New Tax Aimed At Paying Long-Term Costs For Older Adults Faces Criticism

Workers in Washington state saw a new deduction in their paychecks last month: a tax on wages meant to help pay for the cost of long-term care.

The first-of-its-kind tax in the U.S. was created in 2019. However, under the program’s timeline, workers began making payroll contributions in July of 2023.

Washington Cares Payroll Tax

Here’s how it works. Workers in the state who are not otherwise exempt are subject to a 0.58% tax on their wages. That money is directed to a state fund—the WA Cares program—that can be accessed during lifetime to pay for long-term care costs, including needs like food and mobility.

Workers can benefit from the program after paying in for ten years—it’s possible to accelerate that benefit in some circumstances. The maximum lifetime benefit is $36,500, which will be adjusted for inflation. Currently, the benefit is only available to those who remain in the state and is not transferrable to other family members.

Costs

According to the text of HB 1087 (now law), the senior population has doubled in Washington since 1980, and it will more than double again by 2040. Most middle-class families, they say, have not saved enough for care. That’s something that estate planning lawyers are well aware of—typically, higher income families may be able to afford long-term care or have engaged in planning like long-term care insurance to pay for anticipated services. Those already on government assistance likely qualify for more assistance later in life. But middle-class families who have not previously applied for benefits may be forced to rely on family for help—or spend down their savings to qualify for government assistance. The spend-down number to qualify for Medicaid is generally around $2,000 (there’s some wiggle here since, while it’s a federal program, program are administered by individual states).

HB 1087 also notes that, in 2019, the average cost for medical in-home care is $24,000 per year, and the average price for nursing home care is $65,000 per year. But Genworth, a long-term care provider, puts those numbers much higher. They report that the national median cost for a private nursing home room was nearly $100,000 per year ($9,034 per month in 2021) and $4,500 per month for a one-bedroom unit in assisted living. A home health aide costs $5,148 per month, or over $60,000 per year.

That’s concerning for some, when compared with the total benefit available.

Pushback

There is already pushback on the program. Senate GOP Leader John Braun has suggested that workers should be allowed to opt out. According to The Seattle Times, Braun has described the program as “woefully inadequate” and has said that people “don’t like [it] because it’s not well designed.”

Opt-Outs And Exemptions

Opt-outs to the program were previously available. Those workers who had purchased private long-term care insurance on or before Nov. 1, 2021, could apply for an exemption through Dec. 31, 2022. That particular opt-out exemption is no longer available.

Additionally, some taxpayers are already exempt, subject to approval. Those include out-of-state workers, those temporarily working in Washington with a nonimmigrant visa, spouses or registered domestic partners of active-duty military, and veterans with a 70% or greater service-connected disability. According to the website, the program is not available to federal government employees, including active-duty military employees (unless you work for a military department that is considered a Washington state employer).

And while all non-exempt full-time, part-time, and temporary workers in Washington contribute to the fund, self-employed workers must elect to participate.

According to the Employment Security Department, about 508,000 Washingtonians have already opted out. For reference, the current population of Washington is estimated to be 7.8 million—about 38% of those are under 18 or over age 65, bringing the working population to about 4.8 million.

Some, including Sen. Braun, would like for anyone to be able to opt out of the program. That’s worrisome for those who created the tax because it would dilute the fund for future payouts. The money for the tax is pooled in a trust fund and, like Social Security, used to pay out benefits in the future. The fewer participants in the pool, the less money to invest and eventually, distribute. And, statistically those who would remain in the pool would tend to be those with no other alternatives and who need the most benefits.

Insurance

According to the program, the average monthly contribution by Washington workers will be $24.21, or $291 per year. That’s considerably cheaper than long-term care insurance, but authors of HB 1087 suggest such insurance could be hard to come by. They claim that while 102 companies offered long-term care insurance coverage in the state in 2002, today, that number is only 12.

Assuming you can find coverage, premiums and benefits can vary, depending on your health and age, and the growth of the policy. According to the American Association for Long-Term Care Insurance (AALTCI), the average long-term care insurance premium for a 55-year-old man cost $2,220 beginning in 2022. That would provide an initial $165,000 in benefits with the value hitting $222,400 at age 85 (assuming a 1% growth in benefits).

Long-Term Problem

How to fund long-term care is an issue that other states will likely tackle in the future. According to an OECD study, the U.S. has by far the most significant long-term care market, making up a whopping 2.04% of our GDP in 2017. Additionally, the Congressional Budget Office (CBO) has estimated that Medicaid expenditures will grow by an annual rate of 8%, with enrollments jumping from 71 million in 2012 to 91 million by 2023—per the Medicaid website, we’re on track to hit those numbers. Currently, Medicaid pays for more than half of all long-term care in the U.S., and more than 60% of care for nursing home residents.

Under the Federal Insurance Contributions Act, federal taxes are deducted from your paycheck. You’ll see a deduction of 6.2% of your wages—subject to a cap—and 1.45% of your wages—not subject to a cap—taken out of your paycheck. Employers make a matching contribution (and self-employed persons pay both sides). Those taxes help fund Social Security and Medicare programs. In 2023, Social Security, Medicare, and Medicaid accounted for 44% of all federal outlays.