When the issue of LTC hit the political agenda in early 1990s, policy makers in the Ministry of Health & Welfare (MHW, now Ministry of Health, Labor and Welfare, MHLW) were convinced that the LTC should be instituted as an entirely new system rather than simply expanding the existing health insurance system. However a lingering question was on how the new LTC system should be financed, i.e. general revenue financed by tax or social insurance system financed mainly by premium contribution.

In view of the inherent drawbacks of welfare system, some economists advocated introducing a social insurance program to the LTC since as dating back as late 80s. Also some pioneering health insurance societies of major corporations voluntarily introduced non-medical services for the LTC into the benefit. However there were strong preference to tax financed welfare system especially from the people who favor the Nordic country style welfare system.

In early 1994, then prime minister Hosokawa surprised the nation by abruptly announcing that he would introduce a new indirect tax ear-marked for welfare services, which was to be called "National Welfare Tax". His sudden announcement not only surprised the nation but, worse, inadvertently provoked resentment against ubiquitous indirect tax which had been introduced only four years earlier. His proposal was aborted and he eventually resigned.