Vermont has responded to rising childcare costs by increasing taxes on hardworking Vermonters to subsidize childcare for lower-income families, without addressing the supply constraints driving prices up (and in some cases considering further regulatory expansion through proposals such as S.206). That approach may reduce out-of-pocket costs for some families, but it has not made childcare broadly more affordable or accessible because it does not address the underlying shortage of care.
In 2016, 47% of Vermont infants and toddlers likely to need childcare did not have access to regulated care. That shortage reflects a supply problem. In a functioning market, rising demand would attract new providers and help moderate prices over time. But in Vermont, policy barriers have limited providers’ ability to respond.
Proponents of Vermont’s subsidy-heavy approach have argued that “it’s a market failure… parents cannot afford to pay more. Early educators cannot afford to make less… the solution is… money.”
But Vermont’s childcare market is not meaningfully free. It operates under substantial regulatory constraints that affect entry, pricing, and competition. Vermont has lost nearly 60% of its family home-based childcare providers since the early 2010s as regulatory requirements have increased around staffing qualifications, paperwork, quality rating participation, and compliance standards. These burdens have fallen especially hard on smaller providers, many of whom have closed or chosen not to enter the market at all.
Home-based providers often represent the most flexible and affordable options for working families, especially in rural areas. As those providers have disappeared, families have been pushed toward more expensive center-based care, contributing to rising costs. Vermont’s own 2024 Market Rate Survey found licensed childcare rates have risen roughly 35% since 2019.
Yet rather than tackle those supply constraints, legislators passed Act 76, which relies primarily on taxation to fund increased subsidies. Passed in 2023, the law imposed a new childcare payroll tax of 0.44% on wages, with employers paying at least 75% of that burden, along with a 0.11% tax on self-employment income. Revenue projections are roughly $100 to $125 million annually.
Funds from the payroll tax are redistributed through expanded eligibility in the Child Care Financial Assistance Program and increased reimbursement rates for providers. Many lower-income families may benefit, but this does not reduce the underlying cost of care – it just redistributes who pays for it. Middle-income households often still face high childcare prices while also paying into the tax.
That is why the payroll tax is not fundamentally an affordability reform. It is redistribution within a constrained and expensive market, and it also increases labor costs for employers. Some of those costs may show up in slower wage growth, reduced hiring flexibility, or higher consumer prices. Vermont employers have raised exactly those concerns, citing the childcare payroll tax alongside other rising costs of doing business in the state.
So how can the legislature help reduce the burden on families looking for childcare without just shifting the burden onto businesses and other families?
States such as Arizona and Utah have maintained comparatively more flexible frameworks for home-based childcare and small providers, helping preserve lower-cost care options and avoid some of the supply bottlenecks seen in more heavily regulated states. Other states have also focused on modernizing rules that function as supply constraints. Nebraska has explored licensing structures and staffing frameworks aimed at preserving provider flexibility while maintaining safety standards, while Idaho has recently enacted reforms loosening provider ratios and reducing regulatory barriers to expand supply. The lesson is simple: when scarcity is driving prices, expanding supply should be part of the solution.
A Vermont reform agenda could take lessons from these examples by revisiting burdens on home-based providers, reviewing staffing and ratio requirements, reducing permitting obstacles, and pausing additional mandates proposed in legislation such as S. 206. These reforms would not abandon support for families, they would complement it by addressing the root causes of high prices. If Vermont wants childcare to become genuinely less expensive, it needs less emphasis on centralization and greater trust in competition to help moderate prices over time.
