The True Cost of Subsidizing Childcare

As Hawaiʻi’s lawmakers are confronting budgetary challenges, expanding the childcare subsidies may seem fiscally out of reach. Yet, as we discuss, an expanded Child and Dependent Care Tax Credit (CDCC) could recoup a meaningful share of its upfront costs by making it easier for parents to remain in or enter the labor force. Keeping parents working generates tax revenue for the state that would likely partially offset the credit’s fiscal cost.

But such an offset isn’t automatic. The credit has to be generous enough to actually shift labor-force decisions. This is harder than it seems: many lower- and middle-income households face benefit cliffs that blunt the incentive to bring in a second earner. If the goal is to drive labor-force participation, extending the credit to relatively high incomes may be necessary. While this may not achieve equity goals, it may nonetheless prove to be a cheaper form of tax relief for these same households than direct income tax cuts.

The credit can also only increase labor force participation if the supply of childcare can keep up — otherwise an expansion will mostly raise prices rather than enrollment. Factors like high rents and regulatory hurdles that prevent the expansion of childcare spaces therefore may undermine the efficacy of a credit expansion.

What’s the problem with childcare in Hawaiʻi?

Childcare costs in Hawaiʻi are among the highest in the nation. According to the Child Care in America: 2024 Price & Supply Report, the average annual cost of center-based childcare in Hawaiʻi was over $24,000 for an infant in 2024. These costs represent a substantial share of household income — approximately 14 percent of the median income for married-couple families with own children (about $135,000), and 36 percent of the median income for single-parent families with own children (about $52,000).^[1] These costs may be large enough to secondary earners who would like to enter the labor force from doing so.

Multiple bills have been presented this session to expand the Child and Dependent Care Tax Credit (CDCC); here we focus on two. Both would raise the maximum credit households can receive, but they differ in how the credit’s value tapers as household income rises. The more targeted credit (HB 2306) phases out more quickly, concentrating relief on lower- and middle-income families. The broader credit (SB 2683) tapers slowly, maintaining meaningful relief well up the income scale. We refer to these proposals by these labels throughout the rest of the article.^[2]

An expanded credit comes at a time when the State faces real budgetary pressure. The same legislative session that contains the expanded credit also eliminates tax cuts previously scheduled for 2027–2029 and raises rates on the state’s highest-income households. Against that backdrop, one might wonder whether expanding any tax credit is wise.

The relevant question, though, isn’t what an expanded credit costs upfront — it’s what it costs after accounting for the full impact on revenue. The CDCC intended to reduce childcare costs so that parents stay in (or enter) the labor force; a married couple can only claim it if both parents work. To the extent the expanded credit succeeds in drawing parents into work, the earnings they generate are taxed by the state, offsetting part of the credit’s cost. Each dollar the state spends on the credit may end up costing less than a dollar in total budgetary impact.

The credit’s effect on a household’s decision to bring a second earner into the workforce depends sharply on where the household sits in the income distribution. Lower- and middle-income households stand to benefit most from the expanded credit, with the strongest incentives to enter the labor market. Both proposals phase out as income rises, but the targeted credit tapers much faster than the broader credit — actually reducing work incentives for higher-income families.

Recent research suggests that CDCC increases in other states have indeed raised employment and earnings of secondary earners, who in most cases are mothers (Jiang, 2021; Kwon, 2024; Pepin, 2025). Evidence on some universal pre-K programs points the same direction: parents earn roughly 20 percent more both during and after the program, and the gains persist for at least six years after the child ages out (Humphries et al., 2024). It appears that households really do change their earnings behavior in response to the incentives this kind of program creates, and it would not be unreasonable to expect similar effects to occur if Hawaiʻi increased its credit.

What does the credit cost per additional working family?

The fiscal pictures above describe one labor-force entrant at a time. But the credit’s bill includes every family that claims it — including the many families who would have been working regardless. The fiscal case therefore hinges on a question we can’t observe directly: of every dollar the state spends, what share goes to families whose decision to work was actually changed by the policy?

Who actually responds to the credit?

Not every family responds the same way. The lottery study cited earlier finds substantial earnings gains for middle-income parents but no measurable response among the lowest-income parents in its sample — many of whom already qualify for other childcare programs and for SNAP, EITC, and similar benefits, and risk losing eligibility for those if their income rises. That benefit cliff likely blunts the credit’s reach at the bottom of the income distribution. For middle- and upper-middle-income households, the case is clearer: the empirical evidence and the household-level math point the same way, and we should expect a meaningful labor-force response.

One subtlety matters when choosing where the credit phases out: the income of a household before its second earner enters work is not the income it would have after. A family that looks middle-income today — with one earner — can look upper-middle-income tomorrow once the second earner is working. The phase-out should target the incomes households are expected to have after entering the workforce, not before.

Most of the credit goes to families who would have been working anyway

It is important to keep in mind that the bulk of the cost of an expanded credit comes from giving additional funds to households who are already paying for childcare. It is difficult to predict in advance how many families would decide to have a secondary earner enter the labor force due to these expanded credits, but we should expect this group to be fairly small relative to those already working and claiming the credit.

• For new entrants caused by the credit, the state’s added cost is the full amount of the new credit. Before the reform, this household wasn’t working and wasn’t collecting any credit at all.
• For each existing claimant, the state only pays the difference between the reform credit and the current-law credit they were already collecting. That difference can be small — or even negative, if the reform reduces the credit at their income.

The long-run earnings and tax revenue effects may be greater if this program serves to counteract the so-called “child penalty”: parents who leave the workforce — predominantly mothers — experience lasting earnings losses that grow the longer they remain out (Kleven et al., 2019), compounded by labor-market discrimination against women returning after time away. Subsidized childcare during the early child-rearing years keeps secondary earners connected to the labor market and avoids those losses, which would otherwise reduce both household income and state tax revenue well past the years the credit is claimed.^[5]

Will the supply of childcare keep up?

The fiscal arithmetic above assumes that families who want childcare can find it — at a price they can pay and at a quality they trust. Neither is guaranteed. By lowering out-of-pocket costs, the credit pulls more households into the childcare market. If the market cannot expand to meet that demand, two things happen: prices rise to ration the existing slots, and providers under pressure to scale up cut corners on quality. Both erode the policy’s fiscal logic, because the credit only pays for itself if families actually use the care it subsidizes.

Limited capacity can push prices up

Providers need time and resources to add slots, space, and staff. When capacity cannot expand quickly, part of the subsidy is passed through to higher tuition rather than reaching households. Studies of California, another supply-constrained market, find that roughly half of a childcare tax credit’s value can be eroded by price increases alone (Rodgers, 2018, 2023). This can undercut the credit’s intended aim of expanding access to childcare — in some cases leaving care more expensive for many households than it was before the credit took effect.

Research on a subsidized childcare program in Quebec points to a similar lesson. The program substantially increased mothers’ labor force participation, but the gains came primarily from a deliberate effort to expand the number of childcare spaces available — not only from making care cheaper (Montpetit, Carrer & Beauregard, 2026). The takeaway for Hawaiʻi: a credit that lowers what families pay will only deliver on its promise if it is matched by reforms that expand the supply of care.

Quality is still a cautionary note: actions that create new childcare spots without maintaining quality can raise developmental and behavioral risks for children (Jiang, 2021; Baker, Gruber & Milligan, 2008, 2019; Averett et al., 2025).^[6] The early years of Quebec’s expansion show what can happen when efforts to expand supply are rushed, even if longer-run education and earnings effects appear to fade.

Summary and Discussion

This brief argues that expanding Hawaiʻi’s CDCC is more affordable than it appears for the households where the credit actually changes labor-force decisions. The upfront cost is real, but it does not represent the policy’s full fiscal impact when the reform succeeds in moving a secondary earner into the labor force — the resulting state income tax and GET revenue offsets a meaningful share of the cost. In our middle-income case study, the expanded credit delivers roughly $15,000 to $20,000 in additional disposable income while leaving the state with little or no net short-term cost; over a longer horizon, continued earnings can fully recover the state’s outlay.

The case for the credit is greatest for middle-income households. For lower-income households, the loss of SNAP and other transfers when the secondary earner enters the workforce can overwhelm what the credit can offset, even after considerable expansion; many of these benefit cliffs originate at the federal level and are beyond the state’s ability to address. For higher-income households, the more targeted credit (HB 2306) may actually weaken work incentives, while the broader credit (SB 2683) preserves and slightly strengthens them.

The fiscal case also depends on supply: if capacity and quality do not keep up, prices absorb part of the credit and fewer families change their behavior.

Beyond the fiscal case, there are broader gains. Bringing more parents — disproportionately mothers — into Hawaiʻi’s labor force expands the state’s productive capacity in ways that extend well beyond the tax revenue captured in our analysis.

What would these proposals mean for you?

Footnotes

1. [1]U.S. Census Bureau. American Community Survey, 2024 1-Year Estimates Detailed Tables, Table B19126. Median income figures for married and single-parent households. data.census.gov ↩
2. [2]Similar legislation was proposed in the previous session as HB 753 (2025). ↩
3. [3]Example households are loosely based on real Hawaiʻi records from CPS ASEC via the PolicyEngine US Enhanced CPS dataset. Lower- and higher-income variants stylize the mid-income household with different earnings. ↩
4. [4]We use toddler in center-based childcare cost of $18,882 from the 2024 Hawaii Childcare Aware infographic. ↩
5. [5]The long-term-cost calculation walks the credit forward year by year as the child ages, using a step-function schedule for annual childcare cost. Ages 0–4 use the Childcare Aware Hawaiʻi 2024 Price & Supply Report directly: $24,029 infant, $18,882 toddler (the same toddler figure used in the household data), $14,063 preschool/preK. Ages 5–9 use the Hawaiʻi Department of Human Services 2022 Child Care Market Rate Study (statewide 75th-percentile full-time monthly rates: $235 for licensed before/after-school care, $1,185 for licensed center-based or group child care home), combined as nine school months of after-school care plus two summer months of full-day care, then bumped by ~7% for ad-hoc 2024 adjustment — yielding roughly $4,800 per year. Ages 10–12 step down again to ~$2,500 because Hawaiʻi law allows leaving a child alone from age 12, and most families drop to summer-only formal care for late elementary / middle school. Each year’s credit equals the relevant rate times the smaller of that year’s actual childcare cost and the federal eligible-expense cap ($10,000 for one child, $20,000 for two). The cap binds for ages 0–4 and stops binding sharply from age 5, so the cumulative-credit line has three distinct slopes — steep early, much shallower from school entry, gentler still for older school-age. We do not adjust for wage growth, which would raise tax revenue and shorten payback further. ↩
6. [6]Specifically, these studies suggest that higher-income children fare worse in formal care because it substitutes for a higher-quality home environment, while lower-income children may benefit precisely because formal care represents an improvement in quality. ↩

References

1. Averett, S., Gong, Y., & Wang, Y. (2025). Long-term health effects of early childhood exposure to the Child and Dependent Care Tax Credit. Health Economics.
2. Baker, M., Gruber, J., & Milligan, K. (2008). Universal child care, maternal labor supply, and family well-being. Journal of Political Economy, 116(4), 709–745.
3. Baker, M., Gruber, J., & Milligan, K. (2019). The long-run impacts of a universal child care program. American Economic Journal: Economic Policy, 11(3), 1–26.
4. Child Care Aware of America. (2024). Child Care in America: 2024 Price & Supply Report.
5. Hawaiʻi Department of Human Services, Audit, Quality Control and Research Office. (2022). 2022 Hawaiʻi Child Care Market Rate Study: Summary of Results. State of Hawaiʻi.
6. Humphries, J. E., Neilson, C., Ye, X., & Zimmerman, S. D. (2024). Parents’ Earnings and the Returns to Universal Pre-Kindergarten (NBER Working Paper No. 33038). National Bureau of Economic Research.
7. Jiang, H. (2021). The effects of the Child Care Tax Credit on maternal labor supply (Working Paper No. 2015).
8. Kleven, H., Landais, C., Posch, J., Steinhauer, A., & Zweimüller, J. (2019). Child penalties across countries: Evidence and explanations. AEA Papers and Proceedings, 109, 122–126.
9. Knudsen, E. I., Heckman, J. J., Cameron, J. L., & Shonkoff, J. P. (2006). Economic, neurobiological, and behavioral perspectives on building America’s future workforce. Proceedings of the National Academy of Sciences, 103(27), 10155–10162.
10. Kwon, S. J. (2024). The effects of the Child and Dependent Care Tax Credit (CDCTC) on child-care use and maternal labor supply. Social Service Review, 98(2), 293–328.
11. Montpetit, S., Carrer, L., & Beauregard, P.-L. (2026). A welfare analysis of universal childcare: Lessons from a Canadian reform. Working paper.
12. Pepin, G. (2025). The effects of child care subsidies on paid child care participation and labor market outcomes: Evidence from the child and dependent care credit. ILR Review, 78(4), 645–666.
13. PolicyEngine. (n.d.). PolicyEngine US: open-source microsimulation of U.S. tax-and-benefit policy. Used for all household-level tax, credit, benefit, and GET calculations in this brief, including federal and state CDCC schedules, the Hawaiʻi income-tax bracket, EITC, SNAP, WIC, and the 4.712% Hawaiʻi general excise tax. Households are drawn from PolicyEngine’s Enhanced CPS dataset (CPS ASEC 2023 reference year). Retrieved 2026.
14. Rodgers, L. P. (2018). Give credit where? The incidence of child care tax credits. Journal of Urban Economics, 108, 51–71.
15. Rodgers, L. P. (2023). Tax credit refundability and child care prices: Evidence from California. National Tax Journal, 76(1), 95–116.
16. U.S. Census Bureau. (n.d.). Median family income in the past 12 months by family type by presence of own children under 18 years. American Community Survey, ACS 1-Year Estimates Detailed Tables, Table B19126. Retrieved March 23, 2026, from data.census.gov
17. Van Huizen, T., & Plantenga, J. (2018). Do children benefit from universal early childhood education and care? A meta-analysis of evidence from natural experiments. Economics of Education Review, 66, 206–222.