The Children's Fitness Tax Credit: A Study in (Academic) Incentives

The Children's Fitness Tax Credit gives parents a non-refundable tax credit to recognize the cost of registering children in sports. When the credit was first introduced, its cash value was $77.50 - the amount of the credit ($500) times the basic marginal tax rate (then 15.5%).  The popularity of the credit among parents has led to it being enriched to $1000 in 2014 - a cash value of $150.

It's not that much money. Not compared to the Universal Child Care Benefit, which had a (pre-tax, admittedly) cash value of $1920 in 2015. Not compared to the Canada Child Tax Benefit, with a cash value of $1446. Not compared to the value of the Child Care Expense Deduction - worth up to $7,000 times the lower earner's marginal tax rate. But if one judged the importance of a tax provision solely by the number of academic papers written about it, it's one of the key aspects of the Canadian income tax system. 

A partial bibliography of the literature on the Children's Fitness Tax Credit can be found at the end of this post. It's not a long bibliography, but it contains more academic papers than my recent disability tax policy reading list. Why all this interest?

First, there are fiscal inducements. Health research is well-funded. People conduct research on things like fitness tax credits because that's where the grant money is.

Second, analysis of the Children's Fitness Tax Credit is straightforward methodologically. The stated objectives of the program are clear: to increase physical activity among children, and to promote health. There is a widespread consensus as to what a good tax system should achieve: efficiency, equity, administrative simplicity, and so on. The Children's Fitness Tax Credit can be evaluated by its success or failure in meeting these goals. 

Finally, it's fun. It's fun to have a rant. The overwhelming consensus among policy analysts - economists and non-economists alike - is that the Children's Fitness Tax Credit is bad policy. Kevin Milligan gives a concise summary of the case against fitness tax credits here. They're complicated and ineffective, plus low income people miss out on them. There's something satisfying about completely demolishing - intellectually, at least - a poorly designed program.

It's also enjoyable to think about children and sports. I once tried to write a paper on long term care insurance. I abandoned it because every time I worked on it, I became depressed and anxious, thinking about the ravages of old age. It's much more pleasant to day dream about the swish of blades on ice, the thunk of a puck hitting the boards, the camaraderie of the local shinny rink... 

 Much ink has been spilled on subject of the Children's Fitness Tax Credit, but at the end of the day, it seems a picture is worth a thousand words. Here's the picture:

The Children's Fitness Tax Credit enjoys widespread support, has been steadily expanded, and will soon (2015) be made refundable. Judging by their impact on policy, the efforts spent critiquing the Children's Fitness Tax Credit have been largely a waste of time.

Has the time been worse than wasted? Perhaps this is just academic catnip, giving policy analysts something to chew on and keep them happy and occupied? The equivalent of shouting "squirrel" to distract people from the serious business of income splitting, corporate taxation, the treatment of capital income, and so on? There are a number of good papers on this reading list. I wish it was equally easy to find research on aspects of the tax system of greater significance than the Children's Fitness Tax Credit.

Bibliography.

Block, Sheila. "The children’s fitness tax credit: Less than meets the eye."Canadian Women’s Health Network 9, no. 3/4 (2007): 20-21. Ungated here. 

Centre for Spatial Economics Economic Benefits of an Adult Fitness Tax Credit (2007) Ungated here. 

Fisher, Koren L., Amin Mawani, Barbara Von Tigerstrom, Tamara Larre, Christine Cameron, Karen Chad, Bruce Reeder, and Mark Tremblay. "Awareness and Use of Canada's Children's Fitness Tax Credit." Canadian Tax Journal/Revue Fiscale Canadienne 61, no. 3 (2013). Ungated here.

Larre, Tamara, “The Children’s Fitness Tax Credit: Right Message, Wrong Policy Instrument” in Lisa Philipps, Neil Brooks & Jinyan Li, eds. Tax Expenditures: State of the Art (Canada: Canadian Tax Foundation, 2011) 12:1. 

Leitch, K. "Reaching for the Top." A report by the Advisor on Healthy Children and Youth. Ottawa: Minister of Health Canada, Report 4552 (2007).

Leitch, K. Kellie Report of the Expert Panel for the Children's Fitness Tax Credit Ottawa: Department of Finance, October, 2006. Download  here.

Nguyen, Hai V. and Paul Grodendorst, “Does Child Fitness Tax Credit Program Make Children More Active?” unpublished manuscript, available from the authors, contact  vanhai.nguyen [at] duke-nus.edu.sg 

Reach, D.M. (2012). "Fitness tax credits: Costs, Benefits, and Viability", Northwestern Journal of Law & Social Policy, Vol. 7. Ungated here.

Sassi, F., A. Belloni and C. Capobianco (2013), “The Role of Fiscal Policies in Health Promotion”, OECD Health Working Papers, No. 66, OECD Publishing. http://dx.doi.org/10.1787/5k3twr94kvzx-en (tangentially related)

Sauder, JoAnne, “Children’s Fitness and Activity Tax Credits: why they were created and what they are intended to do” (2014) 21 Health Law Journal 75. Ungated here.

Saunder, JoAnne "Canada's Experiment with Children's Fitness and Activity Tax Credits" LLM Dissertation, University of Saskatchewan. Ungated here.

Spence, John C., Nicholas L. Holt, Julia K. Dutove, and Valerie Carson. "Uptake and effectiveness of the Children's Fitness Tax Credit in Canada: the rich get richer." BMC Public Health 10, no. 1 (2010): 356. Ungated here.

Von Tigerstrom, Barbara, Tamara Larre, and JoAnne Sauder. "Using the tax system to promote physical activity: critical analysis of Canadian initiatives."American journal of public health 101, no. 8 (2011): e10-e16. Ungated here.

Comments

[Jim Sentance]

Just wondering to what extent you think making it refundable will improve things.

[Kevin Milligan]

Hi Frances,

I'd add to that the availability of data. That drives some of the research agenda. Some have noticed that, too...(cf Long Form Census).

I agree that these credits occupy disproportional time of analysts relative to their budget value--e.g. CFTC estimated at $130 million for 2014.
http://www.fin.gc.ca/taxexp-depfisc/2014/taxexp1401-eng.asp#toc7

Our CTJ Issue 4 Policy Forum will have a writer making the case for and another making the case against these boutique credits in general.

[whitfit]

One thing that I wonder about with all of these boutique tax credits is the cost of administering them.

I am sure if you add up all the costs of administering, advertising, coming up with policy and legislation, accountants doing tax returns etc... that there is a good chance that these all come to more than the amount of the tax credit given out.

This year I had a student loan receipt for a loan paid off during the year. I got a receipt for a small amount of interest paid - I think around $50. That is worth about $9 I think. Am I really going to file that, send it to my accountant and have them calculate the credit? That seems like a waste - plus the cost of preparing and sending the receipt must have been at least a couple of dollars. Of course, many student loan interest amounts are not like that, but many amounts that will be claimed under the children's fitness tax credit will be.

As an aside, that photo is annoying as a piece of marketing, but also shows a wide range of children's ages. Blended family? Long time between kids? I mean, as a parent of a young child, I don't know if I could handle going through it again in 12-13 years (spread between the oldest and youngest in that photo).

[Frances Woolley]

Jim - making the credit refundable should improve the equity of the credit very marginally, but I don't think it will change the conclusion of, e.g. Nguyen and Grodendorst that the credits don't have any measurable effect on children's participation in sports.

Kevin, who did you find to make the case for the credits? Will be interested in reading that. Yes, the availability of data is a consideration - the Canadian Community Health Survey gives quite detailed info on physical activity that can be used to estimate the behavioural impacts of these credits. There's now a bit of interprovincial variation in the amounts of these credits, too, and given the CCHS is conducted annually, there's a possibility for some nice diff-in-diff estimation.

Whitfit - for sure. You know the old saying "intel giveth, microsoft taketh away." There's a parallel here - TurboTax giveth, with software that reduces the cost of compliance, but any savings are immediately taken away by increased complexity in the tax system.

I don't know if it's supposed to be a blended family (perhaps income splitting and UCCB induced Mom to drop out of the work force and have another kid?) but interestingly, if you watch the video about the credits here http://www.cra-arc.gc.ca/vdgllry/wtchds/menu-eng.html?clp=wtchds/chldrnftnss14-eng&fmt=mp4 the parents of the girl bouncing the ball could be an inter-racial couple.

[Jacques René Giguère]

Frances: why are you talking about this in terms of economics? Whether it economically work or not, it's beside the point. It's rewarding the base. Making it refundable even though those who need the refundability don't have the means to enroll their children simply feed the aspirational side of the poorest. "If I coulsd have enroll my child, I would have received the credit. Praise to our great emir Stephen bin Harperovitch." As long as the recipient think it has value, it's ok. Soldiers die for a piece of metal on their chest for having defended defending the honor of a piece of cloth.

[Min]

Frances Woolley: "TurboTax giveth, with software that reduces the cost of compliance, but any savings are immediately taken away by increased complexity in the tax system."

Really? I would have thought that the complexity of the tax system would follow a Parkinson's Law dynamic, with a steady increase regardless of outside influences. ;)

[Shangwen]

Frances, this reminds me of your post on subsidizing urban cyclists--spending far more on activities than the economic value of the actual health benefits gained at the margin. The CFTC (which I happily maxed out this year, BTW) may be small relatively to budget, but the whole issue of overblown health claims from public expenditures is a huge issue. Perhaps partisan bristling also plays a role in the quantity of publications? "We subsidized suburban soccer fees" may grate on people as it should, but "we hired 50 more nurses!" deserves a lot more scrutiny too.

[Nick Rowe]

I'm suddenly reminded of Carleton's policy (Carleton can't be alone) of paying (is it $100 every 3 years?) part of the cost of glasses. I hate that policy, and others like it. The hassle of trying to find the damned form, fill it in, send it to the right place, not lose the receipt, not to mention the cost of the administrators at the other end, plus moral hazard, must come to close to $100. So I never bother. It's never optimal to ensure against small losses if there's a fixed cost. But we do it. And if you tried to get rid of it, all the sociologists would start jumping up and down in outrage.

This isn't just politics. There's a general theory here, waiting to be discovered (if it hasn't already).

[Nick Rowe]

Damn. insure not ensure.

[Frances Woolley]

Jacques Rene - the JoAnne Sauder thesis has some quite interesting ideas on the political psychology of the CTF.

Shangwen - agree with you about the issue of overblown health claims. On the partisanship issue - if you check out the discussion over on Twitter, you'll see people like Paul Boothe, who I wouldn't really characterize as a lefty, weighing in against the cumulative cost of boutique tax credits. People on the right have reason to dislike boutique tax credits too, because something like the Children's Fitness Tax Credit creates an illusion of taxes being cut, instead of delivering really large reductions in taxes in the way that, say, a one percentage point reduction in the base tax rate would.

Nick - it's interesting, union shops like ours tend to deliver a greater proportion of compensation through benefits than non-union shops like U of T. I think that's because it creates more compressed compensation structure overall. But that's not what the Children's Fitness Tax Credit is doing - it's delivering more benefits at the top of the distribution.

Though I think there's some kind of price discrimination argument to be made here - you don't care enough about filling in the forms to get the lower costs, others who are really price sensitive do.

[Jacques René Giguère]

Boothe is a righty. He may have apolitical agenda but think as an economist. ANd the whole point is not about economic efficiency or even cutting taxes. It's about getting votes. Tounderstand boutique tax credit you need the age old marketing maxim :"I want YOU in the Army", "This Bud's for YOU!" "Darling it's OUR song". He may have shark eyes but politically Harper is a crooner: look the girl in the eyes while you sing.

[Bob Smith]

I'm with Jacques on this (someone mark this time).

The CFTC was always a political ploy. It that respect, its no more, or less, defensible than the countless ways of squandering public resources favoured by politicians of all stripes when elections are in the air. I would have done it differently from the get go to try to minimize the distributional implications and provide more incentive effect (i.e., provide a 100% fully refundable credit up to $100 - for someone at the margin, paying %20 of their kids sporting costs doesn't do them much good. At least a $100 fully refundable credit could pay for a set of swimming lesson), but no one asked me.

I know, from a tax policy perspective, I'm supposed to be fussed by these sorts of gimmicks. But the reality is, when I look through the list of tax expenditures, the gimmicky tax credits amount to a hill of beans in a $300B federal budget. True, there are some tax expenditures with large dollar amounts, but most of those - the basic personal amount, the RRSP deductions, the CCTB, the dividend tax credit scheme, the partial inclusion of capital gains, can be defended (rightly or wrongly) on solid policy grounds other than getting votes - be it enhancing efficiency or equality or achieving some other social (blah, blah, blah) objective.

Yes, if we got rid of all of the gimmicky tax expenditures, we might be able to cut the marginal tax rate by some trivial amount. But we wouldn't, we'd spend that money on some other way of buying votes. Maybe I'm cynical, but I see those sorts of vote buying policies, in whatever form, as just the price of democratic government. As long as they stay relatively modest, that's a cheap price to pay.

[Jacques René Giguère]

Bob: it's the beginning of a beautiful friendship. Is there some nazis we can take care of?

[Bob Smith]

Allons enfants de la Patrie... :)