With revenue concerns becoming increasingly important to many states, it is no wonder that Connecticut would look to New Jersey’s Cosmetic Procedures Tax as a potential source to partially offset its anticipated budget shortfall.
However to do so would unfortunately doom the state to repeat the many pitfalls encountered by New Jersey since its 2004 implementation of the tax. Clearly there is good reason why no other state in the country has passed similar legislation, even though many states find themselves in worse fiscal shape than Connecticut.
For those unfamiliar with the tax, it is simply a levy on certain optional, non reconstructive medical procedures performed in state. However all too often, the difference between cosmetic and reconstructive procedures is extremely difficult to distinguish.
Both young men and women born with non symmetrical body parts, who face daily ridicule by their classmates due to their differences, are often grouped into the category of patients seeking so called “cosmetic” surgery.
So too are those individuals who have improved their overall health by losing significant amounts of weight and as a result require surgery to rid themselves of excessive amounts of skin. They too are required to pay a tax on their procedures, since for insurance purposes, they are deemed to be cosmetic in nature.
As illustrated, these procedures often do not present black and white decisions as to whether they are cosmetic or reconstructive in nature, thus compounding the problem of administration.
From an economic standpoint, while the tax provides a minor source of revenue, it also contains significant patient privacy issues that prevent state auditors from reviewing individual medical records. Such preclusion makes it administratively burdensome, not only for the taxing authority responsible for the administration of the tax, but for the many doctors and dentists required to charge and collect the tax.
Due to the sensitive nature of the procedures being taxed, its overall compliance is at best difficult, and its auditing function is virtually impossible. This fact was revealed shortly after its implementation in New Jersey, and historically the tax has collected only 30% of the revenue it was initially projected to garner.
Finally it should be noted that HIPAA (Health Insurance Portability and Accountability Act of 1996) privacy rules makes this type of tax extremely difficult to administer. In order to perform state audits to determine whether or not those physicians and dentists, charging and filing the tax are doing so properly, it is necessary to review the nature of their procedures to determine whether or not they are cosmetic in nature.
Herein lies the principal problem that any state considering such a tax must face; privacy concerns. Clearly patients’ privacy rights must take priority and doctor/patient confidentiality must be protected, thus thwarting any compliance effort to gain informational access. All auditing and administrative resources committed to enforcing this tax result in nonproductive and inefficient use of state resources.
This is one of the chief factors why legislative efforts have been undertaken to repeal this tax in New Jersey. In general, it is far easier to tweak an existing tax like a sales tax, rather than craft a new tax out of whole cloth, particularly one with such a poor track record.
As a former New Jersey tax administrator who was involved in implementing this tax when it was first enacted, I have firsthand knowledge of its many shortcomings. It is my hope that in sharing a few of my perspectives that I can educate and inform those considering its passage of its negative consequences. In short, there are much easier ways to raise revenue than to enact a Connecticut Cosmetic Procedures Tax.
Richard W. Schrader served as Assistant Director in charge of auditing for the New Jersey Division of Taxation before retiring in 2008. He currently is employed as a subject matter expert by Jefferson Wells’ State and Local Tax Center of Expertise)