ACA's troublesome tanning tax

More than four years ago, the architects of the Affordable Care Act thought they found a winning funding formula. Create a “sin tax” on vanity businesses and use it to help pay for massive increase in government healthcare spending. Proposals to hit Botox sparked strong reaction from the dermatologist lobby, so legislators went to plan B--go after a weaker industry and tax tanning beds.

Proponents loved it. They called it the “Snooki Tax” after the oft-criticized reality TV star and tried to put a shallow celebrity face on a tax that would harm thousands of small businesses. The Congressional Joint Committee on Taxation crowed that the tax would raise $2.7 billion in nine years, all to offset the estimated $1 trillion price tag of the ACA. Each business would have to tack on a 10 percent excise tax on each tanning experience for every customer.

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But, like almost every other aspect of the ACA, its advocates had to eat crow. Revenues shrank to less than half of the anticipated $200 million per year. The ACA’s designers failed to anticipate the elasticity of tanning bed demand. The less necessary an item, the more likely the market will stop using it once taxes or higher prices are imposed.

According to the Heritage Foundation, roughly 19,000 “mom and pop” small businesses may have  been affected by the new tax — and those businesses likely spent an average of $74 an hour to comply with federal tax paperwork burdens, according to a factsheet distributed by the National Federation of Independent Businesses.

Even worse, the taxes collected might not even pay for the efforts to reap them.

Enforcement requires heavy investments in training and employee hours to catch businesses offering services “under the table.” An agent trying to audit a business that offers tanning must observe a business in operation, compare subjective observations about customer flow to the businesses’ bookkeeping, take into account “weak internal accounting systems,” then “request trial balance (if any), summary sheets, work papers and determine the audit trail either for manual or automated record keeping systems, for all transactions.”

IRS instructions to agents assume that tanning bed operators have updated their beds to include software that helps keep account of customer use.  If the beds are not updated, then agents have to “reconstruct” and “verify” tanning revenue using about 30 subjective means.

The tax also includes a large crony capitalist loophole, excepting “qualified physical fitness facilities.” Congress and the IRS decided to, in essence, give health clubs a strong competitive advantage over other small businesses, like hair salons, that offer tanning.

The Affordable Care Act has given the IRS more license than ever to harass and intimidate individuals, businesses, and non-profits. At the very least, when the possibility exists that revenues cannot pay for collection efforts, the federal government should suspend the tax and investigate--or better yet, repeal the tax altogether.

Telford is senior vice president at the Franklin Center for Government & Public Integrity