Vermont Early Care and Education Financing Study

Estimated Costs, Financing Options, and Economic Impacts

by Lynn A. Karoly, Aaron Strong, Christopher Joseph Doss

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Research Questions

  1. What are the projected costs of expanding Vermont's ECE benefit to more families, requiring commensurate pay for providers, and utilizing cost of care in the reimbursement of providers under the state's ECE subsidy program?
  2. What are potential stable, long-term funding sources to finance an affordable, high-quality ECE system for children from birth to kindergarten entry, and how feasible are these sources?

Stakeholders in the public and private sectors in Vermont have been increasing the state's investments in high-quality early care and education (ECE) programs for children not yet in kindergarten. Yet many families are not reached by the funds currently available, especially to afford care for infants and toddlers. Additionally, the ECE workforce has long been underpaid, both in terms of cash wages and benefits. Further expansion of public funds to ensure that young children can participate in high-quality ECE in the mixed-delivery system (both public and private providers) requires an understanding of the cost of high-quality ECE, what is a reasonable contribution families can make to the cost of the ECE they consume, and the potential public-sector revenue options to fill the gap.

Vermont Act 45, passed in 2021, expressed a need to support Vermont's economy by providing access to high-quality ECE and ensuring that the state's early educators are fairly compensated and well supported. The act included a requirement for a financing study. To meet this requirement, the authors estimate the cost for high-quality ECE in Vermont using a mixed-delivery system. In addition, to understand the size of the funding gap that must be filled to expand subsidies to more families, the authors consider several designs for a sliding-scale subsidy schedule.

The authors also identify a set of feasible and stable revenue streams that can be used alone or in combination to fill the funding gap and employ a series of economic models to estimate the net fiscal and economic impact of the effects of the increased subsidies and the identified revenue.

Key Findings

Federal and state funding for subsidized ECE programs in Vermont in 2018–2019 totaled approximately $109 million

  • About 60 percent of families with pre–school-age children have family income below 3.5 times the federal poverty level, the maximum income that currently qualifies for ECE subsidies.

The cost across all of Vermont's pre–school-age children for high-quality ECE with a well-compensated workforce is estimated to total about $645 million per year in 2022 dollars

  • These costs would be paid for by a combination of family contributions and public funding at the federal, state, and local levels.

Family contributions will depend on the assumed sliding scale subsidy schedule

  • The five potential sliding-scale subsidy schedules examined in the study all maintain the current policy of zero family contribution when family income is below 1.5 times the poverty level.
  • Contributions from families between 1.5 and 3.5 times the poverty level are capped at 10 percent or 7 percent of income, depending on the schedule.
  • About $162 million of the total cost would be paid by families with incomes of more than 5.0 times the poverty level, a group that would not be subsidized under these schedules.

Corresponding to the five subsidy schedules, there are five estimates of the size of the annual funding gap after accounting for current public funding and family contributions

  • The smallest gap estimates are $179 million to $193 million per year and retain the status quo of limiting subsidies to families making 3.5 times the poverty level or less.
  • The larger gap estimates of $256 million to $279 million per year extend subsidies to higher-income families.

Funding the smallest gap estimate could be accomplished with single sources of new revenue or a bundle of several taxes

  • The single-source options that would fill an annual $194 million gap are a new 0.9 percent payroll tax, a 2.0-percentage-point increase in the sales tax, a new limited services tax of 9.9 percent, or a new expanded services tax of 7.1 percent.
  • Tax bundles would allow for a smaller increase in the payroll or general sales taxes on top of soda or hospitality taxes.
  • The larger gaps generated by expanding subsidies to higher-income families cannot be funded by a single revenue source without increasing the magnitude of the tax to a rate not typically seen in other states.

The other economic and fiscal impacts associated with funding the larger gap estimates are modest

  • The larger gaps from extending subsidies to families below 5.0 times the poverty level represent approximately 0.6 percent of gross state product and approximately 2.8 percent of appropriations.
  • The taxes required to fill these larger estimates are expected to have a small impact on household economic well-being.
  • The expansion of ECE subsidies has the potential to expand the labor force by 600 to 2,800 workers, an increase of less than 1 percent of the current labor force.
  • Annual gross state product could expand between $59 million and $283 million. The estimated effect on annual government revenues would be between $1.5 million and $11.5 million.

Table of Contents

  • Chapter One

    Introduction

  • Chapter Two

    Background on Early Care and Education in Vermont

  • Chapter Three

    Estimating the Cost of High-Quality Early Care Education for Vermont

  • Chapter Four

    Financing the Cost of High-Quality Early Care and Education for Vermont

  • Chapter Five

    Conclusions and Policy Implications

  • Appendix A

    Additional Documentation for Chapter 2

  • Appendix B

    Additional Documentation for Chapter 3

  • Appendix C

    Additional Documentation for Chapter 4

The research described in this report was prepared for the State of Vermont, Joint Fiscal office (JFO) and conducted by RAND Education and Labor and the Social and Behavioral Policy Program within RAND Social and Economic Well-Being.

This report is part of the RAND Corporation Research report series. RAND reports present research findings and objective analysis that address the challenges facing the public and private sectors. All RAND reports undergo rigorous peer review to ensure high standards for research quality and objectivity.

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