rates adequately pay child care programs for their services, the subsidy system—with supply and demand in equilibrium—has the potential to meet the needs of families while also stabilizing the child care industry.
A new bill passed through the Vermont Legislature will expand the reach of the subsidy system to those making up to 575 percent of the federal poverty level, or $172,000 a year for a family of four. This dramatic eligibility expansion should rapidly increase demand for subsidy slots.
The bill also increases subsidy reimbursement rates by 35 percent, hopefully boosting the supply of high-quality programs in the subsidy system to meet the growing demand. However, even with a 35 percent increase, base reimbursement rates will still fall far short of the true cost of high-quality care.
New Hampshire, too, is responding to the child care crisis. In its latest budget, New Hampshire has included funding for expanded child care eligibility and reduced burdens on providers who are struggling to pay their staff well. Though not as dramatic as Vermont’s child care bill, the New Hampshire legislation could go a long way toward balancing the supply and demand for child care subsidy slots and make care more affordable for families like Lina’s.
Finding the Funding
State policy levers that support families and child care programs by balancing supply and demand can be expensive, and states that want to invest in long-term industry stabilization need to identify sustainable funding streams.
Several states are getting creative. Vermont passed legislation to fund subsidy expansion with a payroll tax. New Mexico passed a constitutional amendment to allow the state to disburse funds from the Land Grant Permanent Fund to support systematic subsidy reform. Louisiana passed a bill allocating a portion of sports betting revenues towards early childhood education. Identifying sustainable funding solutions is critical as temporary pandemic funding—used to fund many temporary child care initiatives across states—begins to expire.
Investing in child care is good for everyone: the child care industry supports children, families, and the economy by providing safe, nurturing care that allows parents to go to work. The current child care crisis costs the national economy billions in lost earnings and tax revenue every year, but states that identify sustainable funding sources to balance supply and demand in the child care subsidy system are likely to see positive outcomes.
Curious about how child care subsidy policies have changed in the past year? In the 2023 National Prenatal-to-3 Research to Policy Summit, we will give you a comprehensive update on state-level action throughout the country—as well as clues into what to expect next year. Sign up today for this free, virtual event.
