Politics & Policy

Obamacare’s Tanning Tax Causes a Slow Burn

(Svetlana Solovjova/Dreamstime)
A supposed revenue-generating provision of Obamacare is an expensive bust.

Among the many items buried in the Affordable Care Act (ACA) was a new federal tax on indoor tanning salons that added 10 percent to customers’ bills.

The “tanning tax,” according to Congress’s Joint Committee on Taxation (JCT), originally was projected to generate some $2.7 billion in new revenue through 2019 — $1 billion in the years 2011 through 2014 alone — which would be used to offset part of the estimated $940 billion that Obamacare was expected to cost through 2019.

The tax committee’s rosy projection was way off. Instead of $1 billion in revenue during its first four years, the tanning-salon tax has actually produced only about $362 million, slightly more than one-third of the JCT’s forecast.

Revised estimates from the Internal Revenue Service and the White House Office of Management and Budget, released last year, now peg total tax revenue at $955.7 million through 2019. But even that number appears overly optimistic.

Why? Because the tax, along with public concerns that tanning might contribute to skin cancer, has helped put a lot of tanning salons out of business — some 9,658 nationwide over the past four years, according to the American Suntanning Association trade group. In New York State, the number of tanning salons has plummeted from 612 in 2009 to 284 today. In New Jersey, there were 431 in 2009; there are 197 today.

The JCT fell prey to a mistake commonly committed by revenue forecasters: They assume that consumers will meekly go along with price increases and that the volume of market transactions will stay the same.

In that sense, the JCT’s bureaucrats behaved like Adam Smith’s “man of system,” who thinks he can move people around willy-nilly as if they were lifeless pieces on a chessboard impelled to action only by a player’s hands. But humans have minds of their own and often respond rationally and predictably to tax increases and other external interventions. And their responses often differ from those the bureaucrats naïvely expect of them.

When a tax is imposed on any good or service, increasing its cost, many consumers will seek out substitutes.

When a tax is imposed on any good or service, increasing its cost, many consumers will seek out substitutes — in this case, buying sunlamps to tan at home, tanning themselves by natural sunlight, applying artificial tans from a bottle, reducing the frequency with which they visit tanning salons, or forgoing tanning altogether.

Such responses are bad news for the owners and employees of tanning salons. In 2009, the industry employed more than 164,000 people, according to the Suntanning Association; in 2015, it employs just over 83,000 — a loss of nearly half the industry’s jobs. Workers unable to find employment elsewhere are no longer paying income or payroll taxes — something else the JCT didn’t count on.

Obamacare’s tanning tax also turns out to be a tax on women. According to the Suntanning Association, women own 70 percent of U.S. tanning salons, compared to an average of 26 percent of all other businesses. Women also account for approximately 95 percent of tanning-salon staffs, and 75 percent of the customers are female.

I’m not defending tanning salons per se, any more than I would defend particular foods, beverages, automobiles, or energy sources. But as an economist, I also do not disparage other adults’ choices.

The bottom line is that revenue projections from the tanning tax were overly optimistic from the outset, and have been undermined further by a rapidly shrinking tax base brought on, at least to some degree, by the tax itself.

This is another example of Washington’s know-it-all bureaucrats getting it all wrong. The misnamed Affordable Care Act, which becomes less affordable every day, is the poster child for bad policymaking. It needs to be dismantled — one piece at a time, if necessary. Repealing the tanning tax is a good place to start.

— William F. Shughart II is research director at the Independent Institute in Oakland, Calif., and the J. Fish Smith Professor in Public Choice at Utah State University’s Huntsman School of Business.

 

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