Tanning Tax Questions

The 10% excise tax on indoor tanning services went into effect on July 1 and there has been a fair amount of negative press that is likely causing many people to wonder why this activity was singled out for taxation. The tax was enacted as part of the Patient Protection and Affordable Care Act (P.L. 111-148, Section 10907; March 23, 2010). It took the place of a provision that would have instead imposed a 5% tax on elective cosmetic surgery.

Several questions come to mind:

1. Why any new excise tax? To generate funds to help pay for health care reform although neither proposal raises a lot of revenue. The tanning tax is expected to generate $2.7 billion over 10 years per JCX-17-10), but the cosmetic surgery tax was projected to generate $5.8 billion over the same time period (JCX-55-09). Given the cost of health care reform, one wonders why Congress opted for the tax that generated less revenue or didn't go with both options.
2. Why a tax on indoor tanning services rather than on elective cosmetic surgery? Well, it seems that indoor tanning is worse for your health than elective cosmetic surgery. Some reports indicate that the American Academy of Dermatology Association pushed for the tanning tax. Per Dr. David M. Pariser, president of the Association: “A tax on indoor tanning services would serve as a signal from the federal government to everyone, especially young people, that indoor tanning is dangerous and should be avoided." (AADA press release of 12/22/09). The AADA also notes that 30 million people use indoor tanning salons including about 2.3 million teens who are potentially more adversely affected by the rays than older individuals. For more on the AADA warnings about tanning salons, see their 2-pager).
3. Was lobbying power a reason for one tax over the other? Apparently yes. A December 21, 2009 story from Reuters noted that the maker of Botox (Allergan) and plastic surgeons were successful in getting the Senate to replace the 5% cosmetic surgery tax ("Botox spared over tanning beds in U.S. health fight"). This article also notes that Congress likely did not want to anger doctors when they needed their support for the overall bill and the FDA had already issued warnings about tanning salons. A December 22, 2009 Daily Finance article notes that the salons are an "easier target" - there are about 20,000 tanning salons, over half of which are owned by women. This article also notes that the Indoor Tanning Association "claims moderate tanning can have health benefit of vitamin D production. Indeed, phototherapy performed by a medical professional wouldn't be taxed." (Alazraki, "'Botax' Out, 'Tan Tax' In: Health Care Bill Offers a Lesson in Lobbying")
4. Why tanning rather than other unhealthy activities? This is a good question. There are various ways to change behavior and tax is one of them, but not necessarily the best one. The new tax requires more administration and compliance time by the IRS and tanning salons. Congress could have required salons to post a warning about the potential harm. That might have deterred more people from indoor tanning than a 10% excise tax. Why not also post such warnings at beaches and public swimming pools? Where is data on the health care costs of skin cancer treatments caused by indoor tanning? Why not a tax on unhealthy foods? The problem is in defining unhealthy foods.
5. Are all indoor tanning services taxed? No. The regulations issued by the IRS exempt tanning services provided by a health club (gym) that comes along with the regular dues. This is odd and really seems to defeat the purpose of the tax if it was to help deter harmful behavior. But, apparently the IRS thought it would be too difficult to determine the amount of ones dues going to the tanning services. I think this should be changed for the final regulations. The health club can make an estimate based on how long a person uses the tanning services and what salons charge for similar time periods, but the amount would not exceed, say 90% of what the person pays for dues. For links to the IRS guidance - click here, as well as here for the IRS video and here for the final and temporary regulations.
6. What will happen to the tanning tax revenues? There was no requirement that any of the revenue be earmarked for educational purposes. The revenues go into the General Fund.
7. Will states adopt a similar tax? Perhaps. Once the federal tax is in place, it is fairly simple for the affected taxpayers to just calculate an additional percent and send it to the state. But I don't except we will see this because states are likely looking for larger revenue sources, such as taxing other "bads" such as soda.
8. Will the tax be repealed? The Indoor Tanning Association has a campaign underway to repeal the tax. There have been proposals to repeal some health care legislation provisions, such as 1099 reporting for corporations (H.R. 5141 - Small Business Paperwork Mandate Elimination Act). I don't expect Congress will repeal these measures because it could start efforts to repeal other health care provisions. Also the repeal of any revenue raiser will require Congress to find some other tax to create or increase or a deduction or credit to eliminate or reduce (to satisfy PAYGO rules).

What do you think about the tax?