Payroll tax to fund child care subsidies will take effect July 1

A new payroll tax will take effect Monday to fund the expansion of Vermont’s child care financial assistance program, making more families eligible to participate and increasing the rates child care providers receive from the state.

Starting July 1, employers will pay a 0.44% tax on wages paid — with an option to withhold up to 25% of the tax from employees — and self-employed Vermonters will pay a 0.11% tax on income, according to a press release from the Vermont Department of Taxes .

The new tax was passed as part of Act 76 , which became law in June 2023 after the Legislature overrode Gov. Phil Scott’s veto . The goal of the legislation is to invest $125 million annually into Vermont’s child care sector and bolster a subsidy program, in which the state reimburses child care centers on behalf of families.

The state has been rolling out updates required by the act since July 2023 and will continue to do so until the end of this year, according to Janet McLaughlin, deputy commissioner of the child development division within Vermont’s Department for Children and Families. Each change, she said, is designed to help more families afford child care and supply child care providers with the money they need to run quality programs.

“We don’t want people to feel like they have to leave the jobs that they love — the jobs that the state needs them to do — to stay home and care for their kids,” McLaughlin said. “A strong child care system is a necessity for our families.”

Along with the start of the payroll tax, the child care subsidy program will see changes July 1, McLaughlin said. The citizenship requirement will be eliminated from the application, she said, which means children who are not U.S. citizens will now be eligible to receive aid. Child care providers will begin a new “streamlined” system for reporting attendance, she added, and all providers will receive an increase in the rates they receive from the state.

This increase covers “50% of difference between family child care and center-based program state rates,” according to a status report from DCF. It follows another increase, which took effect on Dec. 17, that raised rates by about 35% for every participating child care program, McLaughlin said.

The effects of the investment are already starting to show, McLaughlin said. Since January, more programs have opened than those that have closed.

The changes are starting to close a gap in care that has existed for years, she said. According to a report from Let’s Grow Kids , about 8,700 child care slots are still needed to meet the current demand in the state.

The process to apply for the subsidy program will not change on July 1, McLaughlin said, although work is underway to move applications to an online platform by September.

To be eligible to apply , families must live in Vermont, have less than $1 million in assets and meet income requirements, according to the Department for Children and Families. Families must also have a reason for seeking child care to be eligible — such as primary caretakers having a job, looking for work or attending school.

As part of Act 76, the income guidelines were updated in April to include more families in the subsidy program. Families making up to 400% of the federal poverty level are now eligible, when before, the cut off was at 350%, McLaughlin said. An additional 193 families have already joined the program due to this expansion, she said.

In October, the program will be widened again to include families making up to 575% of the federal poverty level.

“Vermont families that have moderate income will really benefit from this,” McLaughlin said. “Before, they were paying 20-30% of their income on child care, and now we can help with that.”

The April revision also made more families eligible to have their child care completely covered by the state. Before, families making 150% or below of the federal poverty level were eligible, but now, the bar has been raised to 175% of the poverty level, McLaughlin said.

Other families pay $50 to $250 per week, depending on their number of children and their gross monthly income. The rest of the cost of child care is provided by the state to child care centers on behalf of the family.

To apply, families must complete an 11-page application form that asks questions about income sources, family members, child care providers and more. Families must fill out supplemental forms as necessary, according to the Department for Children and Families, and file documents to provide proof of household income, education savings accounts and reasons for seeking child care.

Because the expanded program will bring more demand for child care services, McLaughlin said, the state has provided $21 million in “readiness payments” to 800 programs since September to help them pay for repairs, invest in more resources, and increase staff wages and benefits.

“Workforce challenges for the state as a whole are certainly affecting child care providers,” McLaughlin said. “But we are hearing anecdotal evidence that (providers) are becoming more confident in their ability to hire and retain staff.”

Read the story on VTDigger here: Payroll tax to fund child care subsidies will take effect July 1 .