By: Steve Welker
Some in the nation’s capital are exercising their right to protest over the city’s budget plan which includes a “yoga” tax on fitness and wellness services of 5.75%. The proposed budget predicts revenue increases of $5 million from the yoga tax which would be used to partially offset $225 million in cuts. The plan also proposes various other new taxes on services such as carpet cleaning and car washes. While health enthusiasts cry foul, I ask why they were not taxed in the first place.
Let’s get one thing absolutely clear: targeted tax hikes on specific industries or services (as well as exemptions) make bad tax policy. But are they politically viable? Absolutely. States and cities are constantly looking at targeted taxes on various products and services to fund projects or make up for tax cuts elsewhere. These taxes often come in the form of sin taxes on alcohol and tobacco, such as the recently passed extension on Cleveland’s sin taxes earmarked to fund stadium improvements for their professional sports teams. Even the federal government likes to get in the sin tax game from time to time. Taxes are easier to swallow than outright bans, and their chance of success is higher. Just ask NYC about their short-lived big, sugary soda ban. However, sin taxes are never as simple as advertised, especially after running through the gauntlet of legislative compromise, and they can lead to arbitrary and discriminatory differences in the way products are taxed.
Targeted tax cuts make equally bad tax policy. Legislatures often push through gimmicky “tax holidays” such as Virginia’s tax-free week on school supplies in August. These holidays typically receive bipartisan support, as most tax breaks do, for “boosting” the economy or helping lower income households buy necessities. However, studies demonstrate the “boost” is virtually non-existent. Indeed, consumers, well-aware of the holiday and already planning on shopping will time their shopping around the holiday resulting in no boost in sales but substantial reduction in revenue. Additionally, most of the benefit is reaped by higher income households, who get larger tax savings with more expensive purchases. This disproportionate benefit holds whether you employ a one week tax holiday, or permanently carve out exemptions for other necessities such as groceries, which are exempt by varying degrees in forty five states and D.C. By limiting or exempting taxes on groceries, the public essentially discounts expensive, non-staple foods from Whole Foods. In both cases, substantial complexity in parsing and defining what is covered and what is not makes the laws onerous and difficult to administer.
Traditionally, policy analysts will insist that for sales taxes – indeed, for all taxes – simpler is better. This typically translates to an optimal tax featuring a broad base and a low rate. Because taxes distort behavior, it is generally preferable to tax in a way that neither encourages nor discourages one behavior from another. However, this sound tax policy advice yields to political concerns by legislative bodies which all too often obfuscate tax changes out of an understandable fear of political retribution for raising taxes.
The argument for not taxing gyms is easy to understand. A yoga tax would increase the cost of the service. Increasing the cost of gyms discourages gym memberships resulting in declining public health. With rapidly increasing obesity rates, the argument goes, we should not discourage gym membership by taxing it. This argument relies, of course, on the assumption that gym membership impacts public health in the first place. However, there is no data or scientific study to link gym membership with public health. This is not surprising; we’ve known (and joked) for a while that a substantial majority of people who have gym memberships do not use them. But even if it could be demonstrated that public health would suffer as a result of a yoga tax, would that be enough to truly justify exempting fitness and wellness centers from taxation?
It is all about perspective. The yoga tax is better judged from where it puts us relative to the optimum sales tax on goods and services, broad and low, as opposed to merely viewing the taxed services in a vacuum. In other words, why were such services not taxed in the first place? Fitness centers are not being unfairly targeted now, they were unfairly exempted to begin with. If we could create a sales tax base from scratch, our best solution would be to throw everything in, leave nothing out. That way, the rate could be lowered to the point where the price changes were so minimal, nobody’s behavior would be changed. And we would all keep buying (and not using) our gym memberships like we always have.