As discussed in Part 1 of our advisory series, withholdings for Washington State's Long-Term Services and Supports Trust Program ("WA Cares") tax are scheduled to begin July 1, 2023. In Part 2, we ask the hard questions about WA Cares, its lack of public support, funding concerns, and the constitutionality of WA Cares as a state tax.
Does WA Cares have sufficient funding? WA Cares is projected to produce a surplus for the first 30 years. Washington State will collect approximately $1 billion per year from employees and no benefits are payable for the first three years. Once benefits become payable in 2026, the majority of the covered population will not qualify for WA Cares benefits until a much later date.
The problem is that, over time, WA Cares will pay more in benefits than the state collects. When WA Cares was first introduced, the Office of the State Actuary showed WA Cares had a net present value deficit of $15 billion and would be unable to pay benefits when due. A revised actuarial report published on October 20, 2022, now shows WA Cares is expected to be able to pay benefits through the first 75 years of operation. However, should modeling assumptions change, the report provides the WA Cares tax could require an increase from .58 percent to 1.23 percent of wages to cover benefit expenditures.
By 2053, expenditures are anticipated to exceed collected revenue, and it will only be a matter of time before the original surplus is exhausted. This is problematic for anyone paying into WA Cares. Unless funding is examined and corrected annually, WA Cares might not have sufficient cash reserves and would face an unfunded liability similar to Social Security.
Will WA Cares provide an adequate benefit? WA Cares provides a limited benefit of $100 per day to a lifetime maximum of $36,500 only after an individual requires assistance with at least three activities of daily living. In 2023, the nationwide average cost for a private Medicare-certified nursing home room is $108,000 per year. In-home care costs on average at least $51,000 per year for 40 hours of help per week. Thus, many Washington employees believe the benefits provided are simply inadequate and that better, more affordable coverage is available through private insurance.
Is the benefit portable? To qualify for WA Cares benefits, an individual must be and remain a resident of Washington State. This means that individuals who pay into WA Cares will be unable to collect any benefit if they retire in a different state. With the high cost of living in Washington for retirees, this lack of portability remains a major concern for all employees. In contrast, private insurance is typically portable and benefits are paid regardless of where the individual resides.
Is WA Cares an unconstitutional income tax? When the federal court dismissed Pacific Bells, et al. v. Inslee for lack of jurisdiction, the federal court noted the "Plaintiffs may likely challenge WA Cares as violating Article VII, Section 1 of the Washington Constitution that requires all taxes to be uniform upon the same class of property within the territorial limits of the authority levying the tax." Thus, the dismissal set the stage to challenge WA Cares as an unconstitutional income tax imposed on employees receiving wages in this state.
The state would likely maintain that the Washington Constitution is not violated because WA Cares is an "excise tax" and not an income tax. In Quinn/Clayton v. State of Washington, the state similarly argued the new capital gains tax was an "excise tax" and not an income tax. The Douglas County Superior Court disagreed, finding that the new capital gains tax was an income tax. The logic of Quinn/Clayton would indicate that WA Cares is also an income tax. If the tax is declared to be an income tax, as previously indicated, the income tax must be uniform across all taxpayers. Under WA Cares, approximately 470,000 individuals are permanently exempt from coverage by the purchase of insurance from a private carrier, another 200,000 individuals are exempt under the statute, and approximately 230,000 self-employed individuals have the optional right to opt into WA Cares. WA Cares could, therefore, be found to violate the uniformity clause of the Washington Constitution as it is not applicable to LLCs and self-employed individuals and has a number of other opt-out provisions, enabling approximately 900,000 Washington wage earners to avoid the tax altogether.
The Washington State Supreme Court heard oral arguments in the Quinn/Clayton capital gains excise tax dispute on January 26, 2023. One group asked the Court to revisit past precedent as to whether income was properly classified as property under the Washington Constitution. It seems unlikely that the Court will take that approach. Rather, the Court will likely grapple with the issue of whether the tax is an income tax or an excise tax. The Court's decision in Quinn/Clayton will likely shape any arguments relating to the constitutionality of WA Cares as an income tax. The Quinn parties asked that the Court expedite its decision.
What are the next steps? Employers and employees should prepare for wage withholdings to begin July 1, 2023, with the WA Cares tax remitted to the Washington State Employment Security Department in the same manner as Paid Family and Medical Leave contributions. Depending on the outcome of Quinn/Clayton, employers and employees may wish to challenge WA Cares as an unconstitutional income tax and demand that any withholdings paid to the state be returned.