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January 14, 2024 Pro Bono Matters

Fighting Obesity with Tax Breaks for the Gym

Samuel Astorga

Obesity is a crisis in modern America leading to co-morbidities, death, and a significant economic burden. The United States in 2005 spent an estimated $190 billion on obesity-related healthcare expenses. Secretary of Health and Human Services Alex M. Azar II noted that “nearly 80% of adults are not meeting the key guidelines for both aerobic and muscle-strengthening activity.” He notes that “about half of American adults … have one or more preventable chronic diseases” the vast majority of which are “favorably influenced” by regular physical activity. This essay argues that a few changes would allow the tax system to assist those less well off in the fight against obesity.

I. Tax Subsidies for Gym Use

The Internal Revenue Code (the Code) provides two potential tax benefits for gym use: a medical deduction and a fringe benefit. Both are subject to significant Code restrictions.

A. Gym Membership as a Medical Deduction

Qualifying for a medical deduction is difficult. The first hurdle is choosing between an itemized or standard deduction. IRS data shows that in 2018, only 11.4% of tax returns (17 million out of 151 million) had itemized deductions; 2019 had similar results. Medical deductions are rare even among those who itemize, present in about one quarter of itemized returns or about 3% of taxpayers, with the top earners receiving the majority of the benefit.

Figure 1: Lending Tree Medical Expenses for 2018

Figure 1: Lending Tree Medical Expenses for 2018

The statutory limitations on medical deductions also reduce the number of taxpayers that can utilize them. For gym fees to qualify as a medical expense, the taxpayer must satisfy three requirements: (1) a physician must diagnose the taxpayer with a specific disease, (2) the taxpayer must use the gym to treat the specific disease, and (3) the taxpayer would not incur the gym fees but for the specific disease. Taxpayers who do not have a medical diagnosis and prescription for gym use (perhaps because they cannot afford such customized medical care) but choose to use a gym to manage their weight and health will not qualify for a gym fee medical deduction. Even if a taxpayer has the requisite doctor support, the taxpayer must establish that these gym-related expenses are not routine spending: i.e., that the taxpayer would not have paid that expense absent the medical condition. This third requirement means that many taxpayers are ineligible for the deductions.

B. Athletic Facilities as Fringe Benefits

Another set of hurdles for a nontaxable gym experience is provided by the section 132 fringe benefit provision. To be eligible for treatment as an excludable fringe benefit, an athletic facility must be located on the employer’s premises (or on a property rented by the employer for the on-premises facility), operated by the employer, and used by the employees of the employer, their spouses, and dependent children.

For most fringe benefits , availability requires nondiscrimination—essentially, an employer cannot provide a fringe benefit exclusively to highly compensated employees. These rules prevent discrimination and favoritism toward high earners in corporations unless a benefit is available to all or to a large group of employees that can also utilize the fringe benefit. On-premise athletic facilities, however, are not subject to the non-discrimination limitation: a business can provide highly paid executives an exclusive fitness facility benefit.

What if an employer pays for an employee’s private gym membership? Currently, payment of a private gym membership is treated as compensation that is taxable to an employee at its fair market value. What this means in practice is that an athletic facility fringe will not be available to employees whose employers either do not have the resources to build and maintain such a facility for all their employees or choose only to have such a facility available to high-paid executives.

C. The “Upside-Down Effect” of Tax Subsidies for High-Income Earners

Limitations to medical deductions and fringe benefits make both of little use in fighting the obesity epidemic—especially since, as shown, most who benefit from either are in higher-income brackets. As a result of the medical deduction mechanism, “persons with higher incomes, and thus with larger disposable income will likely spend more on medical matters than those with fewer resources.” William Andrews called this an “upside-down effect” through which a system intended to help poorer taxpayers instead subsidizes wealthier taxpayers to get expensive medical treatments. As Andrews noted, the medical deductions are most effective “in reducing differences … at the upper end of the income scale” thus making them a “a useful tool” with a limited application.

As for fringe benefits, since the value of an employer-provided gym membership is excluded from gross income only for those who work for wealthier companies able to maintain facilities, this system disadvantages employees at small businesses who cannot subsidize the costs of an on-premises athletic facility or lease. The inapplicability of nondiscrimination rules also shows the imbalance across income thresholds. Interestingly, because private gym memberships are clearly “too valuable to be considered de minimis,” the requirements are more stringent than for other benefits, such as parking.

II. Behavior, BMI, and Outreach to Disadvantaged Communities

Scientific studies that going to the gym incentivizes a change in behavior that leads to substantive health outcomes; furthermore, rebates and subsidies aid in incentivizing gym use because they remove an economic barrier for people who otherwise could not afford it.

A. Changing Behavior

A Canadian study on sports medicine with participants of largely European ancestry (the Ready Study) investigated not only the positive health effects of fitness, but the effect gym use had on other behaviors that accompany regular physical activity, framed within the Health Promotion Model that considers healthy behavior as a function of environmental, personal and behavior factors. Comparing results for 688 adult members of a fitness center to local community members, the Ready Study concluded that members exercised more frequently: 90% of fitness center members exercised regularly as opposed to 54% of nonmembers. Fitness center members were also more likely to consult several health care providers than non-members: about 90% of fitness center members visited a general or family physician (often for preventative healthcare visits) as compared to 74% of nonmembers.

Incentive and rebate programs can stimulate gym use with the same positive health benefits, with added behavioral factors based on the conditions for the rebate. The Homonoff Study examined an American university’s bi-annual rebate program offered through student insurance that provided a 50% reimbursement of the annual gym membership fee for participants who attended the gym 50 times during one of the two semester reimbursement periods: participants who attended the gym more than 50 times during both semesters had their entire membership fee reimbursed. The Homonoff Study noted that the reimbursement program led to an average of 4.6 more gym visits per semester, a 20% increase from the mean of the study, with increases among both higher and lower frequency gym users.

Two further items are worth noting here. First, the Ready Study and Homonoff study dealt with mostly homogeneous populations (white and college student communities, respectively) and did not cover minority populations, leaving uncertainty about applicability to low-income taxpayers. For example, introduction of a conditional co-pay in one study caused 80% of participants to drop out of a program that previously had a no-cost membership. Second, another behavioral impact is peer support, sometimes noted as one-on-one training or group-based peer health coaching. Group activity at the gym provides another type of peer support. Various studies have suggested that group exercise leads to higher levels of physical activity and may be another reason for positive outcomes resulting from organized classes and group activities like yoga, spinning, and Pilates.

B. Health Benefits

The positive behavioral outcomes from gym use are accompanied by tangible health benefits including weight and cardiovascular health. Ryan E. Rhodes conducted an international study that showed there is epidemiological evidence from the Rhodes Study of international research that routine physical activity is associated with a lower risk for “all-cause mortality”: the greatest reduction of all-cause mortality occurs when a person goes from no physical activity to low volumes of physical activity. The Rhodes Study shows that regular physical activity has been associated as “the primary prevent[or] of more than 25 chronic medical conditions.”

Figure 2: Rhodes Study Analysis of Physical Activity Impact on 8 Diseases
Disease Risk Reduction Risk Reduction assessing Aerobic Activity
Premature all-cause mortality 31% 45%
Cardiovascular disease 33% 50%
Stroke 31% 60%
Hypertension 32% 50%
Colon cancer 30% N/A
Breast cancer 20% N/A
Type 2 diabetes 40% 50%
Osteoporosis Bone adaptations to exercise are load dependent and site specific Routine physical activity is associated with improved bone health
Figure 2: Rhodes Study Analysis of Physical Activity Impact on 8 Diseases

The Rhodes Study demonstrated that exercise rehabilitation has notable effects on type 1 diabetes as well as psychological issues, serving as “essential ‘medicine’ for the secondary prevention of varied medical conditions.” Elizabeth Schroeder showed similar results measuring the effects of health clubs for participants from Iowa State University to show that exercise reduced risks of cardiovascular diseases including metabolic syndrome, high cholesterol, osteoporosis, sarcopenia and functional impairment and lower odds of obesity and hypertension. These positive health impacts of gym use go hand in hand with the behavioral impacts of frequent gym users.

C. Fairness and Equity for Minority Communities

The Center for Disease Control (CDC) provides specific statistics for the United States with prevalence maps for physical activity and inactivity that cover race, income, and other criteria: for example, non-Hispanic Black and Hispanic adults show the largest prevalence of physical inactivity outside work at 30.0% and 32.2%, respectively.

Figure 3: Physical Activity Participation Among Racial Groups

Figure 3: Physical Activity Participation Among Racial Groups

While the CDC survey does not have a statistic that covers both race and income simultaneously, they play overlapping roles in physical inactivity amongst Black and Latino communities. There is a correlation between higher income and greater physical activity versus lower income and less physical activity.

Figure 4: Percent of Americans, by Income, Meeting Moderate/Vigorous Physical Activity Requirements

Figure 4: Percent of Americans, by Income, Meeting Moderate/Vigorous Physical Activity Requirements

One medical study that looked at a program called “Get Active!” that subsidized gym memberships in four YMCAs in the greater Boston area for communities with mostly non-Latino Black and Latino residents found a positive correlation between the frequency of gym visits and health outcomes including significant decreases in weight, BMI, and blood pressure measurements. There are similar health outcomes correlated with gym use among white demographics as well. Importantly, these results show that like the college program, the effects of fully subsidizing gym memberships serve as the most effective means to encourage physical activity in lower-income urban communities.

III. Potential Reforms

Rebates/subsidies eliminate barriers across income brackets and race and are necessary to encourage physical activity. This essay contemplates two solutions: (1) refundable fitness tax credits and (2) expanding section 132’s fringe benefit for athletic facilities. Either or both of these approaches would eliminate a financial hurdle to fitness and make these tax benefits accessible across income and race.

A. Fitness Tax Credit

Implementing a fitness tax credit for both adults and children would allow an equitable distribution of tax benefits that would eliminate the hurdle of utilizing a medical deduction for gym fees. The Personal Health Investment Today bill—pushed by the health industry and passed the House of Representatives in 2018—would have added “sports and fitness” categories to medical deductions, allowing taxpayers to include membership at a gym, participation or instruction in exercise programs, and related equipment as deductible medical expenses. One criticism of that bill was that it would primarily benefit higher income taxpayers and those who already have good health insurance. Batchelder, Goldberg and Orzag noted that deductions and exclusions limit the benefits to high-income taxpayers whereas refundable credits such as the earned income tax credit, the children’s tax credit, and the small insurance health credit help lower-and middle-income taxpayers. They also noted that a uniform refundable tax credit is more efficient in generating positive externalities through the income tax system. Brian Jenn agreed that tax credits are more efficient in achieving policy objectives and that changing deductions to credits would provide benefits to non-itemizers who take the standard deduction, but he noted that tax credits do not fix the issue of higher-income taxpayers utilizing credits.

To effectuate a tax incentive for physical activity, these studies suggest that the government must do so through a refundable tax credit that is accessible to most taxpayers. Simply changing the medical deduction to a credit would not fix all of the distribution problems, but Daniel Reach supported a refundable tax credit to help with the obesity crisis modeled on the Canadian Children’s Fitness Tax Credit (CFTC).

The CFTC, created in 2007 in response to Canadian child obesity concerns, requires a child to be enrolled in an activity that includes “cardio-respiratory endurance and one or more of ... (i) muscular strength, (ii) muscular endurance, (iii) flexibility, and (iv) balance.” The credit had issues when first implemented as a nonrefundable credit, suffering the same upside-down effect as the U.S.’s section 213 medical deductions: a majority of families who took advantage of the credit had an average income of Canadian $130,000 and could incur upfront costs to wait for the end of the taxable year to use the credit. Nonetheless, even critical studies noted that the credit increased participation in physical activity programs for children in low-income families. The success of the credit incentivized local Canadian territories to launch their own children’s tax credits for gym and sports activity too.

Reach’s proposed Americans in Shape Tax Credit (ASTC) addresses the shortcomings of the CFTC and includes both adults and children: it is a refundable credit that would be broadly available for upfront membership fees, sports equipment costs, gym memberships, and exercise classes. Refundability is one element that helps to ensure distribution of the benefit to taxpayers in lower income brackets. As Reach notes, however, implementation of a successful tax credit across income and race requires finding a way to help communities that do not have exercise facilities. Something that could be utilized to fill in the access gap is for the ASTC to include a credit for transit to and from exercise facilities. Although the implementation of an ASTC could suffer a similar upside-down effect to the CFTC, the benefits for overall gym participation among lower-income people and the opportunity for states to follow suit with their own credits should not be overlooked.

B. Expanding the Section 132 On-Premises Athletic Facilities Provision

The expansion of section 132 to include a wider variety of gym-related activities is a simpler approach that could utilize already existing systems of corporate fitness programs and make those feasible even for small businesses to implement. Shepard, for example, advocates including off-premises gym membership fees as a fringe benefit because it is vital to business competitiveness, reduces absenteeism, improves employee morale, increases productivity, and reduces health costs. Shepard notes this would be particularly advantageous to small business employers that comprise about 99% of U.S. employers and employ more than half the private sector U.S. work force.

An alternative, if there is an overriding concern of misuse, would be to treat gym membership fees like the parking facilities fringe benefit. Under section 132(f)(5)(C), qualified parking not only includes employer-owned parking for employees but also covers parking provided “near the business premises of the employer or near a location from which the employee commutes by transportation, in a commuter vehicle or by carpool.” The regulations further specify that parking is provided by an employer if the parking is on the property that the employer owns or leases, the employer pays for the parking; or the employer reimburses the employee for parking expenses. The regulation further provides that if the monthly value of parking exceeds the monthly exclusion (set at $315 for 2024), then the employee must include in income the excess (minus any amount the employee paid). An employer can also provide an employee with a transit pass and/or ride in a commuter highway vehicle for up to $315/month as well, for a potential total of $630 in transit-related expenses in 2024. Applying the requirement that a parking facility “must be near business premises” to a gym membership would allow employers who can afford gym memberships but not an athletic facility to incentivize their employees to utilize nearby facilities. It would appear that the typical $30 membership fee would be insignificant compared to the existing fringe benefits for parking and transit.

This expansion of the fringe for gym memberships (from on-premise to reimbursement for membership fees in nearby facilities) would parallel the earlier modification to provide parity for mass transit benefits with the benefits already allowed for parking. In 2015, Congressman McGovern supported expanding the transportation benefit, noting that it would help employees who used mass transit while resulting in less carbon dioxide emission. There are similar arguments for parity between onsite athletic premises and gym memberships. Whether an expansion includes any off-premises athletic facility or something paralleling the parking benefit, the severity of both the obesity and physical inactivity crisis necessitates a change.

    Samuel Astorga

    LL.M. Student, UCI Law Graduate Tax Program

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