In Texas, Helping Out Child Care Providers with a Tax Break

The financial struggles facing the child care industry were clear even before the pandemic began. A combination of thin profit margins, low pay, and high rates of turnover meant that many providers were having difficulty surviving at the same time that parents were struggling to pay for the child care they depended on to make work possible. When the pandemic hit it made these struggles worse for providers across the country and Texas was no exception. In fact, between 2020 and 2023, 27 percent of programs across the state closed, partly due to state and local stay-at-home orders in response to the virus as well as reduced enrollment and staffing once businesses began to open back up.

What helped keep many Texas child care providers afloat was the $2.7 billion the state received in stabilization funds as part of the American Rescue Plan. Over 10,750 providers in Texas received the funds to assist with reopening, paying their employees, and providing reliable options for families while they work. These vital funds expired at the end of September 2023, however, leaving it to individual states to figure out how to replace the federal dollars.

Some states, such as Vermont and California, stepped up to replace the federal money with general revenue funds. There were efforts in Texas by Democratic lawmakers to spend over $2 billion in state funds to assist the child care industry, but that proposal was always considered a long-shot in the conservative state, despite a historic budget surplus. “We were asking for general revenue for a state investment, but knowing that that's going to be an uphill battle, we were thinking how else to get savings into providers’ pockets if we aren't going to get direct checks to them,” says Kim Kofron, Director of Early Childhood Education for Children at Risk, a Texas-based, non-partisan research and advocacy organization.

One idea that seemed like it could be appealing to a wide spectrum of lawmakers was giving providers a break on their property taxes. Texas actually has some of the highest property taxes in the nation because its lack of a state income tax means it’s heavily reliant on property taxes to fund government services. “As we entered the last legislative session, we had a $30 billion surplus, and our lieutenant governor and governor were saying that they were going to use a lot of that surplus for property tax relief. And so it was just like reading the tea leaves. It's an idea we have talked about, but just didn't really have momentum in the years prior to this,” says Kofron.

After advocates were successful in getting a property tax proposition on the ballot that would target child care providers, Texas voters went to the polls in November 2023 and voiced their approval for Proposition 2, formally known as the “Property Tax Exemption for Child-Care Facilities Amendment.” The proposition, which passed with a 65-35 percent margin, allows counties or municipalities to authorize a property tax exemption on all or part of the value of property used to operate child care facilities. Once enacted, the exemption can save eligible providers between $2,000 to $15,000 per year depending on the size of their property. What providers do with the cost savings is up to them, but some options include investing in new supplies, lowering costs for families, or raising staff pay. According to Kofron, one provider located on the Texas coast is using her tax savings to cover the high cost of hurricane insurance.

Under current guidelines, only about 17 percent of the state’s 15,000 child care centers are eligible for the exemption. To be eligible, at least 20 percent of a center’s enrollees must be from lower income families who use state subsidies to help afford care. Additionally, programs must be qualified to participate in the Texas Rising Star program, the state’s quality rating and improvement system (QRIS). Home-based providers are not eligible for the exemption due to concerns from some lawmakers that these providers already receive a related tax break through the state’s homestead exemption.

Once the state’s voters approved the exemption back in November, it was up to local officials to approve it for their county or municipality. In the past several months, advocates have found success in lobbying the state’s major metropolitan areas to approve the exemption. “We’ve hit all the major areas. All the major metropolitan areas have passed it either at the city or county level,” says Kofron. Austin approved the exemption just two days after the November vote and the state’s other major cities of Dallas, Houston, San Antonio, and El Paso have since joined them.

Local advocacy organizations are helping to get the word out at the local level about the importance of approving the exemption. Children at Risk has created a Child Care Tax Relief website which has resources on how to pass the exemption at the local level, including resources for finding and contacting local officials as well as how to apply for the exemption once it’s passed. Advocates are also using the property tax discussion as an opportunity to connect with local officials to tell the story of the importance of child care in their communities. “One of the good things that has come from this is the level of activation of local advocates. They're building relationships and talking about this issue with local, city, and county officials who haven't talked about child care before,” says Kofron. This has led to a groundswell of local officials pushing the state to commit general revenue to child care needs, a long-term goal of many advocacy groups.

Next steps for these groups include continued efforts to spread the word to local officials about the importance of approving the exemption, particularly among rural areas that have been slower to act than the major population centers. Some advocates would like to broaden the number of centers eligible for the exemption by lowering the 20 percent subsidy threshold. According to Kofron, there’s no shortage of pressing issues to address next: “There's lots of different things that we are working on, asking for general revenue, asking for higher reimbursement rates, all those things that we know will make a difference for providers to serve more kids and be able to pay their staff better.”