A Stitch in Haste

Tennessee is considering revoking the tax-exempt status of the YMCA:

The YMCA has been involved in a nine-year battle with a group of private health clubs who say the YMCA’s state tax exemption gives the organization an unfair advantage in competing for members.

Of course, the most insolent abuser of tax-exempt status is the AARP, which sells — just about everything. And as a tax-exempt behemoth, its inappropriate competition with taxpaying businesses has a significant impact throughout the private sector.

Let’s say I decide to retire and open a gay bar in my neighborhood. Not to make money, but to expand the gay presence in my locale, or to “give back to the community,” or whatever. I make a conscious choice to operate my bar for zero profit. I overpay my bartenders and undercharge my customers — all carefully calculated to just break even.

If that happens — if I have no profit — then I will pay no tax. I am, essentially, a tax-exempt institution. Which is fine if that’s what I choose to do. But would anyone seriously entertain the notion that I should be granted, upfront, tax-exempt status? Of course not. My bar is not a charitable, educational, cultural or otherwise “civic” institution. It’s a business, albeit one that I choose to operate in an unconventional manner.

How is the YMCA, or the AARP, any different? If the YMCA wants to run a gym, or if the AARP wants to offer dirt-cheap life insurance or run any other business for the benefit of seniors rather than for themselves, then they can go right ahead — but without a discriminatory tax advantage. Just like me and my breakeven gay bar.

It’s quite simple really: tax-exempt is (or should be) as tax-exempt does. It should be the activity, not the bottom line, that determines tax-exempt status. Run a health club? That’s a business, not a charity — pay the tax.

Sell life insurance? That’s a business, not a charity — pay the tax. Sell mutual funds? That’s a business, not a charity — pay the tax.

And so on.

If the YMCA wants to make gyms available to the poor and disadvantaged, then let them create a charitable endowment to fund gym vouchers for low-income families. But don’t undercut, via discriminatory tax policy, honest entrepreneurs trying to make an honest profit by providing an honest service — and paying taxes in the process.

Perhaps there will be some gray areas — why is a museum tax-exempt but an art gallery not? But wherever that gray area might be, it is not at the gym.

Hat tip to Tax Policy Blog.