Toddlers, Investors, and Tax Policy

There is a continuing childcare crisis that worsens every year. Congress has historically used tax incentives aimed at parents and employers to try to alleviate the lack of affordable childcare. However, with private equity's increasing investment in the childcare sector, this Article advocates for an entirely new approach: Congress should encourage more people to work in the childcare sector by enacting a tax benefit for the individual childcare service provider. <br><br>Childcare is a broken market. The labor-intensive nature of the industry results in razor thin profit margins, and wages remain low due to entrenched racial and gender norms. There is also a cap on how much parents can afford to pay for childcare. Yet, private equity is continuing to grow its debt-financed investments in the childcare sector. These investors achieve high returns through strategies such as real estate sale leaseback transactions, management fees, cost cutting and tuition hikes. Unfortunately, private equity often leaves a trail of bankruptcies after extracting maximum value from the underlying&nbsp;businesses and leveraging them with debt. This Article provides a critical analysis of how private equity’s acquisition-driven investment in the childcare sector is not only exacerbating the existing childcare crisis by increasing costs and reducing supply but also perpetuating gender and racial inequalities.<br><br>The federal tax code contains two childcare tax benefit provisions that are intended to make childcare more affordable for working parents, but neither had been adjusted for inflation in decades (although, they did get a boost from the One Big Beautiful Bill Act). There is also a tax credit available to employers who provide childcare for their employees. This Article is the first to examine how these tax benefits are primarily helping working parents afford the investor backed childcare chains. It offers a novel analysis of the intersection between tax policy and private equity investment in childcare, adding to the existing literature on federal childcare tax incentives.<br><br>Against this backdrop of a childcare crisis and tax provisions that may be supporting the growth of investor-backed childcare, this Article proposes a transformative solution: the creation of a childcare service provider exclusion. This new tax provision would allow individual childcare workers to exclude from income any wages attributable to providing childcare. By attracting more workers to the childcare industry and increasing the availability of childcare, the proposed exclusion supports working parents and promotes gender and racial equality.