Texas counties, cities embrace new child care center tax credit even though few providers qualify

As Texas’ child care centers struggle to stay open amid mounting post-pandemic financial woes, a lifeline thrown out by voters last year – a new tax credit for providers – is gaining traction in the state’s biggest metropolitan areas.

Its reach is limited to just a fraction of the providers in the state, but the exemption will be a boon for owners who can take advantage of it, supporters say — so the push is on to make the tax credit available to “as many as possible, as quickly as possible” said Kim Kofron, senior director of education for Children at Risk, a nonprofit advocacy group in Texas.

“We feel very good about the fact that the metros have adopted it, because that’s where the majority of our child care centers are,” she said. “But we don't want to forget about the rural areas, too.”

Counties and cities in the San Antonio, Dallas, Austin and Houston areas have in recent months adopted the new property tax exemption for land used by child care centers that owners say will save them thousands of dollars each year at a time when they are struggling to keep up with staff and wages amid increasing costs. It’s the fourth of its kind in the U.S., including a measure passed in Kansas that was ultimately vetoed. Missouri voters will consider a similar amendment in November.

The exemption, known as Proposition 2, has also passed in El Paso County, the City of Denton, Hays County, and Aransas County.

“I was so, so proud,” said Dianne Miller Nielsen, executive director Children's Coalition of Aransas County, who will save $11,000 on the tax bill for her local center. “It’s a blessing to us, for sure.”

San Antonio city council members are set to vote on it this week, while officials in Fort Worth and Lubbock County are in talks with advocates about the tax credit.

The exemption allows the property owner to exempt from 50% to 100% of their property valuation when paying taxes. The law includes requirements that landlords of those properties pass the savings along to renters if the center owners don't own the property, although questions remain about how it would be enforced.

But its impact is limited to just a few thousand child care centers, even if all the locals participate. Only about 17% of the estimated 15,000 child care centers in Texas meet the requirements of the new law, and that total doesn’t include home-based child cares that are also not eligible.

The exemption applies to those centers that receive state subsidies for lower income families for at least 20% of their enrollees. They also must be qualified to participate in the Texas Rising Star program, which ties funding to quality.

“We can't expect all parents to be able to pay tuition that fully funds the cost of quality care,” said Nielsen. “We receive donations, we receive grants from community organizations, and we are so grateful for them. But this tax break has helped us a lot.”

The state’s child care industry was already strapped with rising costs when the pandemic forced them to either shutter altogether for a period of time in 2020 or reduce capacity while officials sought to stem the spread of COVID-19.

Most of them came back with far fewer children in their care, which meant less money at a time when inflation was increasing costs and families were unable to pay higher tuition. Today, there are some 30% fewer centers than there were before the pandemic.

A federal infusion of more than $4 billion to Texas for child care funding helped keep the centers afloat while Texans went back to work in the months after the pandemic.

The funds went directly to 10,790 Texas child care providers in 85% of Texas counties to help cover costs for an estimated 836,000 children, according to the federal Administration for Children and Families’ Office of Child Care. But that funding ended late last year.

An attempt during the last legislative session by state Rep. Armando Walle, D-Houston, to send $2.2 billion in state funds to child care centers to cushion that blow was unsuccessful.

“Texas has money. There’s money, I know it,” said Jacqueline Reza, owner of Flowers in the Garden Child Development Centers in El Paso. “But we’re just not allocating the money in the correct way. We’re building the future taxpaying citizens. We’re building the future little citizens of the world, and quite frankly, these kiddos need more support.”

Instead, Texas lawmakers passed the tax exemption. It was approved by voters in November and requires local approval to go into effect.

The participation of the state’s population centers, which have the heaviest concentration of child care centers, is encouraging progress, but the work is not over, said State Sen. Royce West, D-Dallas, who sponsored the legislation.

“I would like to see more cities and counties taking action on Prop 2, particularly rural areas,” he said via email. “Our Capitol office has had a number of calls from people in rural areas asking how they can also get this enacted locally.”

Data from the Center for American Progress, a nonpartisan policy institute, shows 63% of rural families in the Lone Star State live in a child care desert.

The lack of access to child care already disproportionately affects women and people of color, who compose the majority of child-care facility owners and staff in Texas, said Tim Kaminski, director of operations for Gingerbread Kids Academy and Gingerbread After School Programs, which has seven Texas locations in Fort Bend County.

Without funding to replace the federal relief dollars, up to 44% of child care centers in Texas are likely to close their doors within the next year, according to a survey by the Texas Association for the Education of Young Children.

Child care facilities are struggling to meet rising costs — such as an average 37% increase in payroll — as families strapped by inflation are unable to pay higher tuition to meet those needs, owners and advocates say.

An inability to pay staff adequately makes it hard to meet mandatory staff-to-child ratios with full enrollment, so about 79% of Texas child care providers aren’t running at capacity right now, even when there are waiting lists, the survey said.

In 2020, the property value of one Gingerbread location in Fort Bend County increased by about half a million dollars in a single year, Kaminski said. Two years later, the valuation increased another $400,000, he said. Last year the tax bill for that single facility was $50,000, he said.

But Kaminski, who has been a leading voice advocating for child-care funding and the tax exemption, himself won’t be able to take it this year because his centers haven’t hit the 20% subsidy enrollment threshold required by the law. The state reimbursements are so low, he said, that his budget won’t allow him to absorb that high a share without raising tuition — which of course his families can’t afford.

The new law, while it offers relief to potentially a few thousand centers, leaves most of the state’s 15,061 facilities out of the benefit. Only about 45% of them — some 6,815 — accept subsidies. Only about 2,500 child care centers in Texas receive subsidies as well as being on the required Texas Rising Star program, according to the Texas Workforce Commission, and many of them — like Kaminski — don’t meet the 20% subsidy enrollment level required for the new credit.

“The tax break in its current format will only impact a very small number of providers,” Kaminski said. “Most voters thought they were voting on property tax relief for all child care centers.”

Next year, Kaminski plans to join other owners and advocates in pushing to broaden the credit to include centers regardless of their subsidy status, a change that would only need legislative approval but would help three times as many facilities.

“Proposition 2 was a really important step forward,” said David Feigen of Texans Care for Children, an Austin child-welfare advocacy group. “It’s an acknowledgment that the state cares about this issue, and locals are taking it up as a way to stabilize our programs and help at-risk families. But we have a lot more to do across the board, and that begins with state investment.”

At full capacity and full staff, Reza says she is managing to cover expenses at her facilities but that the situation is difficult in El Paso, where child care centers in Mexico and New Mexico are her direct competitors.

Reza has two centers in El Paso, but the tax break will only help one of them because her newest center has been open less than a year — too short a time to qualify for the Texas Rising Star program.

But the break at her flagship center, which has been open three years, can eventually help her raise staff pay by at least 20%, build playground equipment that will cost about $15,000, replace furniture and make other quality upgrades. Some day, she said, the money will help her save enough to buy the property she has her centers on, instead of renting them.

She hopes the momentum will continue and that lawmakers will continue to help support child care centers both expand and add to their quality of service, she said.

“This property tax exemption is going to be that first step to the bigger change that we need to do,” Reza said.

Adoption by smaller counties and less populated areas is key to helping counteract so-called “child care deserts” by encouraging providers to open centers in those areas.

But acceptance in those regions has been slower, Kofron said. Some are waiting to see how other counties and cities implement the exemption, and many are still trying to determine the impact such an exemption might have on their small budgets.

In Dallas County, for example, the estimated $563,000 cost of the exemption makes a lighter impact on its $31.7 million budget — but much lower costs get dicier when budgets get smaller, Kofron said.

It’s an easier sell once the locals catch wind of how much the issue impacts them, she said.

“We’re starting to build our bench of local officials who care about child care and realize the connection with what that means to the city government,” she said.

The biggest barrier to quick acceptance by those communities has been lack of awareness about either the credit itself or the seriousness of the issue, said Jason Sabo, who has lobbied in Austin for 25 years for nonprofits that advocate for better quality child care for low-income kids.

“The communities where there has been an existing advocacy coalition, they’re passing it really fast, and the places where there’s a little more education that has to happen, I think they’ll pass there soon,” Sabo said.

Kofron said that in some areas, locals are not accustomed to being called upon to support child care.

“It’s not really something that has bubbled up until now,” she said. “It’s never been funded at the local level. As a state, we’re 100% reliant on our federal government to support child care, so there hasn’t been a mindset that the state should invest or the locals should invest. But this is something that we as a community should be asking: Are we making sure that there are places for our [age] 0-5 kids so that our families can work? It’s bringing that to their attention.”

Aransas County passed its exemption within days of the constitutional amendment authorizing it passed last year — a testament to the very active pro-child-care advocates in the area, Nielsen said.

It is also a signal, Sabo said, that the critical role of child care — and, more importantly, the cost to Texas businesses and residents when it’s not available — is finally getting the attention that it deserves.

Last year business leaders from several industry sectors formed the Employers for Childcare Task Force to start pushing for reforms that would support child care services for their employees.

The Texas service industry, for example, faces staffing challenges directly related to child care when employees can’t afford it or don’t have options that allow them to work evenings and weekends — a hallmark of service industry work.

The Texas Restaurant Association, which has been vocal in the past year about the critical impact that shrinking child care options have on the restaurant industry, is engaged on the issue with local governments across Texas and helped push for the tax credit during the regular session, said spokesperson Kelsey Erickson Streufert.

Local TRA chapters have participated in coalition meetings and sent letters of support to city and county elected officials, she said. State leadership also presented during a workshop earlier this year to help advocates and local officials get the exemptions adopted across the state.

“For us, it’s a great opportunity to help child care providers reduce their costs so they can support more working families,” Streufert said.

Public support was evident during the constitutional election in November. Proposition 2 passed in every single county in Texas — garnering 76% in liberal Travis County and 71% in the conservative Midland-Odessa area — except for one.

The measure failed 412 to 413 in Kinney County. It lost by a single vote.

“It’s just one of those weird issues that somehow has managed to transcend politics all these years,” Sabo said. “This is an issue that’s found its moment. And the question is, are we going to respond to what both working parents and their employers are telling us they want and need?”

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Correction, April 4, 2024 at 10:34 a.m. : An earlier version of this story incorrectly stated that Texas was the first state to create a property tax credit for child care centers. It is the fourth state to do so.