This week, the House of Representatives is considering a package of bills related to health-care taxes. One measure, called the Personal Health Investment Today Act (PHIT Act), would expand the definition of qualified medical expenses to include fitness-related expenses such as gym memberships, exercise classes, and equipment. Including these expenses in the definition means that for some taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. payers, they will be tax-deductible. This change contradicts the objectives of tax reform by introducing a new, narrow tax break, and it is not clear that the new tax break will effectively promote healthy behaviors.
The PHIT Act would create a tax benefit in a couple of ways. Expanding the definition of qualified medical expenses would allow individuals to use their Health Savings Accounts (HSAs) or Flexible Spending Accounts (FSAs) to buy fitness classes or gym memberships. It would also allow fitness-related expenses to qualify toward meeting the medical expense deduction threshold; currently, taxpayers who forgo the standard deductionThe standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. It was nearly doubled for all classes of filers by the 2017 Tax Cuts and Jobs Act as an incentive for taxpayers not to itemize deductions when filing their federal income taxes. can itemize their medical expenses if they exceed 7.5 percent of their Adjusted Gross Income (AGI)Adjusted gross income (AGI) is a taxpayer’s total income minus certain “above-the-line” deductions. It is a broad measure that includes income from wages, salaries, interest, dividends, retirement income, Social Security benefits, capital gains, business, and other sources, and subtracts specific deductions. .
The bill would cap the amount of qualifying expenses to $500 for individual filers (double for joint filers), as well as cap any single piece of equipment to $250. Expenses related to golf, hunting, sailing, and horseback riding would not qualify, nor would expenses for exercise videos or books. The Joint Committee on Taxation estimates that this new tax break would cost $3.5 billion over the next decade.
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Expanding narrow preferences is counterproductive to good tax policy. One positive outcome of the Tax Cuts and Jobs Act is a simpler filing process for many taxpayers; the expanded standard deduction and capped, or eliminated, itemized deductionItemized deductions allow individuals to subtract designated expenses from their taxable income and can be claimed in lieu of the standard deduction. Itemized deductions include those for state and local taxes, charitable contributions, and mortgage interest. An estimated 13.7 percent of filers itemized in 2019, most being high-income taxpayers. s means millions more households won’t need to go through the complex process of itemization. Expanding tax preferences is contrary to the principle of a simple, neutral tax code that is easy to comply with.
Tax code complexities like this one often result when lawmakers wish to target benefits to specific people or to encourage certain behaviors. However, it is not clear that the change under consideration will encourage people to exercise more. Instead, the most likely beneficiaries are higher-income people who already have gym memberships. In general, the tax code is an ineffective tool to affect behavior, and there is little reason to believe a narrow fitness preference will be any different.
The PHIT Act is a step in the wrong direction when it comes to sound tax policy. This proposal would distort incentives, narrow the tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. , and add complexity to the tax code all while likely having very little impact on health and well-being. Lawmakers ought to focus on continuing the work of tax reform, perhaps by scaling back existing preferences rather than adding new ones.Share