McKenna: ‘Difference is clear’ between new state payroll, capital gains taxes
A KIRO Radio listener asked if former state attorney general Rob McKenna could weigh in on the legality of Washington state’s new long-term care tax.
“This is not illegal unless the court says it is, and I don’t think the court is going to rule against this tax,” McKenna said. “I doubt there will even be a serious challenge to it. And it’s because we have other kinds of payroll taxes already. So, for example, Washington state is the only state in the country in which employees contribute to the cost of premiums for workers compensation, industrial insurance. We’re the only state where workers help pay the premium for workers comp, and that’s a tax on payroll as well.”
“This is like an excise, not an income tax,” McKenna explained. “An excise is a tax the government imposes in exchange for a privilege that it grants or benefit that it provides. Here, the benefit that would be provided is long term care.”
That said, it does not provide a lot of long-term care. The way the law is written, as McKenna explains, is that individuals would receive up to $100 a day to cover long-term care costs, with a maximum lifetime benefit of $36,500.
“Which actually works out to exactly one year’s worth of coverage if your long term care expenses are 100 bucks a day, which, frankly, isn’t very much for long term care,” he said.
“So it’s true that everyone’s compensation, that is everyone who is a W2 employee, is subject to the tax. It’s also very interesting that the definition of employee compensation under this law doesn’t just include salary,” McKenna added. “It includes bonuses, and it includes company stock, and there’s no income cap. So one example I saw online is that if you’re an Amazon employee with annual compensation of $450,000 — 160,000 salary, 290,000 investing, restricted stock units — you’re going to pay an additional $2,610 in payroll taxes. It’s pretty broad.”
The policy aim is clear, however, McKenna says, in that they’re trying to come up with money to pay for increasing long-term care demands on the system as people live longer and more people need care.
This long-term care tax is also different from the capital gains tax, McKenna explains, in at least a few major ways. In full disclosure, McKenna filed a lawsuit challenging the capital gains tax.
“The difference is pretty clear,” he said. “First of all, the capital gains tax is a tax with the first $250,000 of gain excluded. So the rate on the first $250,000 is zero. Secondly, this payroll tax, .58%, is flat and it’s on every dollar that you get paid on your W2. Just as the workers comp premium tax that you pay is on every dollar that you earn. And third, the capital gains tax is going to be collected by the state and then spent on whatever the state wants to spend it on. They’re going to put it into a particular fund, but … it doesn’t result in you receiving a specified benefit, the way you receive Social Security payments after paying that tax for years and years and years.”
“A fourth way we can distinguish them is this: If you go out and obtain your own private long term care insurance, you can opt out. You have one opportunity to do this. So listeners who don’t want to pay this W2 tax, .58%, need to get this done before the end of the year,” he noted. “But once you opt out, you’re not required to pay the tax. And that’s because you don’t pay the tax if you’re not getting the benefit.”
While you can opt out of the long-term care tax, McKenna says, you can only do so if you get private insurance, which still achieves the policy goal of getting people under coverage for long-term care.
“One other thing that’s important to understand: If you move out of state after you’ve paid this tax for, let’s say your entire career, let’s say you’re 25 years old and you pay it [then move], you don’t get to access the Washington long-term care benefit. You only get to access it if you’re living in the state at the time,” he said.
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