David D. Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: affordable childcare.

As the parents in our audience will know, raising a child is expensive. A recent study from LendingTree found that the average 18-year cost is now over $300,000. As the costs continue to rise, so do concerns about affordability. Federal tax incentives have aimed to offset some of the costs by providing credits for parents and employers. However, these credits don't address what our guest today considers the heart of the issue: the affordable childcare crisis.

In her paper, "Toddlers, Investors and Tax Policy," professor Lauren Shores Pelikan proposes that federal tax incentives should go toward those working in the childcare sector. Providing this incentive would help expand options resulting in more affordable childcare across the board.

Tax Notes legal reporter Trevor Sikes sat down with professor Shores Pelikan to discuss her paper. Trevor, welcome back to the podcast.

Trevor Sikes: Hey Dave, thanks. It's great to be back.

David D. Stewart: First of all, could you give us some background on professor Shores Pelikan?

Trevor Sikes: Yeah. Professor Shores Pelikan holds both a JD, a juris doctor, and a CPA, which those of us who've been to law school know is very impressive to hold both. She's a professor of law at the University of Missouri School of Law, and she focuses on teaching tax, and she practiced as a tax attorney for nearly a decade before becoming a law professor.

David D. Stewart: So what all did you get into?

Trevor Sikes: Well, we discussed her recent paper, which proposed a very interesting idea, the creation of a new tax credit called the childcare provider exclusion credit. Now, this credit would allow childcare workers to exclude their wages from gross income, and the aim of this would be to bolster a struggling childcare worker market, aimed at increasing supply, increasing the incentivization for individuals to become childcare workers.

David D. Stewart: All right, let's go to that interview.

Trevor Sikes: Professor Pelikan, thank you so much for being here with us today.

Lauren Shores Pelikan: Thank you so much for having me.

Trevor Sikes: Now, professor, before we really take a deeper dive into this paper, I would just like to ask you, what is the general background and what is the general idea of this paper?

Lauren Shores Pelikan: Oh, so this paper, it examines our federal childcare tax incentives in light of private equity's investment in childcare. Ultimately, I propose that we flip our tax incentives. Instead of offering a tax benefit to parents to make childcare more affordable, we should have a supply-side tax incentive, specifically a tax benefit for the individual childcare provider.

A few reasons why I propose flipping our tax incentives — we have this continuing national childcare crisis with rising costs and dwindling supply. We have a broken childcare market and private equities investing in childcare and earning significant returns while the rest of the childcare market is barely scraping by. Now, the problem with private equity is not that they're making a profit, it's that the issue is that these profits are not coming from expanding access to childcare or the creation of new spots. They're coming from financial engineering and a consolidation of the market, and there's the risk factor.

We've already seen two private equity on childcare chains go bankrupt and collapse. So ultimately, I do propose this new kind of tax benefit, not for parents, but for the people actually providing care. And I call it the childcare service provider exclusion.

Trevor Sikes: And before we take a deeper dive, why should the government focus on helping to expand childcare, rather the supply or the availability of childcare for parents? What benefits does the government see?

Lauren Shores Pelikan: Yes, absolutely. So we all know childcare is expensive, and it's not just about the money. Finding a spot can be a nightmare. The waitlists drag on for years. The bottom line is that we need more affordable childcare options. But the crazy part is that even though more and more parents need care, the supply isn't going up. It's like the market is stuck or broken.

See, there's a limit as to what families can afford to pay or are willing to pay for childcare, and this cap sets off a chain reaction. The childcare centers can't charge much more, so they end up paying their teachers really low wages just to stay afloat. Childcare is an issue that goes beyond families with young kids and childcare workers. It's not just a parenting issue, it's an economic issue. It's a gender issue. It affects labor force participation, especially for women. It contributes to income inequality, and it slows economic growth when parents are forced to reduce hours or leave jobs entirely.

There are also positive externalities when it comes to childcare. Research shows that children who participate in early childhood education programs, they stay in school longer, and they're less likely to have behavior problems and commit crimes in the future. So my paper does go and propose a tax solution. Again, a new kind of tax benefit, not for parents, but for the childcare providers, with the goal being to attract and keep more people in the childcare workforce.

Trevor Sikes: And what makes the use of tax law and policy an attractive vehicle to help with childcare?

Lauren Shores Pelikan: Well, one reason I thought of a tax solution is because I'm a tax professor. But really, while there is some direct spending by the federal government on childcare, it's patchy and it can easily get cut. The tax code, it tends to be more permanent than government spending, and it can have a significant influence on an individual's behavior. And again, the goal is to influence people to either work in childcare or to continue to work in childcare.

Trevor Sikes: And let's take a step back for a second. Can you explain what the current landscape of childcare providers looks like?

Lauren Shores Pelikan: Absolutely. To really understand the landscape today, we have to start with the fact that childcare in America is mostly a for-profit industry. Over 80 percent of programs are for-profit, but for-profit is a bit of a misnomer for most of them. If you look at your local independent center or the family childcare home, they are barely hanging on by a thread. Their profit margins are often less than 1 percent of revenue. Why? Because childcare is incredibly labor-intensive. And a typical small center, labor costs eat up to 70 to 80 percent of the entire budget. The childcare providers themselves, the individuals providing childcare, they are mostly women, and over one-third are women of color and immigrants. Because there is a cap on what families can afford to pay for childcare, the childcare centers, they pay their teachers really low wages just to stay afloat, just to keep their business going.

On average, preschool teachers, they make about half of what kindergarten teachers make. And then these low wages cause another problem. We have a shortage of childcare workers because they can find better-paying jobs elsewhere, and that leads us to why the childcare market feels so fundamentally broken.

Trevor Sikes: Can't childcare providers just raise costs of services to help with the profitability and wages?

Lauren Shores Pelikan: They have raised cost little bits over time to keep some of their workers, but at some point, parents can't pay much more, either because they're not making enough money at their jobs to pay childcare, or financially it just doesn't make sense, and they choose to stay home and take care of their children. So there is a cap on how much the providers can raise their costs.

Trevor Sikes: And how expensive is childcare these days?

Lauren Shores Pelikan: Whew. Well, I'll start by saying that costs vary a lot depending on, one, the age of the child. Infants are a lot more expensive than preschoolers because of the lower teacher-student ratio requirement that most states have. The cost also varies by type of childcare, whether it's a nanny or it's a center or in-home care, and also by geographic location. That said, the national average cost of childcare is around $13,000, at least in 2024, so those are the numbers in my paper. To put this $13,000 number in perspective, the U.S. Department of Health and Human Services, they have recommended that families spend no more than 7 percent of their income on childcare. The $13,000 number, that's approximately 10 percent of the median income of married parents and 35 percent of the median income of a single parent. And then one last reference point with cost. The U.S. spends far less per child on childcare than other developed countries. For example, the U.S. spends around $500 per child per year, while Norway spends nearly $30,000 per child annually.

Trevor Sikes: You mentioned some demographic information about who childcare employees typically are. I'm wondering if you can dive a little bit more into that.

Lauren Shores Pelikan: Well, most of the childcare providers are women, and I've said over one-third are women of color and immigrants, and that data is a few years old. I will say with childcare data, it's getting better, but that's one of the hardest parts about childcare is just really getting that data in. The best way they get the data in is through surveys and through state reporting agencies. So that's kind of as deep as I can go with some of that data.

Trevor Sikes: You also mentioned the use of private equity and the prevalence of private equity in the childcare provider space. Can you expand on that a bit more?

Lauren Shores Pelikan: Yes. So most folks, when they hear private equity, at least other than some of the tax folks, they think of that iconic movie "Wall Street" and Gordon Gekko's famous line, "Greed, for the lack of a better word, is good." What most people don't know though is that nine out of the 10 largest for-profit childcare chains, they now have private equity investors behind them. And these private equity-backed chains are growing fast. They control about 10 to 12 percent of the licensed childcare market based on the number of children served. And what's even more surprising is that they're pulling in annual profits of 15 to 20 percent of revenue. That is a striking contrast to most independent childcare providers, which are barely breaking even. So that begs the question, well, how are private equity firms managing to make such high profits in a low-margin industry? They are using the same strategies they use across other sectors.

After acquiring an established childcare center, they cut costs, they raise tuition, they sell off the childcare center's underlying real estate to get the cash and then distribute it up to the investors, and then they lease the real estate right back. They also layer on various management and royalty fees, and they do all this using borrowed money. They finance the acquisition with debt, leverage increases their returns, but they also put that debt directly on the books of the childcare business they just bought. So now the center isn't just covering payroll and basic operations. It's also on the hook for lease payments and hefty management fees, all while servicing debt it did not originally incur.

I'm not saying that turning a profit is inherently bad, nor is using leverage to increase returns, but here's the issue. These profits are not coming from expanding access to childcare or the creation of new spots. They are coming from financial engineering and a consolidation of the market. These acquisitions are making the childcare options less diverse, and there's the risk factor. We've already seen two private equity-owned childcare chains go bankrupt and collapse.

Trevor Sikes: So in essence, are you saying that the involvement of private equity is not helping to increase the supply that's needed for childcare provision?

Lauren Shores Pelikan: Exactly. It is not helping to increase our supply, and we desperately need more childcare.

Trevor Sikes: So now let's turn to the government action. What are they doing right now to help with childcare, if anything?

Lauren Shores Pelikan: What the government's doing right now to help families afford childcare, there's really two main approaches. There is direct spending and there's tax-based subsidies. In terms of direct spending, most of what the U.S. does is aimed at children living in poverty through a couple of targeted programs. But even those programs don't reach everyone they're supposed to help. Many eligible families aren't actually getting access to the subsidies or services they qualify for, either because of limited funding, long waitlists, or administrative barriers. So even on the low-income end, support is patchy and insufficient. For most middle-income and even some high-income families, support comes in the form of tax benefits. There are two main provisions in the tax code that are supposed to help parents afford childcare. There's the child independent care tax credit and the dependent care exclusion. Here's the kicker though. Neither of these provisions contains an inflation adjustment mechanism.

So while the cost of childcare has risen faster than inflation, these tax benefits have stayed pretty much the same. Even the enhancements from the new tax law that was enacted in 2025 don't make up for this lack of inflation adjustment. There's also an employer-provided childcare tax credit in code section 45F. Congress significantly expanded the credit starting this year in 2026. Employers can now claim a tax credit of up to $400,000 for a portion of their cost to provide onsite childcare for their employees. Now, historically, this credit was not widely used, perhaps because the cap on the credit was much smaller. It used to be just $150,000. The expanded credit might generate a new supply of employer-provided childcare, but there's still the possibility of continuing issues with this credit. So for one, historically, data shows that it was the higher-income individuals who benefited from employer-provided childcare. And second, when employers do provide onsite childcare, they often contract with private equity-owned childcare chains.

Trevor Sikes: Let's jump into this proposal that you've put together, the childcare service provider exclusion. Can you give a quick overview of what that would look like in theory and in practice?

Lauren Shores Pelikan: Yes. I propose a tax benefit for the individual childcare provider, right? The childcare service provider exclusion. It would allow individual childcare workers to exclude their wages from both federal income tax and payroll tax. The idea is that this exclusion would function like a salary increase, making these jobs more attractive and helping to keep good people in the field. This exclusion would be available to all kinds of individual childcare providers, which is important because it supports parents' ability to choose the type of care that works best for their families. Now, there is a potential risk that the benefit of this tax break might end up benefiting the employers instead, who could then pay lower wages. However, minimum wage laws provide a strong safeguard against that, especially since they're already pretty close to what many childcare workers currently earn. Alternatively, we could structure this benefit as a refundable income tax credit.

However, I'm suggesting an exclusion because it allows the workers to get the extra cash in their pockets right away because employers would not withhold taxes on their wages. Using an income tax credit would require workers to wait until they file their tax return to get their tax refund. Getting the cash in hand throughout the year also might make the exclusion more salient. That is more likely to encourage people to work in childcare.

An exclusion is also administratively simple. The childcare workers can claim the benefit without any affirmative action, which is key to ensuring that all childcare workers can easily access this benefit regardless of their employment status. Now, a natural question is why limit this childcare provider exclusion to just childcare providers? Why not also exempt teachers, social workers, nurses? They are amazing and underpaid, and they deserve our support, so maybe we should. However, my paper currently focuses on childcare because it is a broken market.

The childcare workers earn far less than our K through 12 teachers, social workers, or nurses. The U.S. government continues to underinvest in childcare, and there are positive externalities from investing in childcare. So ultimately the goal is to, again, attract more people to work in childcare and increase the availability of affordable childcare, while also supporting working parents and recognizing the vital role of the people who care for and educate our children.

Trevor Sikes: And why should the government incentivize the labor supply, increasing the labor supply of employment rather than lowering costs or increasing the already existing tax code incentives available for parents and families and caretakers of these children?

Lauren Shores Pelikan: We could still increase some of the tax benefits that are available for parents. The problem with just increasing the tax benefits to parents to make childcare more affordable is that we don't have the supply. So even though more parents would be demanding childcare because they could afford it, we wouldn't have the supply because we can't get those workers in to provide childcare. There's also the risk that if you spend more on the parent, the demand side, that would increase private equity's investment in childcare. Private equity is drawn to markets where there is this steady inflow of money where they can, again, invest. They like the steady cash flow. And so again, if you were to increase the benefits on the parent side, we might get more private equity investment, which is not helping with the supply of childcare.

Trevor Sikes: And on the private equity side, are we seeing it be available to families of all wealth bands or are we seeing it be available more exclusively to families who have more affluent backgrounds or more affluent resources behind them?

Lauren Shores Pelikan: Private equity tends to serve just the profitable part of the childcare markets. They do tend to seek out the more affluent families who can afford to pay their high fees, or they seek out the employers who can pay the high fees or help subsidize the employer-provided childcare for the employees.

Trevor Sikes: And turning back to employees and labor supply within the childcare provision market, are we seeing high levels of turnover with the employees? Is that why we're so short on supply, or are there more reasons outside of that?

Lauren Shores Pelikan: There's a couple reasons. So if you're looking specifically within the private equity-owned childcare chains, there is very high turnover there. And one reason is just the operation of the business. They're very cost-focused. The other section of the economy when you're looking at other necessarily childcare chains, and this also applies to some of the private equity as well, is the individuals [who] are looking, they can find better-paying jobs elsewhere. And as much as maybe they love working with children and childcare, if they can find a job that pays $5 an hour more somewhere else, they need that to help with their families at home. I mean, especially considering inflation over the past several years.

Trevor Sikes: And would this childcare service provider exclusion then help with that turnover by allowing those workers to keep more of their pay, in theory?

Lauren Shores Pelikan: That is the goal. The goal is if you can keep more of your pay, you're paying less over in taxes, then yes, we are paying a competitive salary and we can keep childcare workers in their job or attract new workers. It's essentially government spending through the tax code. So we are spending on childcare, but we're going through the tax code in a very efficient manner.

Trevor Sikes: And how would your proposed exclusion interact with the already existing tax code provisions and incentives?

Lauren Shores Pelikan: We could still keep the tax benefits for parents. Childcare is not affordable on the parent side, so I'm not necessarily saying that we take away those, but we do need something on the supply side. So we do need to spend and increase the workers' wages there. And one thing I haven't mentioned yet, and another reason why I think that this is a strong solution, is that cities and states have been spending on the worker side, on the supply side. And we also had spending during the pandemic at the federal level on the supply side, and those solutions have worked, right? It helped us keep up our childcare supply. So I'm really building on those really creative, innovative solutions that have worked and said, "Let's keep this going on a permanent basis and do it through the tax code."

Trevor Sikes: But I'm thinking of some of these COVID[-19] funding that you mentioned in your paper, for example, the $52.5 billion that's been temporarily supported, but the operative term there being temporary. So are those incentives no longer available for these families, which is why we need to bridge that gap?

Lauren Shores Pelikan: So during COVID[-19], there was spending on the supply side. So these were not going through the tax code, but it was government spending on the supply side, and it was going to help keep those childcare providers in business during the pandemic. That money has pretty much all run out. And so since it's run out, cities and states have actually started to implement their own taxes to raise funds to spend on the supply side because they saw how helpful it was, but we haven't done anything on the federal side. So that's where my proposal is coming into play here.

Trevor Sikes: So then in your view, would federal action help to make more uniformity of the reform of childcare provision and supply that some states are trying to do in a patchwork way?

Lauren Shores Pelikan: Yes, it would help. We'd get something, yes, uniform across the nation. Of course, this is not going to solve the childcare crisis all by itself, but hopefully it's a step in the right direction.

Trevor Sikes: All right. Well, professor Lauren Shores Pelikan, thank you so much for taking the time to speak with us today.

Lauren Shores Pelikan: Oh, thank you for having me.

David D. Stewart: That's it for this week. You can follow me online @TaxStew, that's S-T-E-W, and be sure to follow @TaxNotes for all things tax. If you have any comments, questions, or suggestions for a future episode, you can email us at podcast@taxanalysts.org. And as always, if you like what we're doing here, please leave a rating or review wherever you download this podcast. We'll be back next week with another episode of Tax Notes Talk.

Anthony Zoppo: Tax Notes Talk is a production of Tax Notes. You can learn more about us by visiting www.taxnotes.com/podcast. When major media wants the straight story, they turn to Tax Notes. Thank you for listening, and join us again for another edition of Tax Notes Talk.

Tax Analysts Inc. does not provide tax advice or tax preparation services. Nothing in the podcast constitutes legal accounting or tax advice. A full disclaimer is included in the transcript.

Tax Analysts Inc. does not provide tax advice or tax preparation services. The information you have seen and heard today represents the views of the presenters, which may not be the same as those of Tax Analysts Inc. It may include information obtained from third parties, and Tax Analysts Inc. makes no warranties or representations of any kind and is not responsible for any inaccuracies. Nothing in the podcast constitutes legal, accounting, or tax advice. The tax laws change frequently, and neither Tax Analysts Inc. nor the presenters can guarantee that any information seen or heard is accurate. Also, due to changing tax laws, any information broadcast or downloaded after its original air date may no longer represent the current views of the presenters. If you have any specific questions about any legal or tax matter, you should always consult with your attorney or tax professional.

All content in this broadcast is protected under U.S. and international laws. Copyright © 2026 Tax Analysts Inc. Unauthorized recording, downloading, copying, retransmitting, or distributing of any part of the podcast is strictly prohibited. All rights reserved.