Using the Tax System to Promote Physical Activity: Critical Analysis of Canadian Initiatives

Abstract

In Canada, tax incentives have been recently introduced to promote physical activity and reduce rates of obesity. The most prominent of these is the federal government's Children's Fitness Tax Credit, which came into effect in 2007. We critically assess the potential benefits and limitations of using tax measures to promote physical activity.

Careful design could make these measures more effective, but any tax-based measures have inherent limitations, and the costs of such programs are substantial.

Therefore, it is important to consider whether public funds are better spent on other strategies that could instead provide direct public funding to address environmental and systemic factors.

LOW LEVELS OF PHYSICAL activity are an important public health issue in North America and other developed regions. In the United States, just 42% of children (aged 6–11 years), 8% of adolescents (aged 12–19 years), and 49% of adults get the currently recommended 60 minutes per day of physical activity.^1,2 In Canada, the situation is similar, with 13% of children and 48% of adults meeting Canadian guidelines.^3,4 In a recent nationally representative US survey, just 35% of adults reported any regular leisure-time physical activity.⁵ Adding to the concern about low physical activity levels, recently released findings from the Canadian Health Measures Survey suggest that fitness among both children and adults has declined over the past 2 decades.^6,7 Reducing sedentary behavior and increasing physical activity could help reduce or prevent obesity and its associated health consequences.⁸ Furthermore, evidence shows that increased physical activity has many important health benefits, regardless of weight status.^9,10

A wide range of different policies have been implemented or proposed to encourage populations to be more physically active, including disseminating public information, increasing mandatory physical education in schools, enabling the use of school and community facilities for sports and recreation, and designing the built environment to increase opportunities for safe and accessible physical activity.^11,12 Dunton et al. describe 4 types of policy strategies to promote or discourage a particular behavior: (1) provide information about the behavior, (2) increase or decrease opportunities for the behavior, (3) offer incentives or disincentives for the behavior, and (4) require or prohibit the behavior.¹³ Within the third category, various forms of financial incentives could be used to promote higher levels of physical activity. For example, financial incentives have been implemented to encourage active commuting, such as walking or cycling.¹⁴ Taxes could also be used to provide positive incentives for physical activity (e.g., tax exemptions or rebates on sports equipment or fitness programs) or negative incentives for sedentary behavior (e.g., higher taxes on home entertainment equipment).¹⁵

Federal and provincial governments in Canada have recently introduced tax incentives to promote physical activity and reduce rates of obesity. Tax credits for physical activity programs are offered by the federal government and several provincial governments. Some governments have also provided sales tax exemptions for bicycles or recreational programs. Other countries have looked to these initiatives as models. For example, several state and federal bills have been introduced in the United States that would create tax deductions or credits for fitness programs or health-club memberships,^16,17 and similar measures have been proposed in Australia.^18,19 Tax-based incentives may be attractive to governments because they offer some administrative efficiencies and the political benefit of offering a tax break. However, given the challenge of choosing effective strategies from among the broad range of policy options available to governments, it is important to assess the potential benefits and limitations of using tax measures to promote physical activity. Ideally, this assessment would be informed by data on the effectiveness of these or similar measures. In the absence of such data, novel policies can be evaluated by reference to criteria such as plausibility and equitable distribution of benefits.^20–22

TAX MEASURES AND PHYSICAL ACTIVITY

Governments in Canada are using several different models to provide tax incentives promoting physical activity. The 2 main categories of tax incentives are income tax measures, which involve individuals claiming credits on their annual income tax returns, and sales tax measures, which involve reducing or eliminating tax payable at the point of sale for goods or services.

Income Tax Measures

The first Canadian government to introduce an income tax measure designed to promote physical activity was the province of Nova Scotia, with its Healthy Living Tax Credit.²³ Introduced in 2005, this program allows individuals to claim a tax credit for the cost of enrolling children and youths (aged ≤ 17 years) in organized sports, recreation, or other physical activity programs provided by registered organizations. The amount spent, up to a maximum of $500, is multiplied by the lowest marginal rate of tax (8.79% at the time of this writing), resulting in a tax credit of up to about $44 per child. In 2008 the provincial government announced that it would extend the tax credit to adults beginning in 2009, but this measure was later deferred indefinitely.²⁴

The next and best-known measure is the federal government's Children's Fitness Tax Credit (CFTC), which went into effect in 2007.²⁵ Similar to the Nova Scotia initiative, this program provides a nonrefundable tax credit to parents claiming the cost of organized physical activity programs for children, in this case up to age 16 years (or ≤ 18 years for children eligible for a disability tax credit). The maximum claim is $500, resulting in a tax credit of up to $75 per child (i.e., 15%) at current rates. An expert panel assisted in developing the requirements governing program duration and the types and levels of physical activity for eligible programs.²⁶ These reflect the stated objectives of the measure, which are focused on childhood obesity.²⁶ In the first year of the program, approximately 1.3 million taxpayers (5.2% of a total of 24.6 million) claimed the credit; this number increased slightly to 1.5 million (5.9%) in 2008.^27,28

The province of Manitoba and the Yukon Territory have followed suit with similar programs.^29,30 In the province of Alberta, the legislature passed a bill that would create a tax credit for adult and child physical activity programs,³¹ but it has not yet been proclaimed as law, and the government has expressed doubt that it would be an effective measure.³²

The province of Saskatchewan began offering an Active Families Benefit in the 2009 tax year.³³ This benefit, unlike the other tax credits, is refundable, meaning that an individual can receive a refund equal to the amount claimed even if he or she does not owe any income tax in that year. The Saskatchewan benefit also differs from the others in that it allows individuals to claim the full amount of fees paid up to a maximum of $150 rather than a percentage of fees paid. Fees for cultural, recreational, or sports activities for children aged 6 to 14 years are eligible. In late 2010, Ontario also announced a similar refundable tax credit.³⁴

In 2006 the federal government also introduced a tax credit for transit passes to encourage more people to use public transit. This credit was presented as a measure to protect the environment by reducing air pollution and greenhouse gas emissions,³⁵ but some have suggested that supporting more active forms of commuting could be an effective way of increasing physical activity.^36–38 In 2007 and 2008, approximately 5% to 6% of Canadian taxpayers claimed this tax credit.^27,28

Sales Tax Measures

The use of sales tax measures for public health purposes is familiar from strategies that have used taxation to discourage the consumption of tobacco products and soda or junk food.^39–42 It has been proposed that governments might use a similar strategy to encourage physical activity by increasing taxes on goods and services that are associated with sedentary behavior.¹⁵ However, the measures that have been implemented in Canada are positive incentives rather than negative ones.

The leading example of such a measure is a recent initiative in the province of Ontario. In 2007, Ontario introduced an exemption from provincial retail sales tax on bicycles as a way of promoting physical activity and commuting by bicycle.^43,44 Unfortunately, this was a limited-time measure, initially designed to last to the end of 2010.⁴³ Bicycles and some bicycle parts and accessories were also exempted from provincial sales tax in British Columbia, although the intent of this measure was to promote alternative forms of transportation rather than physical activity in particular.⁴⁵ In July 2010, both provinces transitioned to a new harmonized sales tax scheme, and it appears that the exemptions for bicycles were eliminated in the process.⁴⁶

Of the provinces that charge additional sales tax, most provide an exemption for children's clothing and footwear.^47–49 However, these exemptions are designed to minimize the tax payable on essential goods for families, and they are not intended to achieve objectives related to public health or physical activity. In fact, most provinces specifically exclude clothing and footwear designed for use in sports from the exemption.^47,50

In Ontario and British Columbia, with the transition to harmonized sales tax, a point-of-sale rebate has been provided to preserve the exemption from provincial tax for children's clothing and footwear, but the tax payable on some physical activity–related goods and services has increased. For example, gym and athletic club membership fees, fitness training services, hockey rink rentals, and many sports and dance lessons will be subject to a tax increase, rising from 5% to 12% or 13%.^46,51 However, fees for athletic and recreational programs offered by public service bodies (including nonprofit organizations, charities, municipalities, and schools) to children aged 14 years and younger or to underprivileged individuals with a disability will remain tax-exempt.^46,51,52 Other provinces, such as Saskatchewan and Manitoba, do not impose sales tax on a broader range of athletic and recreational programs.^53,54

CRITICAL ANALYSIS OF TAX MEASURES

When a government creates tax credits or exemptions, it chooses to forgo tax revenue that would otherwise be collected. Such measures, referred to as “tax expenditures,” therefore represent investments of public funds that should be justified in the same way that direct spending is.⁵⁵ The cost of the measures recently introduced in Canada is substantial. For example, the CFTC is estimated to cost the federal government approximately $90 million to $115 million each year in forgone tax revenue.⁵⁶ The province of Saskatchewan, with a population of about 1 million people, budgets $11 million to $18 million annually for its Active Families Benefit, out of a total departmental budget (Tourism, Parks, Culture and Sport) of approximately $113 million to $138 million.⁵⁷ Are these measures justified as cost-effective strategies to increase levels of physical activity?

A report prepared for the Fitness Industry Council of Canada, which the council used to lobby for the expansion of the CFTC to adults, suggested that an adult fitness tax credit offered by the federal government could result in health care cost savings of up to $692 million by 2029, an amount that would substantially outweigh the cost of forgone tax revenue.⁵⁸ However, these estimates depend on some rather optimistic and simplistic assumptions. First, the report assumed a −0.9 price elasticity of demand for recreation services; this means that for a 15% reduction in cost because of the tax credit, a 13.5% increase in participation is predicted.⁵⁸ Second, the report assumed that the increased participation induced by the credit would lead to individuals becoming “physically fit”—half of participants within 2 years and the remainder within 3 years—which would affect their use of health care services accordingly.⁵⁸ Finally, it assumed that those newly active individuals would be healthier and more productive workers, generating higher overall tax revenues.⁵⁸

It is easy to spot the flaws in this assessment, but it is much more difficult to make a sound and realistic prediction of the long-term impact of tax incentives on a complex, multifactorial behavior like physical activity. No data exist on the extent to which income tax incentives change health behaviors⁵⁹ because the fitness tax credits are the first income tax initiatives to have this aim, and no studies have yet directly studied their impact on physical activity. Limited evidence suggests that other economic incentives can effectively encourage people to be more physically active, at least in the short to medium term.^60–63 There is also evidence of financial barriers to participation in organized activities.^64,65 Some studies have shown, however, that rates of compliance with or participation in physical activity programs are generally low,^66–68 and these low rates are one reason why subsidies for participation in physical activity programs were found to have only small effects.⁶⁶

Unfortunately, there are several reasons to believe that a tax credit will not be very effective in increasing physical activity. The amount of the credit is relatively modest, in most cases representing a rather small proportion (≤ 15%) of the total amount of the claim (which in turn may be less than the actual cost). It may be unrealistic to expect that a credit of $75 (using the CFTC as an example) or even $119 (for an individual claiming both the CFTC and the Nova Scotia credit) would be a strong incentive to encourage parents to enroll a child in a program that costs more than $500. The amount of the credit could, of course, be increased, but this would substantially increase the cost of the initiative.

Exacerbating this problem is the fact that the individual does not receive the benefit of the tax credit until after an annual tax return is filed, potentially a year or more after the expense was incurred. One of the well-accepted tenets of behavioral economics is that individuals tend to discount the value of future benefits.^69,70 Therefore, even assuming that a $75 credit might influence an individual's decision if the credit were provided immediately, delaying it until the following year would likely lessen its impact substantially.

Furthermore, even if a tax credit does encourage more parents to enroll their children in eligible programs, it is not clear what impact this would have on the children's overall levels of physical activity. Will a child continue to be active on days when he or she is not participating in the organized activity or after the program has ended? If not, the benefits will be very modest in proportion to the government's investment. If participation in organized physical activity does occur, will it simply displace physical activity that would have taken place in the form of free play or casual sports or games? This effect will be very difficult to assess.

A related concern is that a tax credit will not provide an equal benefit or incentive to all families and in particular may not have much effect on lower-income groups. In fact, early evidence on use of the credit shows that lower-income households are less likely to be aware of the credit or to use it.^71,72 In the first 2 years of the federal credit, rates of use ranged from less than 1% of taxpayers in the lowest income categories to around 20% in the highest category.^27,28 This finding is of particular concern given that promoting equity and reducing inequalities are essential principles of ethical public health policy^73,74 and that children from lower-income families tend to be less physically active; thus, they could benefit even more from an incentive making activities more affordable.^75,76

It seems unlikely that the promise of a 15% reimbursement the following year will be enough to make it possible for lower-income parents to pay hundreds of dollars in registration fees for their children's activities. To the extent that the program becomes stable and parents come to rely on the credit being available from year to year, the problem may be mitigated somewhat, but the delay and the small proportion of fees that the credit represents will still limit the measure's effectiveness for lower-income families. In addition, most of the measures to date have taken the form of nonrefundable tax credits, which can only reduce the amount of tax payable, and therefore are only of use to individuals whose income is high enough to owe tax in a given year. This limitation will exclude the lowest income bracket of earners, even if they file tax returns to claim other benefits.

The structural features of the income tax system limit the extent to which initiatives like the CFTC could be improved in response to critics' concerns. For example, the tax credit could be made more useful to lower-income families by making the credit refundable and equal to the full amount of fees paid up to a certain limit, rather than a percentage. The Saskatchewan initiative has adopted this model and provides a refundable credit for the full amount of fees paid up to $150 per child. This allows individuals who do not owe tax to receive the credit, and it reimburses a larger proportion of the cost of programs, even up to the full cost of less expensive programs. The other key weakness of the tax credit, however, is the delay between paying fees and receiving the credit, an unavoidable feature of a tax system that relies on annual returns. This limitation is important because it undermines the usefulness of tax credits as public health strategies.

A sales tax exemption might be superior to an income tax–based incentive in certain respects. Unlike an income tax credit, a sales tax exemption generally provides an immediate benefit and would reduce the up-front cost of a good or service, making it more useful to lower-income groups. Also in contrast to a tax credit, which must be claimed, an exemption or rebate applied at the point of sale may provide a benefit to individuals by making goods or services more affordable even if they are not aware of the measure, though the effectiveness of the exemption would be further enhanced if it were widely publicized. Sales tax measures can more easily be used to encourage a broader range of physical activities beyond organized programs, such as exemptions on sporting equipment, for example. The short-lived Ontario tax exemption for bicycles provides a model for this strategy.

Two main challenges would confront those developing a sales tax–based strategy for promoting physical activity: determining whether the exemption amount would be sufficient to influence behavior, and choosing the goods and services covered by the exemption. The typical exemption would be in the amount of 5% to 8%. Even when provincial and federal exemptions are combined, it is not clear whether the tax savings would be high enough to have a significant impact as an incentive. It is also possible that the actual reduction in cost to the consumer may be less than the exemption if providers increase prices in response. Many studies have attempted to estimate the impact of tax or subsidy amounts on food and beverage purchases,^41,77–79 and some of these suggest that variations in price must be substantial to have a significant impact^78,80; but limited research has been done in the context of physical activity.⁶²

Policymakers would also need to determine which goods and services should be exempt. For example, should all sporting equipment be included, or only certain categories? The answer to this question will depend on the specific intent of the measure. If, as seems most promising, the measure focused on promoting physical activities that are accessible to all socioeconomic groups, it might include such items as soccer balls, basketballs, and bicycles, but not golf clubs or hockey equipment, which are likely to be used only by those who can afford more expensive fees and memberships. Regardless, some difficult line-drawing exercises would be needed, although these are certainly not unknown in current income or sale tax schemes, in which it is necessary to define programs eligible for the CFTC or basic groceries that are not subject to sales tax, for example.

Both income tax systems and sales tax systems have structural features that create advantages and limitations for their use as ways to deliver incentives for physical activity. By their nature, income tax and sales tax systems have universal application, allowing policymakers to reach the vast majority of the population in a single program that uses an existing administrative structure. Although universal application may be highly efficient, it can also be disadvantageous because it does not lend itself to strategies that target particular subpopulations or risk groups. Such distinctions can be incorporated into a tax-based scheme, but that would cause the administrative costs to increase to the point that it would likely not be cost-effective to use the tax system as the basis for the measure. Because of this limitation, most tax-based schemes will create windfall gains for families that are inclined toward physical activity and that could easily afford the costs of programs and equipment without any public support.

All of these tax-based measures also have inherent limitations because of their focus on changing individual behavior. Tax expenditures generally have been described as supporting an agenda of privatization that shifts the emphasis to individual choices rather than the provision of government services.⁸¹ Tax expenditures aim to affect individual behaviors without addressing systemic factors that could be strong influences on those behaviors; for example, they give incentives to register in physical activity programs or to purchase equipment, but they do not necessarily affect the availability of such programs or of safe places to use the equipment.

Structural features of tax measures also contribute to challenges in evaluating the programs. Whereas the multiple and complex factors that affect participation in physical activity make it difficult to evaluate the effectiveness of any measure designed to promote physical activity,⁸² the broad application of tax measures, their use of existing administrative structures, and delays in the availability of data make empirical evaluation of tax expenditures a particular concern. All of these features must be taken into account when weighing the benefits of using the tax system against the benefits of other strategies.

CONCLUSIONS

The implementation of recent tax-based measures in Canada has provided a timely and unique opportunity to study the advantages and limitations of using tax regimes for public health initiatives. Tax-based spending programs tend to be popular, partly because they can be publicized both as tax relief and as a way to achieve other social or economic aims.⁸³ It is therefore not surprising that the tax system is now being used as a public health strategy. Further research should be done to assess these measures and inform future policy decisions. For example, we can analyze patterns of use and attempt to investigate whether tax measures affect people's perceptions and behaviors, although it will be difficult to determine whether tax measures have actually had a significant impact on levels of physical activity. However, in evaluating existing and proposed tax-based strategies, it is important to design measures to be as effective as possible and to recognize that some limitations are inherent to tax systems and are thus unavoidable in practical terms.

A comparison of the Saskatchewan Active Families Benefit with the CFTC and similar tax credits shows that measures using the income tax system can be made more effective and equitable than the present CFTC model is likely to be. Governments could help to promote public health if they took potential impacts on physical activity into account when formulating sales tax policies. For example, excluding sports clothing and footwear from sales tax exemptions for children's clothing may be reasonable from one perspective, but such an exclusion could undermine efforts to encourage greater physical activity, especially among children in lower-income families. Similarly, the transition to harmonized sales tax in some provinces could have an unintended and avoidable negative impact by increasing tax rates for physical activity equipment and memberships. The pervasiveness of tax programs also presents unique opportunities for governments to exploit policy synergies by integrating dual objectives into the design and evaluation of programs. For example, tax credits encouraging people to use active forms of transportation have the potential to produce both public health and environmental benefits.^18,84–87

Even carefully designed tax-based measures have structural limitations. For example, delays in receiving the benefit are inherent to income tax-based incentives, and neither income tax nor sales tax lend themselves to targeted programs so that they risk being both underinclusive and overinclusive in scope. The estimated costs of the tax-based programs in Canada are substantial; therefore, it is important to consider whether those public funds are better spent on other strategies that could instead provide direct public funding to improve recreational facilities and active transportation networks or to enhance physical activity programs in schools.