Fitness Tax Credit: Fitness Inducer or Revenue Reducer?

A while back I wrote about a proposed junk food tax.  Proponents of junk food taxes argue that maintaining good health amoung individuals in society is an important public policy consideration.  But there are components to a healthy lifestyle beyond avoiding junk food.  Fitness through physical activity is frequently cited as a critical element of healthy lifestyle.  Daily exercise and weight control is the bedrock of the nutrition pyramid published by the Harvard School of Public Health.  And the Presidential Council on Physical Fitness and Sports reports that “Adults 18 and older need 30 minutes of physical activity on five or more days a week to be healthy; children and teens need 60 minutes of activity a day for their health.” ((http://www.fitness.gov/resources_factsheet.htm))  In response to these calls for increased physical fitness, some are proposing a fitness tax credit.  If the health of individuals is indeed an important public policy objective, then a fitness tax credit, a tax credit that makes fitness resources more accessible, may be a worthy consideration.

What is a Fitness Tax Credit?

A fitness tax credit allows individuals to claim a credit against income taxes for fitness related spending.  There are a variety of mechanical details that can be modified in the credit including the maximum amount of the credit, the types of activities whose expenditures qualify and accounting requirements for the expenditures.  But the fundamental idea is to return to individuals some of the money that is spent on fitness.

Tax credits are a way for the government to subsidize behavior.  The United States already offers tax credits for a variety of behaviors including:

Each of the above credits constitutes a subsidy of the related behavior.  A tax credit for tuition means that when an individual spends money on tuition, she will get at least some of the money back in the form of a reduction on taxes owed.  This encourages spending on tuition, or more precisely, education.


Why a Tax Credit for Fitness?

Generally, the argument in favor of a fitness tax credit is that health of individuals is an important public concern and that encouraging fitness leads to:

  1. a healthier population ((Many would argue that a healthier population is a more productive population.))
  2. a reduced burden on society for treating ailments that could be prevented through increased fitness.


How Might a Fitness Tax Credit Work?

A fitness tax credit could take many different forms.  Let’s start by examining an existing fitness tax credit in Canada.

Since 2007, Canada has offered a Children’s Fitness Tax Credit.  The “tax credit lets parents claim up to $500 per year for eligible fitness expenses paid for each child who is under 16 years of age at the beginning of the year in which the expenses are paid.” ((http://www.cra-arc.gc.ca/whtsnw/fitness-eng.html))

Fitness expenses must be for a “Prescribed Program.”

To qualify for this amount, a program must:

  • be ongoing (either a minimum of eight weeks duration or, in the case of children’s camps, five consecutive days);
  • be supervised;
  • be suitable for children; and
  • require a significant amount of physical activity that contributes to cardiorespiratory endurance, plus one or more of:
    • muscular strength,
    • muscular endurance,
    • flexibility, and/or
    • balance.

Physical activity includes strenuous games like hockey or soccer, activities such as golf lessons, horse-back riding, sailing and bowling as well as others that require a similar level of physical activity. ((http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns360-390/365/prgrm-eng.html))

The Canadian Children’s Fitness Tax Credit is thus squarely aimed at increasing youth fitness by subsidizing up to $500 in annual expenses for programs that are deemed to improve fitness.  A fitness tax credit could take other forms such as tax credits for:

  • Gym memberships ((The subsidy could potentially be linked to gym attendance to insure that the subsidy was effectively utilized.))
  • Exercise equipment
  • Adult sports programs

For any given form of the program, issues could arise relating to the correlation between fitness expenditures and actual fitness.  For example, if the program provides a credit for gym membership fees, then citizens who participate in other fitness activities like running or cycling would not be eligible to receive the credit.  The mechanics of the program could be tweaked to try to improve the degree to which individuals who participate in fitness related activities in a meaningful way become eligible for the credit.  But the match will likely always have some degree of imperfection.  To the extent that the program is tied to fitness related expenses, there will be some people with high expenses and poor fitness (such as people who join a gym and never attend) and some people with low expenses and good fitness (such as people who participate in inexpensive fitness activities like running).


Taxes vs. Tax Credits

Society’s two primary methods of instituting monetary incentives are to tax behaviors that it wishes to discourage and subsidize behaviors that it wishes to encourage.  For many broad societal agendas, there are both behaviors that advance the agenda and behaviors that hinder the agenda.  Take for example the agenda of reducing traffic on freeways.  Society may elect to tax those behaviors that contribute to traffic by charging a toll to drive a car on a freeway.  Alternatively, the society may elect to subsidize behaviors that reduce traffic by offering a tax credit for money spent on rail and bus passes.  Many policy regimes implement some combination of both methods.

Similarly, if society wants to improve the health of the population through monetary incentives intended to modify individual behaviors, they can do so by taxing unhealthy activity or subsidizing healthy activity.  In an effort to improve the health of members of society, a tax could be imposed on the consumption of junk foods deemed detrimental to health.  But one objection often made to the taxation of a behavior is that the tax in some fashion imposes on the freedom of individuals to partake in that behavior.  For example, a tax on cigarettes reduces the freedom of people to smoke cigarettes by imposing on them an extra cost of smoking.  Along the same lines, a tax on junk food imposes on the freedom of individuals to make their own dietary selections.  For this reason, many object to a proposed tax on junk food.

A tax credit may seem to avoid this problem.  A tax credit for fitness does not on its face impact the freedom of individuals to make their own lifestyle choices.  Individuals who choose to partake in the subsidized activities will benefit from the tax credit.  Individuals who chose to refrain from the activity will not be directly taxed for sitting out.  But the tax credit imposes a cost on society in the form of diminished tax revenue from those who qualify for the tax credit.  A reduction in total tax revenue could mean reduced funds available for other government projects or increased taxes elsewhere to compensate for reduced taxes due to the fitness tax credit program.


Should the Government Really be Subsidizing Fitness?

Proponents of a tax credit may argue that a fitness tax credit reduces health care burden on society and thus could lead to a net economic benefit.  A group in Canada pushing to extend the Children’s Fitness Tax Credit Program to adults reports that:

The federal government would save $2.5 billion over the next 21 years by extending the benefits of the current Children’s Fitness Tax Credit program to adults. ((http://www.adultfitnesstaxcredit.ca/   –  the quote references an economic study on the effects of the program))

Citing a report by the Centre for Spatial Economics, the groups further states:

Projecting 21 years outward, the report’s findings show the government would see cumulated health care savings of $9.1 billion and cumulated net personal tax losses of $6.6 billion.

The applicability of these results to the United States is debatable.  Canada’s healthcare system is substantially more socialized than that of the United States and thus the Canadian government may be likely to experience a greater economic benefit from the improved health of individuals.  But to the extent that individuals with healthy lifestyles consume fewer healthcare resources, society may experience some economic return on the tax credit.

However, short term positive economic impact of a fitness tax credit is arguably speculative.  This leads to the following question: assuming a net economic cost to society (at least in the short term), is individual fitness an important enough public objective to warrant societal investment through government subsidies?  The government currently subsidizes a variety of behaviors that are deemed beneficial to society, some of which were mentioned above.  Does individual fitness call for less societal investment than other behaviors that currently benefit from tax credits such as education or home ownership?  Why do we subsidize education and home ownership?  Does education of individuals yield a net long term benefit to society that is likely to offset the costs of the subsidy?  What about home ownership?  Could increased fitness potentially pay off by yielding a more productive and efficient society in the long run?


What about Abuse of the Incentive Program?

With any subsidy there is a concern over potential abuse.  There is of course the risk that people could incur fitness expenses and claim a tax credit for the expenses, but not actually use the fitness products or services that were purchased.  In this situation the government is paying for products or services without society experiencing the benefit of healthier individuals.  However, there is little incentive for individuals to purchase products or services that they won’t use just to get the costs reimbursed.  Further, such behavior can be disincentivized by offering a credit for only a portion of the amount paid.  For example, a fitness tax credit could return 70% of costs of fitness programs to an individual.  If an individual enrolls in a program and doesn’t use the service, they would be stuck paying 30% for a program they did not participate in.

There is also potential for fraudulent abuse of the system.  The potential for this abuse is an often cited objection to any kind of government incentive.  And many beneficial government incentives suffer from abuse at a huge cost to society.  The Treasury Inspector General reported that the government paid more than $25 million in fraudulent claims on a homebuyer tax credit.  ((http://blogs.forbes.com/moneybuilder/2010/06/23/inmates-irs-employers-among-those-found-to-abuse-homebuyer-tax-credit/))  Abuse of a fitness tax credit could take the form of parents taking a tax credit for fitness expenses for non-existent children or taxpayers claiming credits for non-existent expenses.  Concern over such fraudulent abuse is valid.  But a fitness tax credit would most likely offer a relatively small credit when compared to other existing tax credits such as the First Time Homebuyer Tax Credit and various tuition tax credits.  There is little indication that a fitness tax credit would attract abusive behavior beyond that which has been deemed acceptable elsewhere.


The Future of America’s Fitness

The President’s Council on Physical Fitness Reports

    • Significant health benefits can be obtained by including a moderate amount of physical activity (e.g., 30 minutes of brisk walking or raking leaves, 15 minutes of running, 45 minutes of playing volleyball). Additional health benefits can be gained through greater amounts of physical activity.
    • Moderate daily physical activity can reduce substantially the risk of developing or dying from cardiovascular disease, type 2 diabetes, and certain cancers, such as colon cancer. Daily physical activity helps to lower blood pressure and cholesterol, helps prevent or retard osteoporosis, and helps reduce obesity, symptoms of anxiety and depression, and symptoms of arthritis.
    • Heart disease is the leading cause of death among men and women in the United States. Physically inactive people are twice as likely to develop coronary heart disease as regularly active people.
    • 37% of adults report they are not physically active. Only 3 in 10 adults get the recommended amount of physical activity.
    • Poor diet and inactivity can lead to overweight/obesity. Persons who are overweight or obese are at increased risk for high blood pressure, type 2 diabetes, coronary heart disease, stroke, gallbladder disease, osteoarthritis, sleep apnea, respiratory problems and some types of cancer.
    • 41 million Americans are estimated to have pre-diabetes. Most people with pre-diabetes develop type 2 diabetes within 10 years, unless they make changes to their diet and physical activity that results in a loss of about 5-7 percent of their body weight.
    • Obesity continues to climb among American adults. Nearly 60 million Americans are obese. More than 108 million adults are either obese or overweight. That means roughly 3 out of 5 Americans carry an unhealthy amount of excess weight.
    • 16 percent of children and teens aged 6 to 19 were overweight in 1999-2002, triple the proportion in 1980. Fifteen-percent of children in the same age group are considered at-risk for being overweight. The percentage of overweight African American, Hispanic, and Native American children is about 20%.
    • Health risks associated with being overweight or obese include type 2 diabetes, high blood pressure, high cholesterol, asthma, arthritis. ((http://www.fitness.gov/resources_factsheet.htm))

Notwithstanding the data, many may object to a tax credit that diverts precious government funds in an effort to influence a very personal decision about lifestyle.  Is this reaction rooted in a belief that physical fitness is inappropriate subject matter for government incentivization?  Or is it perhaps a visceral reaction to a proposed increase in government involvement and diversion of government resources at a time when those resources are perceived to be particularly scarce?  Regardless, with the growing epidemic of obesity, particularly among children, the health debate will undoubtedly continue.  A policy of incentivizing fitness has a place in that debate.

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