The Taxman Cometh for College Sports
UPDATE: Since this piece was first published, the GOP tax plan has been signed into law. All of the proposed revisions to the tax code that impact college sports were included, except one: access to tax free municipal bonds to pay for facility constructions. The irony, of course, is that both parties have been actively trying to eliminate this tax break from almost the moment it was created, as it's largely viewed as a tax break for billionaire team owners.
Why was it left in? Effective lobbying by those same said billionaires is the most likely reason. So while college athletic directors are now scrambling to devise new ways to generate revenue and shield these earnings from the IRS, the beat goes own for pro sports.
Regardless of your political beliefs or orientation, there’s one thing that we can all agree on: the tax plan currently being debated in Congress will fundamentally reshape the finances of college sports.
Admittedly there’s a lot that’s unknown (case in point: I’m writing this at the same time the Senate is writing their version of tax reform), but it’s fair to say that fiscal knives are being sharpened for the income and expenses of university athletic departments.
To access the best tickets for college football and basketball games, fans are required to make a donation to foundations that support athletic departments. It is, for all intents and purposes, a personal seat license for college sports, but because the money flows through a foundation, up to 80% of the donation can be deducted from federal taxes.
The Senate version eliminates this deduction, and has an estimated increase of $200 million in revenue to federal coffers as a result.
The impact on college athletic departments, which have come to rely on these donations as a major source of revenue, is uncertain. Estimates, including one by Williams College economist Jon Bakija, suggest that college sports program might experience a 20-30% drop in giving.
...Fiscal knives are being sharpened for the income and expenses of university athletic departments...
Licensed merchandise is big business for colleges and universities. All those logod hats, replica jerseys, and BBQ aprons add up: according the International Licensing Industry Merchandisers Association, licensed merchandise was a $348 million revenue stream for colleges in 2016.
The Senate bill goes after this previously untaxed revenue as well. Specifically, the bill will treat the “sale or licensing by an organization of any name or logo of the organization (including any trademark or copyright related to a name or logo) … as an unrelated trade or business.” This will make licensing sales, which are generally used to underwrite scholarships, subject to Unrelated Business Income Tax and can theoretically produce another $200 million in annual tax revenue.
College Coaches Salaries
The top paid public official in nearly every state is almost invariably a college football or basketball coach. These multi-million salaries will be taking a hit in the form of a changed exemption designation in both proposals.
The House plan would place a 20% excise tax on nonprofit organizations (including both public and private universities) for salaries of $1 million or more paid to their five highest earners (which are almost exclusively coaches and university presidents). The Senate plan offers similar language: “…person who performs services as an athletic coach for an organization that is an eligible educational institution … is treated as a disqualified person.” Meaning they are disqualified from any tax-exempt status.
As a result, while revenue sources from ticket donation and licensing (which are often used to pay these high salaries) are diminished, the costs of these salaries may face a 20% increase.
According to a 2014 Chicago Tribune article, spending on college athletic facilities nearly doubled in the 10 year period between 2004 and 2014, growing from $408 million to $772 million. It’s going to get harder to fund the college sports facility construction arms race.
For the last 30+ years, sports facility construction funding for pro and college sports has leaned heavily on access to tax free municipal bonds. Both House and Senate bills will end this practice.
According to the Brookings Institution, the federal government has lost about $3.2 billion in revenue since 2000 by permitting use of tax free bonds for stadium construction. That reason, combined with a “tax relief for billionaires” aura, is why eliminating access to these bonds has been a goal of both parties for some time, perhaps most famously with Senator Daniel Moynihan’s (NY-D) Stop Tax-Exempt Arena Debt Issuance Act ("STADIA") legislation from 1996.
While the impact of this provision will be acutely felt by pro teams and private schools, it’s unclear how this will impact public university college athletics programs. Public universities, by dint of their status, may still be able to obtain access to tax free bonds to underwrite their sports palace dreams.
A lot will happen in the days (hours?) since we post this. Even if both chambers pass their respective version of tax reform, there’s a lot that can change as the two bills are merged. Still, if this tax reform package becomes the law of the land, the way college sports programs acquire and spend money will be forever altered.