The True Cost of Subsidizing Childcare

by Binierose Cacho and Dylan Moore, UHERO, May 1, 2026

Executive Summary

As Hawaiʻi’s lawmakers are confronting budgetary challenges, expanding the childcare subsidies may seem fiscally out of reach. Yet, as we discuss, an expanded Child and Dependent Care Tax Credit (CDCC) could recoup a meaningful share of its upfront costs by making it easier for parents to remain in or enter the labor force. Keeping parents working generates tax revenue for the state that would likely partially offset the credit’s fiscal cost.

But such an offset isn’t automatic. The credit has to be generous enough to actually shift labor-force decisions. This is harder than it seems: many lower- and middle-income households face benefit cliffs that blunt the incentive to bring in a second earner. If the goal is to drive labor-force participation, extending the credit to relatively high incomes may be necessary. While this may not achieve equity goals, it may nonetheless prove to be a cheaper form of tax relief for these same households than direct income tax cuts.

The credit can also only increase labor force participation if the supply of childcare can keep up — otherwise an expansion will mostly raise prices rather than enrollment. Factors like high rents and regulatory hurdles that prevent the expansion of childcare spaces therefore may undermine the efficacy of a credit expansion....

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