Repeal the “gym tax?”
(Photo by Justin Sullivan/Getty Images)
State Rep. Sara Carruthers recently introduced House Bill 595, legislation to exempt memberships to gyms or other recreational facilities operated by 501(c)(3) organizations from state sales tax.
Tax carveouts are not particularly rare pieces of legislation: “tax” is a dirty word, so legislation that policymakers put forth to decrease taxation in one way or another can lead to nodding of heads.
What makes good tax policy, though? A bill such as this appeals to the idea that nonprofit organizations serve the public good, so we should find ways to support them. But we know that “nonprofit” is just a tax designation. Yes, a nonprofit has to follow certain rules in order to qualify for the tax breaks it receives from the federal government, but at its heart a nonprofit works much the same way as any other business: it brings in revenues and it provides goods and services.
A tax break for nonprofit gyms and recreational facilities is essentially a subsidy for the services it provides. Since that money would come from general revenue fund dollars, it means we would take money away from schools, public health, and other state spending to fund these tax expenditures for nonprofit gyms and recreation centers.
How can we justify making a decision like this? Let’s go back to the fundamentals of tax policy for some guidance.
The central rule of tax efficiency is keep taxes “broad and low.” The more carveouts for different goods, the more likely a tax is to distort spending patterns, creating incentives for people to shift their spending from their preferred goods to other goods. The higher taxes are, the greater the magnitude of these effects.
An inefficient tax or tax break can be justified by curbing “external” costs, or market failures that taxes and subsidies can help remedy. For instance, a tax on cigarettes can reduce youth smoking, thus curbing addiction and saving lives. A subsidy for schooling can grow the economy by giving people access to human capital tools that will lead to more productivity and higher wages in the future.
There are some potential public benefits to cheaper gym memberships, with better exercise to curb obesity being one example. Gyms and recreation can also be used for education about health or cultural education or even as a way to provide job training.
Would these have better external benefits than schooling and investment in public health? I’d like to see the evidence.
Another dimension of tax analysis is equity: Who benefits from a change in the tax code? A major critique of the 501(c)(3) system is that the direct recipients of the benefits of charitable giving tax write-offs are the wealthy people who do not claim the standard exemption on their tax form. I would love to see more data on this, but it would be hard for me to believe that a majority of people who have memberships at nonprofit gyms and recreational facilities are low-income.
No matter how noble their aims may be, nonprofit gyms and recreational facilities are not likely to be efficient or equitable recipients of public funds. If we want to grow the economy or make it more fair, there are likely much better use of tax dollars.
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