What Does America Get for $500 Million a Year in Adoption Tax Credits?
by James Hamilton, Esq.
In 2010, The United States granted American tax payers $500 million in tax credits for the adoption of children here and abroad. What did we get for it? Taken to the cleaners.
What it is.
The United States has granted an adoption tax credit since 1997. The credit is available to eligible households adopting from foster care or engaged in either private domestic adoptions or international adoptions. Since 1997, the amount of the credit has risen from the lesser of $5,000 or the actual adoption costs incurred (for adoptions in 1996) to almost $12,970 today. (The credit is not available for those with a MAGI of more than $234, 580 and it begins to phase out at $194,580.)
For most of this time, the credit has been “nonrefundable”, meaning that it could be applied to your net tax obligation up to the amount of the tax due. In two of these years, 2010 and 2011, the credit was“refundable”, meaning that those who owed less in taxes than the maximum credit actually received adirect payment from the U.S. Treasury. (The Earned Income Credit, available to lower income households, works in exactly this fashion.)
The credit was made permanent by the American Taxpayer Relief Act of 2012. Before then, it had been extended and amended periodically after being attached to other legislation, e.g., the Small Business Protection Act of 1996, the Economic Growth and Tax Reconciliation Act of 2001.
Where it came from.
The adoption tax credit has been supported in Congress by members of both parties. It has been supported and aggressively lobbied for by many organizations. In 2012, for example an adoption industry trade organization, the National Council for Adoption (NCFA), engaged both professional and citizen lobbying efforts intended to make the credit permanent and to make it refundable once again.
Its “Adoption Tax Credit Advocacy Kit”, was “designed to help [the public] educate policymakers,members of the media, and others on the importance of extending the adoption tax credit to help every child find a family.” As we’ll see, the credit does more to line the pockets of the adoption industry than it does to ensure that every child has a home.
The NCFA’s goal was to ensure that the adoption tax credit: not be reduced to $6,000; remain available for families adopting from foster care or in privately, whether domestic or foreign; be made permanent; be refundable; and be made a “flat” tax credit for those adopting children with special needs (i.e., that such families receive the full amount of the credit without being limited to the actual costs incurred in the adoption.) It’s worth noting that the only changes sought were to make the credit permanent and to restore its refundability.
How it is sold.
The NCFA’s kit included customizable scripts for talking to members of Congress, letters, email, and op- ed pieces or letters to the editor. The common threads in each are best demonstrated by this excerpt:
“I believe the best adoption tax credit would be permanent, so that it would always be available to support children joining families through adoption. It should also be inclusive to ensure that children
benefit whether they are adopted from foster care, though intercountry adoption, or through private domestic adoption. It should be a refundable credit, so that those with moderate or lower incomes can receive the full benefit of the credit regardless of their tax liability. It also is important that the credit remain “flat” for children with special needs.”
The NCFA’s sample op-ed states that the cost of domestic and intercountry adoption is “typically between $10,000 and $40,000”, then goes on to admit that “[a]doption from foster care is more
affordable upfront” and stress that “children adopted from foster care often have significant special needs that may require added expenses for years to come.”
What wasn’t disclosed.
1. The effect of federal tax subsidies on the cost of private domestic and international adoption.
Infant adoption is an exercise in free market economics, in which price is dictated by supply and demand. There is no question but that the supply of domestic infants available for adoption has
decreased markedly in recent decades. In economic terms, the supply has diminished. Where international adoptions provided an outlet for some of the domestic demand, it has consistently
outstripped supply, forcing the costs ever higher.
Today, domestic adoption costs are limited only by what the market will bear. There is little if any relationship between the cost of providing adoption services and the amounts paid by those adopting, particularly in attorney and other privately facilitated adoptions.
Adoption tax credits increase the cost of adoptions, in two ways. First, by increasing the amount families are able to pay. Second, by increasing the number of families eligible to enter the market.
Credits, in other words, increase the amount the market will bear and increase demand without increasing supply. Who wins? Those who profit from adoption and those adoptive families at the upper
end of the economic ladder, so long as their incomes do not exceed the limits established by Congress.
2. Any sound public policy basis for a tax credit for adoption of healthy infants, foreign or domestic.
Yes, infant adoption is expensive. But, what public purpose is served by a government subsidy for the adoption of healthy newborns who are not currently in foster care and are extremely unlikely to ever be at risk of entering foster care, so long as they are made available for adoption? None that I’m aware of. NCFA argues that a tax credit, particularly a refundable credit, allows low and middle income families to enter the market. They do not, and cannot credibly, argue that it allows them to compete with higher
income families for the adoption of a healthy infant, when the cost of such adoptions may reach as high as $40,000. Where are the low cost adoptions? Foster care, where the state and federal governments already absorb much if not all of the costs of adoption in order to find homes for the children in our care.
Let me blunt: no healthy infant available for adoption in the U.S. will lack a home, with or without the adoption tax credit.
But what of the children of other countries? There are a number of issues here, beginning with whether tax funds are most efficiently spent subsidizing an international adoption or funding local services for children lacking homes in other nations. That question is beyond the scope of this piece, but it is one which must be addressed by any advocate of tax credits for international adoption.
Assuming arguments that humanitarian reasons exist for supporting international adoption, one must still consider the inflationary effects of the tax credit on the cost of international adoption. Despite the fact that more than 6 billion of us crawl the face of this planet, there are only a relatively few children available for adoption internationally, in an international marketplace.
3. The existence of other state and federal programs subsidizing the adoption of children with special needs.
The nature and amount of such assistance are described generally in this publication:
I favor increased funding for these programs in lieu of tax non-refundable or refundable tax credits, to the extent that they do not currently provide adequate incentives for the adoption of waiting children with special needs from foster care.
4. The existence of an alternative, which would treat adoptive families in much the same manner as biological families: a tax deduction.
The current tax code provides for the deduction of medical expenses, including medical expenses incurred in connection with a pregnancy and birth. The value of the deduction, if any, depends upon the amount of those expenses, the marginal tax rate of the family incurring the expenses, and whether and to what extent total medical expenses exceed the 7% threshold in current tax law.
An argument can be made that equal treatment be given to those adopting, on the ground of tax fairness. While this deduction may have some of the same inflationary effects on adoption costs as the tax credit, the effect is likely to be much smaller, simply because the dollars involved are far fewer.
Where the money is going.
According to the NCFA, the IRA has estimated that the tax credit “benefitted 96,949 children and their families in 2010.” No specific source was provided by the NCFA for that claim. The number of waiting children in our foster care system has hovered in the 100,000 – 115,000 range for a number of years.
The numbers reported for domestic and international adoptions for 2010, again by the NCFA, were 22,000 and 29,005, respectively. While the NCFA’s numbers make it hard to see where the IRS got its figure, we can see that some 50,000 non-foster adoptions occurred that year . At even $10,000 per adoption, we paid at least $500 million in 2010 to subsidize these adoptions and more than $600 million if each family exhausted the full, refundable cr edit in that year. Small change in terms of the federal budget, perhaps, but not an insignificant sum for the adoption industry. Certainly, it was sufficient incentive to lead the industry and its trade organization to fight long and hard to make it permanent.
The industry did not get all it wished out of Congress. The credit remains non-refundable. Time will tell whether the industry and its trade organization, the NCFA, come back for another bite of the apple. The industry already has begun a campaign to convince more states to grant adoption tax credits, in the guise of providing “incentives to stabilize the family life of some of society’s most vulnerable children.” Stabilizing the revenues of the American adoption industry would be more accurate.
National Council For Adoption, Adoption Tax Credit Advocacy Kit. (February, 2012, revised May, 2012)
Adoptioncredit.org, Save the Adoption Tax Credit
Charlotte Lozier Institute, The Adoption Tax Credit: Progress and Prospects for Expansion. (March 13, 2013)
James M Hamilton is an attorney in St. Paul, MN. He and his wife adopted internationally in 1992-93, before the adoption tax credit was enacted. Whether he would have accepted the tax credit had it existed is an open question.