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New Jersey Reverses on Cosmetics Tax

2 min readBy: Jordan King, Scott Drenkard

On January 17, 2012 New Jersey Governor Chris Christie signed into law the abolition of the state’s 6 percent 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. on cosmetic procedures.

A cosmetic medical procedure is any medical procedure performed on an individual which is directed at improving the subject’s appearance, and which does not meaningfully promote the proper function of the body or prevent or treat illness or disease. Examples include cosmetic surgery, cosmetic injections, dermabrasion, laser skin resurfacing, and cosmetic dentistry.

The phase out will begin after July 1 of this year with an immediate reduction to 4 percent in the first calendar quarter. The rate then drops to 2 percent after that first quarter until its complete elimination on July 1, 2013.

The measure operates like a selective sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. on cosmetic services, where a 6 percent tax was levied on each purchase of a cosmetic service. However, regardless of the “luxury” nature of cosmetic services, governments should not use the tax code to influence what individuals want to purchase. By eliminating the tax, New Jersey reduces market distortions and promotes the principle of neutrality. Moreover, taxpayers save money in reduced compliance and administrative burdens. The bill’s sponsors Sen. Joseph Kyrillos (R-Monmouth) and Sen. Paul Sarlo (D-Bergen), say the “eight-year-old tax is not only a burden to patients, but to the medical offices that must collect the tax and state agencies that enforce it.”

The tax brought in $10.8 million annually in state revenue, however, in fiscal year 2011 New Jersey’s total revenue was $28.3 billion. This means that the tax yielded only .038% of total revenue. Compliance costs make the meager revenue gain hard to justify, as cosmetic businesses must file quarterly reports which then are processed by Department of Revenue administrators. If the $10 million dollars is necessary to fund necessary government services, using broad based taxes to collect that revenue is a far less distortionary method of collection.

New Jersey has moved in the right direction by abolishing an unnecessary tax that picks winners and losers in the market, collects little revenue, raises prices for consumers, and increases compliance burdens.

More on New Jersey here.