Tax Subsidies for College Sports
One of the weirder aspects of American higher education is that a fair number of universities operate what are basically professionally sports teams as a sideline business. They differ from normal professional sports teams in that they’ve organized a cartel to sharply limit the amount of compensation that can be provided to a sub-set of the workforce, but in other respects—revenues, salaries for coaches and administrators, facilities, etc.—they resemble for-profit professional entertainment enterprises. This has long struck me as wrong in various ways, but it took the CBO Director’s Blog to get me to see that there’s a tax policy angle here:
A new CBO study released today assesses the degree of commercialization of athletic departments by comparing their share of revenue from commercial sources with that of the rest of their schools’ activities. In the case of NCAA Division IA schools, 60 percent to 80 percent of athletic departments’ revenue comes from activities that can be described as commercial—seven to eight times that for the rest of the schools’ activities and programs. For schools in the rest of Division I, revenue from commercial activities accounts for a much smaller share of athletic departments’ revenue, about 20 percent to 30 percent.
The high share of commercial revenue for some sports programs raises the questions of whether those programs have become side businesses for schools and, if they have, whether the same preferential tax preferences should apply to them as to schools in general. The Congress could change the tax treatment of sports programs in several ways, such as limiting the deduction for contributions, limiting the use of tax-exempt bonds, or limiting the exemption from income taxation. As long as athletic departments remain a part of larger nonprofit or public universities, however, schools would have considerable opportunity to shift revenue, costs, or both between their taxed and untaxed sectors, rendering efforts to limit the tax preferences for athletic departments alone largely ineffective. In contrast, changing the tax treatment of income from certain sources, such as corporate sponsorship income or royalties from sales of branded merchandise, would create less opportunity for shifting revenue or costs, and it would have larger effects on the most commercial sports programs.
This last option seems like something we should do. When you’re looking for revenue, it’s important to find it in these little nooks and crannies. In particular, when you have a situation where raising the tax leads to little tax-avoiding behavior, it means you’re looking at a revenue measure that’s going to have a minimal distorting effect on the broader economy.
23 Responses to “Tax Subsidies for College Sports”
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May 29th, 2009 at 9:34 am
Zags! Spokane’s finest! We’re in yglesias’ blog, we made the big time now!
May 29th, 2009 at 9:41 am
They differ from normal professional sports teams in that they’ve organized a cartel to sharply limit the amount of compensation that can be provided to a sub-set of the workforce . . . .
This is a difference?
May 29th, 2009 at 9:42 am
The tax implications lie in the code for non-profit tax exempt entities (501C3). I once ran a unit within a university that had outside contracts and the auditors carefully looked to see if the income was taxable. The usual problem with university businesses is their direct competition with commercial businesses. A university can compete too effectively because it has no tax burden to raise costs and it can often use lower cost student labor, among other things. The athletic departments,as you note, have no commercial competition to complain, so that issue is moot. Many times the taxable income is expressed as a percentage of the total income (no more than 20% comes to mind) and when compared to the total university income, athletic income is usually trivial. Additionally, it wouldn’t surprise me if intercollegiate athletics are presented as being necessary, in some way, to the mission of the university, thus justifying tax exemption.
May 29th, 2009 at 9:49 am
No tax breaks for Adam Morrison!
May 29th, 2009 at 9:51 am
This is silly. Much, much sillier than McCain blaming earmarks.
May 29th, 2009 at 9:54 am
If corporations and the wealthy won’t pay more taxes, then the revenuers need to go after the previously untaxed, nonprofit community hospitals, colleges, even churches.
I bet they won’t touch 527 political organizations. Remember Chuck Grassley wanting to tax pimps and whores? They won’t touch the political version.
May 29th, 2009 at 10:01 am
Taxing colleges. Brilliant idea.
Why don’t we just reduce the amount of funding to colleges and redirect the money elsewhere? Would Matt support that?
May 29th, 2009 at 10:02 am
Why would the government intervene? The sports divisions of these universities get a steady stream of athletes for way under market price, and the universities get a cash cow. Perfect symbiosis.
Meanwhile, if you ended this free-market revenue stream, the government would be liable for the difference.
And that would only hurt places like Gazonga University.
May 29th, 2009 at 10:10 am
Just another reason to implement the FairTax.org
May 29th, 2009 at 10:13 am
Let’s privatize school sports! Add promotion and relegation and you’ve got a real market in professional sports. (I wonder how much could Michigan get from a Wolverines IPO?) And good riddance to goddam HS pep rallies and athletic scholarships.
May 29th, 2009 at 10:20 am
“they’ve organized a cartel to sharply limit the amount of compensation that can be provided to a sub-set of the workforce”
Seriously Mat, you’ve heard of salary caps and draft haven’t you? The difference between college sports and other is one of degree.
May 29th, 2009 at 10:35 am
Yea, but it’s one hell of a degree. Millions and millions of degrees, actually.
Let’s see, several million dollars annually versus a scholarship (that many “students” don’t really use in any meaningful way) and maybe some cash on the sly.
And Coach K can peddle cars, sneakers, and video games while his players have to jump through hoops to retain their “amateur” status.
College sports is about the biggest racket devised by homo economicus.
May 29th, 2009 at 11:25 am
Tax health care benefits..tax colleges? What’s next – tax welfare benefits and housing subsidies? Who the hell dreams this stuff up? The GOP?
May 29th, 2009 at 11:25 am
Most college athletic administrators will tell you privately that the millions of dollars generated by college athletics don’t really make it back to the school’s general fund. It’s simply recycled into the athletic program in the form of opulent facilities and enormous coaching salaries.
When I was at UConn in the early 1990s, nearly a quarter of the dorms and the science building had to be condemned because they were falling apart. The Homer Babbidge Library was covered in scaffolding because the facade was falling off (the architects forgot to factor in the stress of the books on the facade when the libary was built). Meanwhile, the basketball program was raking in millions. Did those millions get spent rebuilding the crumbling campus? Nope. Those millions were spent building a football stadium in Hartford so UConn’s hapless and ignored I-AA football team could join Division I.
It took a massive tax increase in CT to literally rebuild the school from the ground up, while the athletic department wasn’t expected to contribute dime one.
May 29th, 2009 at 11:51 am
My Ph.D. advisor, who was also deeply involved in institutional politics, was consistently of the opinion that colleges should pay student athletes for playing 4 years, offer them 4 years of free education whenever in their life they choose to take advantage of it, and quit pretending.
May 29th, 2009 at 11:54 am
I’m starting on the faculty at a I-AA school this fall (sorry, FCS school) and during my interview I learned that several attempts to move to I-A were stalled when the athletic oversight committee learned that almost no I-A schools make money on their football programs. Apparently basketball brings in decent money, but by the time the extravagant facilities and big coaching and scholarship rosters are paid for football doesn’t. So calling college athletics a “cash cow” is probably inaccurate, and it looks like many of these football programs may be spending a lot to avoid looking like a for-profit enterprise.
May 29th, 2009 at 12:10 pm
Depending on whether this money is then recycled back to the Universities’ general fund, I’m not sure this is a problem. The college I work at has a low level athletic program, but during the summer essentially operates as a hotel, offering our student housing and conference facilities to all comers. If this money went to lining the pockets of administrators that would be a problem, but when it’s poured into the general fund it benefits the university.
May 29th, 2009 at 12:18 pm
Well this is just dumb. How many Athletic Departments make an actual net profit as opposed to simply using money from football and basketball to fund other sports?
To avoid taxes all you would have to do is to set up the Athletics program as its own entity much as bigger Universities do their Alumni Associations. Once they deduct all the expenses from the non-revenue sports there would typically be no net profit. And the fact that the Football coach was getting paid millions and the team had a lavish training facility doesn’t get you far. Check out the salaries and headquarters of organizations like the Red Cross, the United Way and the Boy Scouts.
Football U has always been a problem, I cringe when I see some of the majors of football players in the SEC, but like it or not it is what makes Title 9 even possible. And while Football may not make direct contributions to operating expenses it helps maintain the attention of major donors who make contributions outside the Athletic Fund.
But in any event all of these proposals to raise money by taxing sports departments or employer health are just the result of Democrats being too chicken shit to tax capital gains at rates equal to regular income. All the claims that taxing those gains restrict investment are based on a totally flawed (but very self-serving) psychological model that posits that every person ever born has a built in tax calculator that magically allows him to compute the effects of small changes in taxes. EMH and Homo Oeconomicus are convenient myths to cover the traditional historical project of wealthy people, which is to shift the real burden of taxes from capital to labor while allowing themselves to maximize their consumption.
Historically what happened after Reagan cut taxes? Well we started getting TV series like “Lifestyles of the Rich and Powerful” “Dynasty” and “Dallas”. What happened after Bush II followed suit? We had people like Ken Lay buying five different homes in Vail (or was it Aspen) and other guys throwing $1 million birthday parties for their trophy wives and $30,000 shower curtains for their maids.
Lowering taxes lowers the marginal cost of consumption which in turn makes consumption go up. If you want people to reinvest their money in productive ways the key is to keep the marginal cost of consumption high and not low. Technocrats get this when it comes to gas taxes but they never seem to make the same connection to capital gains. Want to keep capitalists from eating their capital in unproductive ways? Make the only tax-limited path be rolling gains over into new investments.
I don’t know if Monopoly still has a square called Luxury Tax but it was based on a sound economic and psychological principle, it may not raise a lot of revenue but it sure made millionaires think twice. Somehow younger Liberals who grew up under Reagan need to get it through their heads that those guys were wrong about everything economic, it is not necessary to run every proposal through a free market model or assume that investment is affected negatively by higher marginal rates. All of that is just fancier curves drawn on fancier napkins with way more multi-variate calculus attached layered on top of a cartoon psychological model.
Tax hedge fund compensation as regular income. Then maybe we can start looking for the crumbs in the nooks and crannies. As it is we are just ignoring the elephant in the room.
May 29th, 2009 at 12:20 pm
offer them 4 years of free education whenever in their life they choose to take advantage of it, and quit pretending
Totally agree with that. I’d go further and suggest that the four years of free education–at whatever Div I institution they see fit to attend in the future–ought to be offered in full in the original scholarship offer and ought not be recindable midway though. That still leaves millions of dollars in unearned income for the coaches and administrators. The situation as it stand is obscene.
May 29th, 2009 at 12:30 pm
Fine. Leave the status quo in terms of college athletic spending, salaries, commerical tie-ins, and absolute insulation from having to contribute to the school’s general fund. However, in return for this lofty tax free status, you have to actually pay the athletes their cut of the revenue. That means when the athletic department makes a mint selling Tim Tebow jerseys in the school Co-Op or in local department stores, Tebow himself gets royalties. That means that Ty Lawson gets a cut everytime his likeless is used in the EA College basketball videogame. If one were to tally up all the ancillary income colleges make off of overtly marketing their players, that tally would greatly outstrip the value of the scholarship they receive.
The thing I’ve never understood about the college athletic booster mentality is that the boosters give millions of dollars to the schools (and occasionally millions of dollars under the table to the players), but what EXACTLY do they get in return?
May 29th, 2009 at 12:33 pm
Bruce, nice trickle-down rant. So, tell me, how do you explain that under the trickle-down system, average real wages WENT DOWN? It is no longer possible for a middle-class family to get by on just one income. The number of people in poverty WENT UP. The number of people without health insurance WENT UP. The percentage of overall wealth controlled by the top 1% WENT UP.
Don’t give me this Laffer curve bullshit, trickle down has been an abject failure.
May 29th, 2009 at 2:46 pm
Erasmus, did you actually read Bruce Webb’s comment? Didn’t sound like trickle-down to me.
May 31st, 2009 at 5:43 am
Pete and whoever else,
If a college makes a killing on merchandise or tickets or whatever, why do you think that the players should get a cut? In pro or college sports, why does the enormous amount of profit in any way mean that players should get royalties or a high-paying contract?
The revenue earned by a sports league as a whole has nothing to do with the quality of the players (that’s assuming it does not compete with other leagues, but if it does just consider the sport as a whole). Player skill is completely relative. The revenue simply comes from people liking sports. If every basketball player in the world was 10% slower or less accurate it wouldn’t matter. If the Yankees hardly ever won it wouldn’t matter, because some other team would be winning instead. From the perspective of the Yankees, or of UConn, having the best players means they will be popular, and so they’ll get more revenue, so it’s worth paying players a lot. But that just sucks the revenue from somewhere else without adding anything. From the perspective of the league as a whole, the entertainment value has not changed, so total revenue will not change, so the player compensation race is just inflation. It is not like engineering or medicine or ditch digging, where being good at your job actually does mean you produce more value. The same goes for the coaches and managers: someone’s always going to win, even with no coaches at all, so they add nothing.
The point of this is that the optimal athlete salary does not depend on a team’s revenue; it depends entirely on the supply of players. Lots of people dream of paying sports professionally and lots want to play in college for free–>high supply–>you can pay them dirt and everyone’s happy. The players might even be happier, because the pool of people who are best at a sport is not quite the same as the pool of people who love playing it the most (and with dirt pay, those are the players you’d have). Obviously, keeping the entertainment value requires that the players still be fit and skilled enough to play the game well, but that’s a much lower bar than being the best in the sport. And even if you do want the best in the sport, the salary that would entice a top player to play in the MLB is much lower than the salary the Yankees might offer today to steal him from the Red Sox.
Slashing player compensation (and coaches’ pay, and stadium construction, etc.) would leave a huge profit. That profit comes from high revenues which really only exist because sports events/endorsements are not competitively priced, because sports leagues tend to be monopolies/cartels by nature (and there’s nothing wrong with that–society would not benefit much from having ten more basketball leagues competing with the NBA and NCAA). What makes sense in my mind is for government to charter the monopoly and regulate it, so that the surplus cash is either eliminated through low prices or diverted to the universities or government.