BILL ANALYSIS
SENATE REVENUE & TAXATION COMMITTEE
Senator Gilbert Cedillo, Chair
AJR 8 - Mountjoy
Amended: As Introduced
Hearing: January 14, 2004 Fiscal: No
SUBJECT: Federal Income Tax Deductions: Long-Term
Insurance Premiums
EXISTING LAW
EXISTING FEDERAL AND STATE LAWS: Allow taxpayers who
itemize a deduction for unreimbursed medical expenses that
exceed 7.5% of their adjusted gross incomes. Unreimbursed
long-term care insurance premiums are included in the
definition of medical expenses eligible for the deduction
but are capped based on the age of the taxpayer, as
follows:
Age of Taxpayer Maximum Deduction 40 or less $ 200; 41-50 $
375;
51-60 $ 750; 61-70 $2,000; over 70 $2,500
Allow taxpayers to exclude the value of medical insurance
benefits (including long-term care insurance benefits)
provided by their employer from gross income. The exclusion
is allowed for employer-provided insurance that covers the
taxpayer, his or her spouse, and his or her dependents.
Allow employers to deduct their costs to provide health
insurance (including long-term care insurance) to their
employees, employees' spouses, and employees' dependents.
EXISTING STATE LAW authorizes a nonrefundable $500
long-term caregiver credit for eligible taxpayers. A
taxpayer with long-term care needs may claim the credit for
himself or herself. Alternately, the spouse or dependent of
that taxpayer may claim the credit if they help the
taxpayer with his or her long-term care needs. The credit
is not allowed to married couples filing jointly with
adjusted gross incomes (AGIs) of $100,000 or more or to
other individuals with AGIs of $50,000 or more. The credit
is available through the 2004 tax year.
AJR 8-Mountjoy
Page
THIS BILL
Memorializes the United States (U.S.) Congress and the
President to review federal income tax laws applicable to
the deductibility of long-term care insurance premiums, and
to enact new tax benefits allowing individuals to deduct
the total cost of any premiums paid for a qualifying
long-term care insurance policy or contract. Further
encourages Congress and the President to provide for full
deductibility of long-term care insurance premiums,
regardless of the income of the taxpayer paying the
premium, the total annual amount paid by the taxpayer for
medical expenses, or the age of the covered individual.
FISCAL EFFECT:
None
COMMENTS:
A. Purpose of the bill
This bill is sponsored by the California Senior Legislature
and is intended improve the affordability of long-term care
insurance. This bill's author notes that increasing the
affordability of long-term care insurance will reduce both
federal and state governments' costs to provide long-term
care for the uninsured.
B. Previous Hearing
This bill failed passage in the committee on July 17, 2003.
At that time, the committee members asked the author to
amend the bill to require specific income eligibility for
long term care credits. The author offered an amendment to
restrict the bill to low- and middle-income individuals,
but does not define the amount. Committee members
suggested a specific means test, such as a percentage of
poverty levels; the author did not accept these amendments.
The committee may wish to consider a study by the LAO to
determine the most effective use of this credit and the
AJR 8-Mountjoy
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population that would benefit most.
C. Long Term Care
Providing long-term care for elderly family members and
children in need of it has become a significant challenge
for a large number of American families. According to
information compiled by the California Health and Human
Services Agency from a variety of state and federal
sources, California is home to approximately 600,000
persons with significantly restricted function resulting
from disability or illness. If California follows national
patterns, close to two-thirds of these Californians are
elderly. According to the Agency for Health Care Policy and
Research, about 15% of U.S. adults are providing special
care for seriously ill or disabled taxpayers. Of those
receiving care, 57% are aged 65 or over, 40% are
working-age adults between 18 and 64 years of age, and 3%
are children. The percentage of the population requiring
long-term care assistance is expected to grow over time as
the baby-boom population ages.
Family members provide much of this long-term care on an
informal basis. Medicare (coverage for the elderly and
disabled) was not designed to cover long-term care.
Medi-Cal (coverage for those with low incomes or those who
are indigent due to health care costs) does help offset
long-term care costs but has historically focused on
providing nursing home coverage. For these and other
reasons, many family members invest significant time and
money and undergo physical and emotional strain to care for
their loved ones at home or nearby. Approximately three
million Californians provide about 2.8 billion hours of
assistance to their loved ones at an average cost of
between $4,800 and $10,400 per caregiver. These figures
compare to costs of approximately $50,000 for nursing home
care.
D. Does Long Term Care Save the State Money?
Long-term care insurance is virtually untested as a means
of helping offset long-term care expenses. Only 1.5% of all
Americans has long-term care insurance, in part because of
its cost. Long-term care insurance premiums average $750
per year for individuals who purchase the insurance at age
45 but increase to nearly $4,000 for persons at age 70 and
over $6,700 for individuals at age 75.
AJR 8-Mountjoy
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According to the Center for Health and Long-Term Care
Research, every long-term insurance policy sold with
automatic inflation protection saves the Medi-Cal program
approximately $14,000. Although California ranks second
among all states in sales of long-term insurance policies
sold, the state's penetration rate is just under 7%.
E. Previous Legislation
Several measures have previously been introduced to offer
state income tax credits or deductions for the purchase of
long-term care insurance [e.g., AB 64 (Alquist) from the
2001-02 Legislative Session, AB 149 (Leach) from the
1999-2000 Legislative Session, AB 864 (Battin) from the
1999-2000 Legislative Session, and AB 2 (Alquist) from the
1999-2000 Legislative Session]. All of these bills failed
due to cost concerns.
Support and Opposition
Support: California Senior Legislature
CalPERS
State Farm Insurance
California Association of Health Facilities
Opposition:California Tax Reform Association (CTRA)
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Consultant: Gayle Miller
January 9, 2004