As California considers how to fund long-term care (LTC) services, payroll taxes are emerging as one of the leading options. Payroll taxes, which are automatically deducted from employees’ wages, are often seen as an effective way to generate stable, ongoing revenue for public services. Several payroll tax models are being discussed, each with different structures for determining tax rates and distributions. Below is a breakdown of some payroll tax models related to LTC funding, along with examples of how they have been implemented or proposed elsewhere.

1. Flat Payroll Tax

A flat payroll tax applies the same percentage rate to all employees, regardless of their income level. For example, all employees may pay 0.5% of their wages towards long-term care funding. This tax is straightforward and easy to administer, as the rate remains constant across different income brackets.

Example: Washington State’s WA Cares Fund

Washington became the first state in the U.S. to implement a payroll tax specifically for long-term care with its WA Cares Fund. Beginning in July 2023, workers are required to contribute 0.58% of their wages. This tax applies equally to all wage earners, regardless of income. The revenue generated funds long-term care benefits, allowing eligible individuals to access services like in-home care or nursing facilities when needed.

Advantages:

• Simple to calculate and administer.
• Ensures that everyone contributes to the program equally.

Challenges:

• Can be regressive, as lower-income workers end up paying a higher percentage of their total income compared to high earners.

2. Progressive Payroll Tax

A progressive payroll tax imposes higher rates on higher-income workers, making the tax burden more equitable. In this model, lower-income earners contribute a smaller percentage of their wages, while higher-income earners pay more. This is designed to ensure that the tax burden is distributed according to workers’ ability to pay.

Example: California’s State Disability Insurance (SDI)

California’s State Disability Insurance (SDI) program is funded by a progressive payroll tax. In 2024, employees contribute 1.1% of their wages up to a maximum taxable income of $153,164. This means that higher earners pay more in total taxes, but the percentage rate remains the same until it reaches the cap. A similar structure could be implemented for LTC, with an increasing rate or income cap for high earners.

Advantages:

• Ensures higher-income individuals contribute more to the program, making it more equitable.
• Reduces the financial burden on low-wage workers.

Challenges:

• More complex to administer, as rates vary by income level.
• May face resistance from high-income earners.

3. Income-Based Sliding Scale Payroll Tax

A sliding scale payroll tax sets different contribution rates based on defined income brackets. Instead of a single flat or progressive rate, there are distinct categories with different tax rates for each income level. For example, those earning up to $50,000 might pay 0.5%, while those earning more than $100,000 could pay 1.5%.

Example: Proposed New York State Paid Family Leave

In 2016, New York implemented a paid family leave program funded through employee payroll contributions, which operates on a sliding scale. Workers contribute between 0.126% to 0.511% of their wages, depending on their income level. A similar model for LTC in California could ensure that low-income workers face minimal financial burden while high earners contribute more proportionally.

Advantages:

• Ensures that tax rates are closely tied to income, making it a fairer system.
• Can generate more revenue from higher earners while protecting low-income workers.

Challenges:

• More complex to implement than a flat tax, as it requires careful calibration of tax brackets.
• May lead to disputes over where income thresholds should be set.

4. Payroll Tax with Income Exemptions

In this model, there are income exemptions that protect workers earning below a certain threshold from paying the tax at all. For example, individuals earning less than $25,000 per year might be exempt, while those earning more than this amount would pay the tax on wages above the threshold.

Example: Oregon’s Paid Family and Medical Leave Insurance Program

Oregon’s Paid Family and Medical Leave Insurance Program includes exemptions for low-income earners. Workers earning below a certain income threshold are exempt from paying the tax, and only those earning above that threshold contribute. A similar structure for LTC in California could exempt the lowest-income workers while still providing comprehensive long-term care funding.

Advantages:

• Protects the lowest-income earners from additional financial strain.
• Keeps the tax burden more equitable by requiring only higher earners to contribute.

Challenges:

• Exemptions could reduce the total pool of contributors, potentially leading to underfunding.
• Could create income cliffs, where workers just above the exemption threshold may feel disproportionately taxed.

5. Payroll Tax with Employer Matching Contributions

Another model is a payroll tax where employers match the contributions made by employees. This model requires both employees and employers to contribute a percentage of wages, effectively doubling the amount of revenue generated without placing the full burden on employees. The tax rates could vary depending on income or remain flat across all wage earners.

Example: Social Security Payroll Tax

The Social Security Payroll Tax is an example of a system where employers and employees each contribute 6.2% of wages up to a certain wage cap ($160,200 in 2024). If California adopted a similar system for long-term care, employees and employers could both contribute, for instance, 0.5% each, doubling the available funds for the LTC program.

Advantages:

• Shared responsibility between workers and employers ensures a more balanced funding structure.
• Provides a substantial revenue source without disproportionately burdening employees.

Challenges:

• Employers may resist, viewing the matching contribution as an additional cost of doing business.
• May lead to lower wages or fewer job opportunities if employers pass the cost onto employees or reduce hiring.

Balancing Fairness and Sustainability

Each of these payroll tax models offers different advantages and challenges. As California explores the best way to fund long-term care services, balancing fairness and sustainability is critical. The flat payroll tax is simple and easy to administer, but progressive and sliding scale models offer greater equity by ensuring that higher-income earners contribute more. Income exemptions and employer matching models help distribute the financial burden, making long-term care funding more sustainable in the long run.

California’s decision will ultimately reflect its commitment to ensuring that all residents have access to affordable long-term care, without placing undue financial strain on vulnerable populations. The right payroll tax model will be one that generates sufficient revenue while ensuring fairness across income levels.