The towels are insulating the bottom of the tub to the tune of at least 2 degrees. Remove the towels for a few hours and then re-take the heat readings.
In my 41 qt racks, I set the thermostat at 96 degrees. On top of 1" of aspen, the temps is about 90 degrees. If I push the aspen away and take a shot on the bottom of the tub, that temp reads 96 to 98 degrees.
If I leave the aspen pushed back along the length of the heated area, the temp settles at about 92 degrees as the insulation is removed and the heat dissipates at a higher rate.
Elizabeth - the towels are insulating the tub. When you remove them you are getting an elevated reading because they are slowing the dissipation of heat.
The temperature you are shooting for is the one on TOP of the towels. Tune your thermostat to that temp and expect a few degrees of variation along the length of the flexwatt.
The Herpstat isn't defective. Flexwatt does not heat evenly over it's whole length. The temperature will naturally vary over the length of the heat tape itself. Also, the floor of the tubs are never perfectly flat and minute differences will translate into slight temperature variations.