Friday, June 13, 2014

Should health clubs be taxed like other services, or should they be subsidized?

Washington, D.C. (the city, not the symbol of the federal government) is pondering a significant restructure of its tax code, which would include income tax cuts coupled with expansion of the sales tax base. As the Cato Institute reports:
To partly offset the loss in revenue, the city council decided to expand the sales tax base to include some currently untaxed services, such as carpet cleaning, beautician services, and storage facilities. It would keep the sales tax rate at 5.75 percent, lower than Maryland and Virginia.

However, one particular service industry is trying to sink the entire deal. The sales tax base expansion would include fitness services, such as gym and yoga studio memberships. One gym, Vida Fitness, is leading the charge against the “D.C. Fitness Tax,” urging customers and D.C. residents to sign a petition opposing treating fitness services like most other retail goods and services. Contrary to what Vida Fitness and others say, this isn’t a new tax only affecting their industry; it is simply the expansion of the general sales tax base to include their industry’s products.

I think Cato's Nicole Kaeding is right in pointing out that this isn't an example of targeting a specific industry (compare, for example, "sin" taxes on smoking, gambling, etc.) as it is an example of revoking an exemption that's enjoyed by a few select industries.

From a legal/public policy standpoint, there's an important distinction. A targeted tax can be used to destroy an unpopular industry, because it alone suffers from having to endure the tax. If the majority (which does not frequent that industry) supports raising the targeted tax to ruinous levels, there won't be enough opposition to stop that from happening. Chief Justice John Marshall realized this almost 200 years ago in the landmark case McCulloch v. Maryland (1819), when the state of Maryland tried to apply a special tax against only the federal Bank of the United States but not any other similar banks in the state. Marshall explained:
The people of all the States have created the General Government, and have conferred upon it the general power of taxation. The people of all the States, and the States themselves, are represented in Congress, and, by their representatives, exercise this power. When they tax the chartered institutions of the States, they tax their constituents, and these taxes must be uniform. But when a State taxes the operations of the Government of the United States, it acts upon institutions created not by their own constituents, but by people over whom they claim no control. It acts upon the measures of a Government created by others as well as themselves, for the benefit of others in common with themselves. The difference is that which always exists, and always must exist, between the action of the whole on a part, and the action of a part on the whole.
In other words, if the people of Maryland wanted to enact a ruinous tax in order to attack the Bank of the United States, but they had to apply it to all banks in the state, they would, in effect, cut off their noses to spite their faces. It's the power to single out the Bank of the United States, whose constituents had no voting power in the state, that was so dangerous.

Back to the D.C. tax restructuring .... this doesn't look like a targeted tax. Until now, health clubs were enjoying a special benefit that wasn't generally available. Now they may lose that privilege.

Okay, so it's not a targeted tax. Is it a good idea nonetheless? When you tax something, you decrease demand for it. When you subsidize something, you increase demand for it. Maybe we (i.e., society) should subsidize health club memberships, thereby increasing demand for them, which if everything plays out optimistically, would lead to fitter and healthier Americans.

On the other hand, simply getting people to pick up gym memberships doesn't mean they will actually go work out. Estimates range from 67 percent to over 90 percent of members who don't go. In addition, public subsidy of gym memberships might simply spur health clubs to raise their prices, a phenomenon that seems to have taken place in universities and law schools.

Of course, running doesn't require a gym at all. (Unless you're a weather wimp like me.)

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