A new tax credit for Alabama employers who help provide child care for eligible employees went into effect Wednesday (Jan. 1) and companies will soon be able to apply for a credit of up to $600,000.
The new law, heavily supported by Republicans and Democrats in the 2024 legislative session, says employers can be reimbursed for costs related to building and maintaining in-house child care facilities or paying for outside care for the children of qualifying employees, or those earning less than $80,000 a year.
The new law also includes a separate tax credit for child care providers as well as a grant program for non-profit providers.
House Minority Leader Anthony Daniels, D-Huntsville, sponsored the bill along with Sen. Garlan Gudger, R-Cullman. Daniels pitched a similar bill in 2023, but this year the idea became part of a larger package of bills. State leaders hope this bill will get more working-age Alabamians employed.
“It is my hope and belief that this critical component of the 2024 ‘Working for Alabama’ legislative package will immediately help revitalize Alabama’s workforce when it takes effect in January of 2025,” Daniels told Alabama Daily News recently.
Alabama has one of the lowest labor participation rates in the country, 57.6% in November, compared to a national rate of 62.5%. And more than 20% of potential workers ages 24 to 56 are currently opting out of the labor force in Alabama. A lack of access to affordable child care has been identified as one of the reasons why.
“The law will reduce access gaps for affordable childcare by incentivizing employers to offer childcare, as well as sending direct aid to childcare facilities across the state,” Daniels said.
The legislation says the employer tax credit, applicable to any tax burden the company has, is capped at $600,000 per year for each employer. In 2025, total employer tax credits will be capped at $15 million. In 2026, that increases to $17 million and then $20 million in 2027. At least 25% of credits are to go to small businesses or those in rural areas. Large companies can be reimbursed via the credit for up to 75% of their costs for providing care; small businesses, those with 25 employees or less, can be refunded 100%.
Employers can start reserving their credits on March 1 and they’ll be awarded on a first-come, first-served basis, according to the ADOR.
The tax credit is set to end after 2027, but could be extended by lawmakers.
Child care facilities’ tax credits are capped at $25,000 per year per facility and are based on the number of low-income children served and the facilities’ quality rating from the state. A center with a five-star rating could receive $2,000 per eligible child; a one-star rating would receive $1,000.
Staffing shortages, affordability, concerns about quality
The facility tax credit and separate facility grant program for nonprofit facilities, administered by the Alabama Department of Human Resources, are each capped at $5 million per year.
Advocates for the bill earlier this year said in 2022, nearly 85,000 families in the state found themselves without viable child care options due to staffing shortages, affordability or concerns about quality.
“In 2025, we should see an increase in the number of licensed childcare facilities, and a corresponding increase of Alabamians entering or reentering the workforce, confident that their loved ones will be taken care of while they work to put food on their family’s table,” Daniels said.
The legislation tasked the Alabama Department of Revenue with establishing the rules for implementing the employer tax credit and the smaller credit for child care providers. Public hearings for the proposed rules are set for Jan. 7.
EDITOR’S NOTE — This story was written by Mary Sell and originally published by Alabama Daily News. It is reprinted with permission.
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