TAX EXEMPTIONS AND FITNESS CENTRES: Evidence from the United States

Tax exemptions encourage non-profit organisations to provide community services to areas which otherwise would not have had access to these services from for-profit fitness providers. But revoking tax exemptions would lower non-profit entry into such markets by 25%.

This is the main conclusion of research by Teresa D. Harrison and Katja Seim, published in the May 2019 issue of The Economic Journal. Their findings suggest it is beneficial for communities to allow non-profit organisations to keep their tax-exempt status as it encourages them to enter the market while not significantly discouraging for-profit providers.

The researchers explore the market for fitness centres in the United States which shows that non-profit organisations do not directly compete with its for-profit counterparts. In recent years, for-profit gyms, health clubs and fitness centres in the United States have complained that non-profit institutions – especially those of organisations such as YMCA – have enjoyed an unfair position due to their tax-exempt status.

This study finds that for-profit fitness centres and non-profit fitness centres run by the YMCA within the same market do not show significant competition when making decisions to enter a market and that standalone non-profit gyms do not compete with for-profit gyms because they cater to different demographics.

The researchers also note how non-profit gyms provide additional community services that the community would otherwise go without: revoking the tax exemption would lower non-profit entry into markets by 25.6%, a decline largely represented by YMCAs that offer both fitness centres and youth care services. This shows that the YMCA chooses to complement its fitness services with child care to better serve its market (which it is able to do potentially because of costs saved from having the same facility for both).

While the tax exemption appears to play a significant role in non-profit entry, revoking it does not deter for-profits significantly.  For example, a full revocation of the non-profit property tax exemption would result in loss of 43 facilities in the markets studied, including 23 daycare centers and 32 after school programs operated by the YMCA. Whereas for-profit gyms hardly changed their behaviour. At the same time, the research finds that simulating a full property tax exemption for for-profit gyms would increase for-profit entry by 16.2% and decrease non-profit entry by only 2.6%.

The research uses a model that evaluates simultaneous market entry decisions for for-profit fitness centers and YMCA’s. The paper accomplishes this by segmenting the United States into distinct community markets and estimating the effect of population demographics, such as incomes and age, and the presence of the other type of organisation have on the decision of a for-profit fitness center or a YMCA to enter a market.  Due to the depth of the data the research can show that different factors influence market entry by YMCAs and for-profit fitness centers. For example, YMCAs choose to enter a market and provide both services when there is a higher percentage of single parent households, or a less educated population, pointing toward the non-profit choosing under-served markets along non-income dimensions. 

'Non-profit tax exemptions, for-profit competition, and spillovers to community services’ by Teresa D. Harrison and Katja Seim is published in the May 2019 issue of The Economic Journal.

Teresa D. Harrison

Associate Professor at Drexel University and Academic Director of Nonprofit Governance at Drexel’s Gupta Governance Institute

Katja Seim

Associate Professor of Business Economics and Public Policy at the Wharton School at University of Pennsylvania