Hello M.,
What a difficult, awful situation to be in. I'll try and add a few perspectives. I just finished writing my master's thesis on how to use positive discipline techniques to help small children get along with cats. No joke! Pretty relevant. I did focus on two year-olds, and I know that three year olds are a whole different ball of wax (my daughter is still two). However, I'll give it a shot. I'm also happy to send you a copy of my thesis, and you can read the relevant portions for a LOT more detail. My email is ____@____.com.
I think that unless you're willing to devote a LOT of time and energy to solving this problem, you should indeed try to find another home for the cats. The younger the cats are, the easier it will be to find a home for them. So if your gut is telling you that the right thing to do is find them another home or take them to a shelter, by all means do it soon.
I also agree that getting your daughter some addition support/evaluation/etc. is a good idea. Her behavior does seem extreme, but not out of the bounds of ordinary for small kids.
It is key that you supervise her when she's around the cats. I know that's probably next to impossible with another little one around, but this is what you need to do until the behavior is changed. One way to accomplish that is to separate your daughter from the cats by having them in a safe place with everything they need (food, water, litter, toys, resting place, etc.).
Personally, I do not recommend spanking her when she does the wrong thing to the cats. I may be dead wrong, but my sense is that at best it will create a scenario where she'll behave when your present but really socks it to them if no one is watching. She very well might really seek out opportunities where she can catch them alone. Again, supervision, supervision, supervision.
The emphasis of my thesis was on telling small children exactly what to do with cats, as opposed to focusing on what they should not do. Very specific language about petting, how to pet, where, and with constant supervision. Also about creating other habits of care that can substitute for the negative attention, i.e. giving them food every day, and (if she can handle this) even hand feeding them dry food.
I would also add that it really sounds to me like your daughter is feeling like the situation is out of control, and she's looking for control over the cats. At least with my daughter, even though most of her problem behaviors have cleared up, she still likes to chase them sometimes or make a loud noise because she likes the power of the cause and effect that's created by her actions. Channeling this desire for power and influence into something positive (feeding them, brushing them) might help.
There's lots more I could say. Anyone reading this is welcome to email at the address above. However, my sense is that you're probably dealing with more than you can handle and you need to simplify the situation. Having two kittens and a baby is a ton. My best wishes to you in this very hard situation.
L.