President Biden and the Democratic-controlled Congress are poised to continue the federal government’s spending spree, this time through a $2 trillion extravaganza named Build Back Better (BBB). Just before Thanksgiving, the House of Representatives narrowly passed its version of the measure, and the Senate is now mulling possible changes to the package.
The spending plan would pay for an assortment of climate change and social programs, including a massive expansion of childcare and preschool. Should it pass, the Congressional Budget Office estimates that a near-universal childcare subsidy would add about $273 billion to the federal budget over the next decade, while a universal preschool program would escalate spending by $109 billion during that period. Those numbers, however, underestimate the eventual cost of the programs, as BBB doesn’t provide funding for either of them after FY 2027. If both are reauthorized, the Committee for a Responsible Budget calculates an added expense of roughly $800 billion in the ten-year budget window.
Those big numbers reflect only federal outlays. A full accounting requires consideration of the fiscal impact on state budgets, as well. Akin to a promo rate or loss leader, the feds would pick up the entire tab for expanded childcare and preschool in FYs 2022–24. Thereafter, states are on the hook for covering part of those costs—should they choose to participate in these programs. Here’s the fine print:
- Childcare: Starting in 2025, states would cover 5 percent of the “direct services” costs—the bulk of the childcare outlay—with higher rates applying for “quality activities” and administration.[1] Perhaps averaging across those categories, the Senate Republican Policy Committee cites a 10 percent state share for childcare.
- Preschool: Starting in 2025, states would cover an increasing share of the universal preschool cost. States would cover 5 percent of the cost in FY 2025, 20 percent in FY 2026, and 36 percent in FY 2027.
What does this mean in terms of real dollars? To get a ballpark sense, consider the potential impacts on Ohio’s budget once the matching requirements kick in. Table 1 begins with the childcare costs under three scenarios (we’ll tackle pre-k next). The low-cost scenario assumes a conservative estimate of the number of families who would opt into the new program and also assumes average childcare costs that are roughly the same as today. Meanwhile, the high cost scenario assumes higher take-up rates along with escalating childcare costs, something many analysts predict will occur. One could, of course, test a whole range of assumptions, but these simple examples help to illustrate costs. Even with a modest 10 percent state match—an assumed average across the three childcare spending categories—Ohio would be looking at an additional $150 to $350 million per year in childcare spending.[2]
Table 1: Projected annual childcare costs to Ohio under BBB
Notes: BBB’s income eligibility threshold for childcare is 250 percent of the state median income. Approximately 90 percent of Ohio taxpayers report incomes below $132,000—roughly 2.5 times the state’s median for a family of four—so I multiply the number of children age 0–3 (about 413,000) by 0.9.[3] I then subtract the number of children age 0–3 who would likely be covered under existing public childcare programs (roughly 43,500). The participation rate is uncertain, but 75 percent of children participated in Quebec’s universal childcare program five years into implementation. The average center-based childcare cost in Ohio is $9,919 per child. However, BBB requires states to link childcare payments to cost studies that would likely produce higher amounts. To receive subsidies, childcare providers must increase childcare workers’ salaries to match elementary school teachers and participate in the state’s quality system, which awards credit for meeting certain staff-to-child ratios.
But childcare is only half of the story. Turning back to universal preschool, we see a bigger fiscal impact, which reflects the larger state share in comparison to BBB’s childcare proposal. In a low-cost scenario, Ohio would spend an additional $294 million per year in FY 2027 when the 36 percent match applies. In the higher cost scenario, expenses would be nearly two-thirds of a billion per annum.
Table 2: Projected annual preschool costs to Ohio under BBB
Notes: There are no income limits on BBB’s preschool program, so the number of 3–4-year-olds in Ohio (roughly 275,800) is used as the number of eligible children. I then subtract the number of children participating in existing publicly funded preschool programs; about 71,600 children are in the state’s preschool program, Head Start, and preschool special education. Somewhat lower cost assumptions are applied to the preschool program as childcare. Although BBB likewise calls for higher wages and staff-to-pupil requirements for preschools, analysts assume lower pre-K costs than childcare. This table excludes additional expenditures for preschool “state activities” (e.g., administration and data systems); states would pay 47 percent of those costs.
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Taken together, Ohio should expect to add somewhere between $450 million to $1 billion per year to its budget to pay its share of childcare and preschool costs starting in 2027. That’s not peanuts. It amounts to 5 to 10 percent of the current state budget for primary and secondary education. Think about the opportunity costs this way: A half billion dollars would allow Ohio to double its funding for economically disadvantaged K–12 students. Or it could help the state pay down its new (and more expensive) funding model. Yet tying up millions in childcare and preschool spending will constrain state lawmakers’ ability to fund other important initiatives, or lead to tax increases.
There’s much commentary and analysis about the merits of expanding public childcare and preschool programs. For now, we’ll leave those debates to others. But one thing is clear: There are serious costs to making these programs a universal entitlement, both to the federal government and to states. States can opt-out of these programs at any time, either on the front end or, more perilously, when the state share comes into effect. Should BBB pass, only time will tell whether state policymakers, including those in Ohio, feel the federal “incentives” are worth the squeeze.
[1] The state share of quality activities costs (e.g., facilities and “supply building”) would vary by jurisdiction, as those are linked to Medicaid reimbursement rates. (Ohio’s is 36 percent.) States would cover 47 percent of administration.
[2] Those numbers are higher than the projections in an analysis by Angela Rachidi of the American Enterprise Institute who cites an added cost of $79 million per year by 2027. However, her analysis only looks at the “direct services” share.
[3] Although children ages three and four are eligible for childcare under BBB, I assume that they’ll participate in the universal preschool program.
