Sue Lani Madsen: An income tax by yet another name

Starting in January 2022, working Washingtonians will be paying income tax. It won’t be called income tax. It will show up on pay stubs as a contribution to the Long-Term Services and Supports Trust Act fund. LTSS Trust contributions will start out at 0.58% of all W-2 wages, paid quarterly. Income from self-employment is exempt. There is already talk of raising the tax rate to keep the fund solvent.

The LTSS Trust attempts to solve a very real problem. Too few people save adequately for old age. Nobody expects to need help. Nobody plans to live in a nursing home and few can afford it without Medicaid. And yet seven of every ten Washingtonians will eventually need support of some kind, whether in-home assistance, a nursing home or somewhere in between.

According to a Washington DSHS briefing sheet supporting the Trust, 20 to 40 hours per week of home care costs $33,000 to $66,000 per year. Facility-based care runs from $69,000 to $131,000 annually.

The LTSS Trust promises a maximum $36,500 lifetime benefit. That’s $100 a day for one year of home care, and it’s done. Or it might cover three to five months in a nursing home. As Grandpa used to say, it’s better than a sharp stick in the eye. But not by much.

Compared to a typical long-term care (LTC) insurance policy with an $800,000 lifetime maximum, the LTSS Trust is a short-term care plan with lousy benefits. And the insurance commissioner doesn’t allow private companies to sell short-term plans in Washington because they’re a bad deal for consumers. Only the state of Washington can do that.

Rep. Joe Schmick, R-Colfax, was frustrated by the partisan non-debate over HB 1087, which passed with no Republican support. “If you look at the time value of money compared to a payroll tax over 40 years, as an investment you’d be a fool to even buy this,” said Schmick.

And there’s another catch. If your private policy hits its maximum and Medicaid pays for your last days, your assets are protected up to the limit of your lifetime benefit. Your heirs won’t be forced to sell your home to reimburse Medicaid for your care, unlike the state program which offers no asset protection.

Financial planner Don Morgan from Spokane Valley pointed to other inferior benefits. Credible LTC insurance covers cognitive impairment as a standalone condition, well before abilities to cope with dressing, bathing, eating and mobility are impaired. The state’s short-term plan requires demonstrated difficulty with three of 10 ADLs (activities of daily living) before kicking in, limiting its usefulness to keep a beloved family member with dementia at home.

You can opt out of the tax if you have your own LTC insurance. The policy must be in force by November 1 of this year to avoid the first round of tax collection, although the process for opting out won’t be known until October 1. Employers will be required to deduct the tax on a quarterly basis starting January 1, 2022. The opportunity to file for an exemption ends December 31, 2022, and there are no refunds. Anyone joining the Washington workforce after the window closes has no opportunity to opt out.

Insurance company reactions are varied. Some have restricted offerings, selling only to those over 40 years old and wary of consumers who will cancel after establishing an exemption. Others are marketing like crazy this summer.

No company is currently selling a policy to anyone under 20 years old, according to Diana Wilhite, former Spokane Valley City Council member and currently working as a retirement advisor. “You used to be able to buy a policy as young as 18. Millennials will have a hard time finding a policy today,” said Wilhite. She is also concerned with the lack of awareness among employers on their new responsibilities as tax collectors.

Every employee collecting a paycheck from a Washington-based company will pay this income tax. Live in Post Falls and commute to Spokane? You pay the tax and get no benefits. Live in Washington and planning to retire in Montana? You pay the tax and get no benefits. Working remotely for a tech company based in Washington? You pay the tax and get no benefits.

And speaking of tech companies, Microsoft is reportedly working on a group LTC plan for employees at less cost, with better benefits and portability between states. Keeping those high-tech high value employees in the system matters because it’s a flat tax. Doesn’t matter if you make $50,000 a year managing a small business, more than $750,000 as a university administrator or $19 million playing quarterback for the Seahawks. Everyone pays the same rate.

You could say that’s a point in favor of not allowing anyone to opt out, one of the benefits of a flat tax system. Or you could ask a different question. If a big corporation can offer portable LTC coverage with real benefits at less cost, why is the state bumbling into the insurance business with an ill-conceived income tax hitting hardest those who can least afford it?

Contact Sue Lani Madsen at rulingpen@gmail.com.