How the Tax Law Fuels the College Sports Arms Race

New York Times op-ed, The Department of Lucrative Athletics, by Gilbert M. Gaul:

Another key element fueling the [college sports] arms race is the increasingly indefensible tax treatment of sports revenues. Decades ago — before the lucrative television contracts, Internet marketing, Nike sponsorships and luxury boxes — Congress essentially exempted colleges from paying taxes on their sports income. The legislators’ reasoning now appears shockingly quaint: that participation in college sports builds character and is an important component of the larger college experience.

Many booster clubs are recognized as charities under the federal tax code. At Florida and Georgia, to name just two universities, the athletic departments are set up as charities. Universities also have access to tax-exempt financing when building ever-larger stadiums and arenas. Boosters and donors benefit from generous tax deductions when they buy the best seats or endow an athletic scholarship. That’s right: colleges now endow their quarterbacks and linebackers the same way they do a distinguished chair of American literature.

If college presidents really wanted to halt the college sports machine, they could try two options. They could insist that athletic departments operate within their university budgets, like the English or biology departments; or they could ask Congress to rescind the tax breaks on the commercial income earned by athletic programs.

Congressional Budget Office, Tax Preferences for Collegiate Sports (blogged here):

Long viewed as an integral component of higher education, sports in many universities have become highly commercialized. Successful athletic programs are very rewarding financially: The NCAA men’s basketball tournament alone garnered about $143 million in revenue for athletic departments in 2008, and college football bowl games generated a similar amount.

Such large sums raise the questions of whether those sports programs have become side businesses for schools and, if they have, whether the same tax preferences should apply to them as to schools in general. This CBO paper compares athletic departments’ share of revenue from commercial sources with that of the rest of the schools’ activities to assess the degree of their commercialization. It also discusses some of the issues that might arise if the Congress decided to alter the treatment of intercollegiate sports programs in the tax code. ...

The study also examines the issues that might arise if policymakers decided that some or all of the activities of the schools’ athletic programs were primarily commercial rather than educational—a decision that would greatly reduce or eliminate the rationale for giving those activities preferential tax treatment. The Congress could change the tax treatment of revenue from those activities in several ways, for example, by limiting the deduction for contributions, limiting the use of tax-exempt bonds, or limiting the exemption from income taxation. ...

[R]emoving the major tax preferences currently available to university athletic departments would be unlikely to significantly alter the nature of those programs or garner much tax revenue even if the sports programs were classified, for tax purposes, as engaging in unrelated commercial activity. As long as athletic departments remained a part of the larger nonprofit or public university, schools would have considerable opportunity to shift revenue, costs, or both between their taxed and untaxed sectors, rendering efforts to tax that unrelated income largely ineffective. Changing the tax treatment of income from certain sources, such as corporate sponsorships or royalties from sales of branded merchandise, would be more likely to affect only the most commercial teams; it would also create less opportunity for shifting revenue or costs.

(Hat Tip: Ann Murphy.)