Nonprofit tax exemptions, for-profit competition, and spillovers to community services

Katja Seim, Business Economics and Public Policy, The Wharton School, and Teresa Harrison, Professor of Communication, University at Albany

Abstract: Nonprofits are increasingly present in industries with a large for-profit sector, raising questions about their competitive advantage afforded by the nonprofit tax exemption. We estimate an equilibrium model of market structure for recreation/fitness centers to assess whether nonprofit and for-profit firms compete directly for the same customer base. Our results suggest that the two ownership types serve independent markets. Consequently, nonprofits do not meaningfully crowd out for-profit competitors. We find that local property taxes, as a proxy for a firm’s tax burden, significantly affect for-profit entry and that nonprofit entry would fall by 25% without affecting for-profit entry if the same property tax liability were imposed.