The lights have been turned out at the state capitol and lawmakers have scurried home to escape the fall out of their actions and now it is up to the governor to deal with the mess left behind by lawmakers. Unfortunately, it seems that many, and in particular the business community, have put their bets on the governor to stop bad legislation from becoming law. Among the measures that may be vetoed is the proposal to impose a new tax on everyone in the state for the purpose of funding a long-term care insurance program.

It is amazing that lawmakers would support raising nearly $100 million in new taxes through the long-term care proposal while fiddling with all kinds of schemes to balance the state budget. On one hand, lawmakers decried the loss of services for the poor, cuts to education, and reductions to public safety. They raided special funds to help balance the budget, took the proceeds of fees paid by professionals for licensing and sapped the fund that is supposed to help people acquire their first home.

The long-term care proposal is patterned somewhat after Social Security, but instead of the contribution being based on a percentage of a person’s wages, it is a flat dollar amount per month — initially $10 per month rising to $23 per month by 2011. As a result, it is a regressive tax, that is $10 to a low-income family is a larger percentage than it is for a high-income wage earner. Indeed, the new tax will be a true burden on the poor and middle-income families of the state as any single person earning more than $10,000 in gross income or a couple earning more than $16,000 will be subject to the new tax.

And in their drive to make the proposal more palatable, the proponents added features like making the amount paid into the program tax deductible and providing a tax credit to those who buy their own private long-term care insurance. Those features favor largely upper-income taxpayers as middle- to low-income taxpayers probably are better off taking the standard deduction at the federal level and barely have enough deductions to make it attractive to itemize deductions at the state level.

As for the tax credit, if a person has the means to afford long-term care insurance on his or her own, they would probably be in a higher income bracket. Thus, the tax benefits of the bill favor upper income taxpayers while those at the lower end of the income scale will just end up paying the tax and having no tax benefits.

And speaking of benefits, it should be remembered that any income tax benefit means that it is that much less that will accrue to the state general fund, the fund where the state is having all of these shortfalls. So the tax benefits created by the long-term care proposal will mean less money for schools and less money for human services. The net effect is that the general fund will be subsidizing the long-term care fund.

As noted earlier, the proposal is patterned after the Social Security model where there are enough contributors to the fund to match and cover the benefits paid out. However, as anyone who was around in the 1970’s knows Social Security has needed several fixes and a number of tax increases to keep up with the benefits paid out. As the baby-boomer generation ages, the prospect that Social Security will be able to pay the benefits grows even more doubtful. This long-term care plan will eventually become the big black hole that Social Security is.

Proponents might argue that future rate increases won’t be necessary because the money will be invested and should produce enough income to forgo rate increases in the future. First of all, the rate increases are already established by the legislation, rising to $23 a month by the year 2011. Second, if the contributions are to earn any kind of decent return, it is a certainty that they will have to be invested outside the state. Think about it, $100 million or more a year will have to be sent outside the state to earn the money to pay for the benefits. That’s $100 million that could have been spent and invested in Hawaii. So instead of bettering the economy, proponents have driven another stake into the heart of the economy.

And the economy? Well, here is one more thing with which employers will have to contend. Proponents believe that this new tax will just be filed like any other income tax. Not so, the employer will have to keep track of which employee worked enough hours this month in order to make the $10 contribution, attach that record to a Social Security number and reconcile it at the end of the year. Yes, it will add to the cost of doing business.

The long-term care issue needs to be addressed. The problem with the proposal currently on the governor’s desk is that it will ensure that there will be automatic tax increases in the future as the funding scheme fails. It deserves to be vetoed.

”’Lowell L. Kalapa is the president of the Tax Foundation of Hawaii, a private, non-profit educational organization. For more information, please call 536-4587 or log on to”’ http://www.tfhawaii.org

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