How to Fund Obamacare? Gimmicks Like a Tanning Tax Are Not the Answer

Not long after the U. S. Supreme Court handed down its recent decision to save Obamacare, for the second time in three years, more bad news about the law made headlines. For 2016, individual health insurance policyholders should expect the cost of their coverage to increase, perhaps substantially.

"Health insurance companies around the country," the New York Times reported on July 3, "are seeking rate increases of 20 to 40 percent or more, saying their new customers under the Affordable Care Act turned out to be sicker than expected.... Blue Cross Blue Shield plans -- market leaders in many states -- are seeking rate increases that average 23 percent in Illinois, 25 percent in North Carolina, 31 percent in Oklahoma, 36 percent in Tennessee, [51 percent in New Mexico], and 54 percent in Minnesota."

While older, sicker people have taken advantage of Obamacare, young healthy people -- the client base Obamacare required in order to succeed -- have balked at signing up. "As a result," Senator John Barrassco told The Times, "millions of people will face Obamacare sticker shock."

The sharp increases are necessary largely because funding for the law was never adequately addressed when the legislation was being developed in Congress in 2009. To carry out what was then called "the $940 billion health care overhaul" -- that number would later be revised up to $1.3 trillion -- the bill's framers, working with the Obama administration, included new taxes that were supposed to generate fresh revenue to help pay for the bill.

Among the bill's 21 new taxes were a tax on manufacturing or importing medical devices; an individual mandate excise tax, for those who violated the law and refused to purchase health care insurance; and, in one of the more peculiar developments associated with the law, a 10 percent tax on services provided by indoor tanning salons. The tax did not cover spray tanning, and physical fitness centers that did not charge for tanning services were exempt. But if you used a tanning bed at your neighborhood salon -- an activity enjoyed by 30 million people nationwide each year -- you had to pay up. The Congressional Joint Committee on Taxation (JCT) projected the tanning tax would generate $2.7 billion over 10 years.

The tax emerged after the failure of a proposed 5 percent tax on elective cosmetic surgery, specifically breast implants and Botox injections, a so-called Bo-Tax. That tax was killed thanks to the aggressive efforts of lobbyists representing the medical and drug industries. They argued the tax, to quote The Times, "discriminated against women, who receive the majority of cosmetic surgery and anti-aging injections."

If the proposed Bo-Tax was "anti-woman," then so is the tanning tax. Seventy percent of tanning businesses are owned by women, compared to a national average of 26 percent in other industries. Also, 95 percent of tanning salon employees are women, while 75 percent of the customers are women. "They are still discriminating against women," Kathy Ray, a moderator for a salon owners forum, said at the time. "It's just changed industries. It hasn't changed the end customer."

Hers was not the only spirited response to the law. Joseph Levy, an industry executive, told one publication: "This is going to close tanning salons. You can't just pass a tax like this to customers and not have it hurt your bottom line." Closing salons, however, seemed to be the point of some lawmakers. As Senator Richard Durbin of Illinois wrote to his constituents: "Our proposal will deter the use of tanning beds by young Americans, reduce the risk of exposure to cancer, and save lives." To which John Overstreet, a tanning industry executive, replied: "What is next? Are these same special interests going to force the government to tax us for going to the beach and then subsidize sunscreen?"

One congressman, Ted Yoho of Florida, even called the tax racist -- a comment that made national news. "I had a little fun with [Speaker of the House John] Boehner and told him about the sun tanning tax," Yoho said at a town-hall meeting in Gainesville. "He goes, 'I didn't know it was in there,' and I said, 'Yes, it's a ten percent tax.' He goes, 'Well, that's not that big of a deal.' I said, 'It's a racist tax.' He goes, 'You know what, it is.'"

Incendiary comments aside, enough time has now passed to evaluate the success of the tax. So far, it has not succeeded in generating its projected revenue. Of the $2.7 billion to be produced over 10 years, $200 million was supposed to be raised in fiscal year 2011, but according to the Office of Management and Budget the Internal Revenue Service collected less than half that, $86.3 million. The numbers for the next three years were not any better: $91.5 million for 2012; $92 million for 2013; $92 million for 2014. The JCT predicted the tanning tax would generate $1 billion during those four years. The OMB set the actual amount collected at $362 million.

But here is the problem. Instead of increasing in coming years, revenue will dwindle since the tax is literally killing the indoor tanning industry. In 2009, the year before the tax went into effect, there were 18,245 tanning facilities nationwide. By the end of 2014, that number had dropped by 52 percent to 8,587 facilities. "In fact," Congresswoman Lynn Jenkins of Kansas declared, "the excise tax has been a contributor in the closing of more than 8,000 small businesses across the country and the loss of nearly 65,000 jobs."

If Obamacare is here to stay, funding for it must be addressed. The Obama administration can't use gimmicks like a tanning tax to distract from who is really going to pay for this law: policyholders who will see the cost of their insurance skyrocket.