As California grapples with the growing need for long-term care (LTC) services, the state is exploring several tax proposals to fund a sustainable solution. With an aging population and rising costs for elder care, these tax proposals aim to provide financial support for services such as home care, assisted living, and nursing homes. In 2023 and 2024, the California Department of Insurance (CDI), in collaboration with various stakeholders, is evaluating several models to address the crisis. Here are five LTC tax proposals currently being considered for California.

1. Payroll Tax Based on Income

One of the leading proposals under consideration is a payroll tax based on income, similar to Washington State’s WA Cares Fund. This model would impose a small percentage of workers’ wages, likely between 0.5% to 1%, as a tax to fund a state-run LTC program. This system would pool the tax revenue to provide long-term care benefits for residents when they need it, such as in-home assistance or nursing home care.

Advantages:

• Easy to administer, as it is automatically deducted from wages.
• Ensures that the program is funded by all workers, creating a large pool of resources.
• Provides a universal benefit to those who contribute, regardless of income.

Challenges:

• Some workers, especially younger individuals, may resist paying into a program they might not use for decades.
• The tax may add to the financial burden on lower-income workers, although exemptions or tax caps for low earners could mitigate this.

2. Employer Contribution Model

Another proposal involves requiring employers to contribute to an LTC fund, either by matching employee contributions or by paying a flat percentage of payroll into the system. This approach seeks to share the responsibility between employees and employers, creating a more balanced funding mechanism.

Advantages:

• Reduces the financial burden on individual workers by sharing costs with employers.
• Encourages employer involvement in long-term care planning for their employees.
• Could be coupled with tax incentives to encourage employers to contribute more voluntarily.

Challenges:

• Resistance from business owners who may view this as an additional cost, especially in industries with tight margins.
• Potential job loss or wage stagnation if employers offset the tax by reducing other employee benefits or hiring fewer workers.

3. Wealth Tax or Estate Tax

A wealth tax or estate tax targeting high-net-worth individuals has also been floated as a way to fund long-term care. This tax could be applied to the wealthiest Californians, either as an ongoing wealth tax or as a tax on estates valued above a certain threshold when individuals pass away. The revenue generated would be used to support long-term care services for the general population.

Advantages:

• Targets those with the greatest financial resources, reducing the tax burden on middle- and lower-income individuals.
• Could generate significant revenue with a relatively low tax rate due to California’s high concentration of wealth.
• Aligns with the idea that wealthier individuals can afford to contribute more to the public good.

Challenges:

• Likely to face strong opposition from wealthy individuals and interest groups.
• Wealth and estate taxes can be complicated to administer, with potential for tax avoidance strategies.
• May not generate sufficient revenue to fully cover long-term care costs on its own.

4. Public-Private Partnership with LTC Insurance

This proposal involves the creation of a public-private partnership where residents are required to purchase private long-term care insurance, but the state would offer subsidies or tax credits to make it affordable for low- and middle-income earners. In this hybrid model, the state would regulate private insurance companies and ensure they meet certain standards, while individuals contribute through premiums.

Advantages:

• Encourages personal responsibility by requiring individuals to invest in their own long-term care.
• Leverages the private insurance market, reducing the burden on state-run programs.
• Provides flexibility for individuals to choose their level of coverage and benefits.

Challenges:

• Private LTC insurance can be expensive, even with subsidies, and many Californians may still find it unaffordable.
• Complex regulatory and administrative challenges in overseeing private insurance providers.
• Doesn’t offer universal coverage, meaning some individuals could still fall through the cracks.

5. Sales Tax Increase with Exemptions for Essentials

An alternative proposal to raise funds for long-term care is a statewide sales tax increase, with exemptions for essential items such as groceries and medications. This approach would spread the tax burden across all Californians, with the additional revenue earmarked for a long-term care trust fund.

Advantages:

• Generates revenue from a broad base of consumers, ensuring that everyone contributes to the system.
• Easy to implement, as the sales tax infrastructure is already in place.
• Exemptions for essentials help protect lower-income individuals from regressive tax effects.

Challenges:

• Sales taxes tend to be regressive, disproportionately affecting lower-income individuals who spend a higher percentage of their income on taxable goods.
• The increase might not generate enough revenue to cover the full cost of a comprehensive LTC program.
• Public opposition could be strong, as Californians already face relatively high sales taxes.

Conclusion: The Path Ahead

California’s long-term care funding challenges require innovative and comprehensive solutions. These five tax proposals reflect the diversity of ideas being explored to ensure that the state’s elderly and disabled populations receive the care they need without placing undue financial strain on families. As the California Department of Insurance continues its research and gathers input from stakeholders, the most viable option will likely involve a combination of these proposals, balancing the need for sufficient funding with fairness and equity for all Californians.

By the end of 2024, California could be on the verge of implementing one of these groundbreaking models, setting an example for other states grappling with similar long-term care crises.