Tax credits are policies that allow people or businesses to reduce the amount of income taxes that they pay. Tax credits for businesses and for families can both be used to support early childhood services. Some states, such as Louisiana, Nebraska, and Maine, issue tax credits to child care businesses and/or workers based on quality measures. Others, such as Colorado and Oregon, provide a credit to individuals or businesses who make donations that expand or improve child care programs in the state. As of 2020, 18 states offered tax credits to employers for investing in providing child care for employees.

Many local governments currently provide tax credits to businesses to incentivize economic development and employment opportunities in their communities. A similar approach could be used at the local level to incentivize businesses to provide or invest in early childhood services, but currently, no cities or counties in North Carolina offer local tax credits to support early childhood services. No changes are needed to state law to allow local governments to pass these policies.

Another option is to offer tax credits to families at the local level. These are local policies that provide additional credits to families that are eligible for federal and/or state tax credits like the Earned Income or Child Tax Credit. At least three local communities (New York City, San Francisco and Montgomery County, Maryland) offer working family tax credits. While they aren’t used explicitly for early childhood expenses, these credits can make it easier for families to afford child care. For local tax credits to be implemented in North Carolina, the General Assembly would need to change state law to allow local governments to make these payments. (North Carolina could also support working families by passing a state-level Earned Income Tax Credit and/or Child and Dependent Care Tax Credit).