A group of several children in a preschool

Evaluating the Impacts of Federal Subsidies for Early Childhood Education and Care: Executive Summary

Harris Eppsteiner , Maddie Lee and John Ricco
April 16, 2026

Key Takeaways

  1. We use The Budget Lab’s new model of early childhood care and education for children ages 4 and under, which incorporates both demand- and supply-side dynamics, to analyze how five different policies would affect (i) families’ care and work decisions, (ii) care worker wages, (iii) provider prices, (iv) the federal budget, and (v) children’s long-run earnings.

  2. Subsidies that limit out-of-pocket care costs to a fraction of income generate large shifts into formal care and boost maternal employment and wages for care workers. But these policies would also push up market prices, increasing costs for the federal government and for families who do not qualify.

  3. Subsidizing providers’ labor costs benefits families by bringing down market prices for care, but unlike with demand-side subsidies, these price reductions are not targeted by family income. This leads to larger benefits for higher-income families, who disproportionately use more expensive forms of care.

  4. A $1,000 child allowance policy, which would increase families’ disposable income without changing the relative cost of different forms of care, produces negligible changes in enrollment and associated outcomes.

  5. Policies such as co-pay caps and tax credits for providers do the most to boost future earnings and future federal tax revenues, but these particular long-run benefits offset only a fraction of near-term costs.

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Introduction

In recent years, there has been growing interest in policies which reduce out-of-pocket costs for early childhood education and care (ECEC). The Budget Lab (TBL) has developed a new open-source equilibrium microsimulation model for analyzing ECEC policy. The model is designed to capture both supply and demand dynamics in the nationwide ECEC market for children from birth through age 4, allowing us to estimate how new federal policy initiatives would affect:

  • patterns of childcare usage and parental employment, which are closely related decisions for families;
  • cost burdens for different types of families, accounting for changes in subsidy eligibility and market prices;
  • the prices that childcare providers charge;
  • the wages earned by care workers;
  • the federal budget, including feedback effects on tax revenues from changes in parental employment; and
  • children’s future economic outcomes, based on how a policy reform induces children to move between ECEC options with different estimated impacts on their future earnings.

Our report analyzes five illustrative policies designed to highlight the tradeoffs policymakers face when crafting programs to increase access to affordable care:

  1. Universal Subsidy: offer free childcare for low-income families and cap out-of-pocket childcare expenses for middle- and high-income families.
  2. Income-Limited Subsidy: offer free childcare for low-income families and cap out-of-pocket childcare expenses for middle- and upper middle-income families, with high-income families ineligible for subsidies.
  3. Expanded Care Credit: expand the Child and Dependent Care Tax Credit (CDCTC) to cover a greater share of childcare expenses and to allow low-income families to benefit fully from the credit.
  4. Provider Tax Credit: partially subsidize labor costs for ECEC providers, making care provision at lower market prices financially viable.
  5. Child Allowance: provide $1,000 per child for all families, regardless of childcare enrollment, parent employment status, or income.

Below, we summarize our main findings.

Effects on ECEC Enrollment

Each policy creates distinct incentives for families to place their children in different types of ECEC. The most generous subsidies would generate the largest shifts into formal care arrangements, while the Child Allowance policy, which does not subsidize any particular form of care, would leave enrollment largely unchanged.

Effects on Maternal Employment

Parental decisions about childcare are tightly bound up with decisions about whether and how much to work. The most generous subsidies we analyze would increase maternal employment rates by about 6 percentage points.

Effects on Care Worker Wages and Employment

When demand-side subsidies make formal care cheaper, more families try to enroll. Meeting this demand requires hiring more care workers, which in turn requires raising wages to attract workers to the ECEC sector. The most generous subsidies we analyze would require hiring over half a million additional full-time equivalent workers and raising average hourly wages by $3 to $8 (depending on education level).

Effects on Children’s Future Earnings

Research suggests that ECEC policies can also affect children's long-run economic outcomes. The two large-scale subsidy policies generate the largest estimated gains in earnings at age 27, with effects concentrated among lower- and middle-income families.

Fiscal Effects

None of the policies fully "pay for themselves” in fiscal terms, but the Provider Tax Credit recovers the largest share of its upfront cost through higher future federal tax revenues.

Distributional Effects

Different ECEC policies deliver benefits to different parts of the income distribution. Copay-cap subsidies and the Expanded Care Credit deliver the largest benefits as a share of income to lower- and middle-income families, while the Provider Tax Credit's largest dollar-amount benefits flow to families at the top.

Distributional Effects