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Do “sin taxes” change behavior?

On Behalf of | Aug 25, 2017 | Internal Revenue Service

State legislatures continue to increase the tax on cigarettes. Alcohol comes up in the sin tax discussion occasionally. The latest in Massachusetts is a proposed tax on sugary drinks, which health advocates argue will lower the rate of type 2 diabetes.

One of these taxes that is not frequently discussed is a 10 percent excise tax on indoor tanning services that went into effect with the Affordable Care Act (ACA). Has this one reduced the number of perfectly tanned individuals in New England?

Not bringing in the expected revenue

This tanning tax not only sought to reduce the number of people using indoor tanning services (research has shown UV radiation from tanning beds is one of the primary causes of Melanoma). But, the estimated $2.7 billion over 10 years was revenue to offset the costs of the ACA.

In the last four years, actual revenue from the tax is much lower than expected: $367 million. 

From the public health perspective, this might be a positive message that signals lower health costs related to future skin cancer treatment. From the indoor tanning industry, the argument is that the tax is a job killing “failure.”

Causation or correlation?

Whether the tax simply correlates with a decrease in demand or caused it is unclear. From the research, it is likely more of a correlation.

The Great Recession reduced demand in the first place. At the same time, high school students are not placing the same level of importance on being tan. Research shows that the percentage of high school students who tan has dropped to 7.3 percent in 2015 from 15.6 percent in 2009. This trajectory may continue.

The tanning business could face headwinds, but there are plenty of loyal customers. For small business owners, it is important to dutifully collect the federal excise tax or significant tax problems might loom on the horizon.


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