The Affordable Care Act, passed in 2010, included several new revenue provisions, intended to fund the federal government’s expanded role in the health care system. Many of these new sources of revenue were excise taxes, levied on specific goods or activities. One of these, the medical device excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. , has been in the news lately. But, five years after the passage of the ACA, it’s also worthwhile to examine some of the less well-known excise taxes created by the law, to see how they have affected federal revenues and the economy.
One of the first revenue provisions in the Affordable Care Act to be implemented was the indoor tanning services excise taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. , which went into effect on July 1, 2010. The provision applies to almost all businesses that operate ultraviolet tanning lamps, which are required to collect a 10-percent tax on all sales of tanning services.
Initially, the revenue estimates for the ACA projected that the tax would bring in $2.7 billion in revenue over ten years. However, the actual revenues of the tax have been far below the initial projections.
For instance, in the initial revenue estimates, the indoor tanning tax was projected to bring in $300 million in 2014. However, according to the Office of Management and Budget, the federal government only collected $92 million from the indoor tanning tax in 2014, less than half of the initial estimate.
These revenue shortfalls led the Joint Committee on Taxation in 2012 to revise its initial estimates for the revenue brought in by the indoor tanning tax over ten years, from $2.7 billion to $1.5 billion.
It’s an open question why revenues for the indoor tanning tax have been so far short of the estimates. One explanation is that it is simply difficult to forecast the revenues of an entirely new tax. This is the approach taken by the former director of the Congressional Budget Office, Douglas Holtz-Eakin, who commented, “The scores are most important where the legislation is most original… [but] you’re at your least best when it’s most important and that’s because there’s no data.”
Another explanation is that some tanning businesses have not complied with the new tax; the Treasury Inspector General for Tax Administration reported in 2011 that fewer than 11,000 of an estimated 25,000 tanning businesses had paid the indoor tanning tax each quarter.
Of course, taxing an economic activity incentivizes individuals and businesses to shift away from it, and there is evidence that this is the case with the indoor tanning tax as well. The Wall Street Journal found that a tanning salon franchise in Florida defaulted on 41.1% of its federal small-business loans, which the franchise owner attributed to the burden of the new tanning tax. In a study in Illinois, over a quarter of tanning businesses reported having fewer clients due to the tax. And 13% of businesses that filed the tax in March 2011 did not do so in March 2012, indicating that the companies in question likely went out of business.
Finally, the indoor tanning tax was designed with an especially narrow tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. . In particular, three months after the passage of the ACA, the IRS exempted “qualified physical fitness facilities,” such as gyms and health clubs, from the tax if they offered tanning services as part of a larger package. Shortly beforehand, tanning industry leaders warned that the revenue estimates for the tanning tax were too high, because the gyms that would be excluded from the tax had significantly higher earnings than the typical tanning salon. So, the exclusion of “qualified physical fitness facilities” was likely a factor in reducing the indoor tanning tax’s revenues below projection, because it concentrated the tax’s burden on smaller businesses.
The indoor tanning services excise tax represents a very small portion of federal revenues, and pays for less than 0.1% of the cost of the Affordable Care Act. Yet, its lower-than-expected revenues are a reminder that taxing something usually leads to less of it, and that narrowly targeted taxes are often imprudent and distortionary.
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