How the NCAA Scams Taxpayers for Welfare Money

Edward Silva would like to thank you. Well, not you specifically. The collective, taxpaying you.

In other words, us.

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A University of Maryland men’s basketball season ticket holder, Silva paid $1,198 for two seats at the Xfinity Center in College Park, Md., where he watched the Terrapins upset then No. 5-ranked University of Wisconsin, win a two-point squeaker over lowly Northwestern University, and enjoy a mostly successful season that culminated in a NCAA tournament berth.

Of course, Silva—like many college sports fans—also paid Maryland’s athletic department for the right to purchase his tickets, in this case a $700 donation (ahem) to the school’s Terrapin Club. And that’s where we come in. Thanks to a longstanding legal quirk that treats campus athletics as something akin to the Salvation Army, Silva was able to deduct 80 percent of said donation on his income tax return—which means that every time Silva thrilled to freshman guard Melo Trimble’s precocious playmaking, the federal treasury helped pick up the tab.

“I don’t know exactly how much it saves me,” says Silva, 32, a federal government attorney who lives in Bethesda, Md. and has been taking the ticket deduction since 2008. “But I know my refund gets bigger.”

Should taxpayers be credited with an assist?

“I guess they should,” Silva says. “I never made that leap before, but it makes complete sense. Most of these schools are funding sports by donations, and if I’m getting a tax deduction for it, it does seem very odd.”

March Madness is many things: three weeks of manic, do-or-die basketball; three weeks of depressing, done-and-dead bracket failure; a superfluous reason to hate on Duke University; a national celebration of ~~labor exploitation~~ the amateur sports spirit. But beyond all that, it’s also a carnival of Sports Welfare, the largely indefensible, wholly unnecessary, very odd public subsidy that gushes through big-time, big-money college sports like water from a broken main.

Enjoying all the brand-name tournament sponsorship from the NCAA’s corporate champions? You’re paying for a part of it. Happy that the seats at Nationwide Arena and the KFC Yum! Center were full during second and third-round games? You paid for a part of that, too. From college bowl contests to the University of Oregon’s $68 million Death Star-shaming football training facility to boosters paying big bucks for premium stadium parking and other perks, the billion-dollar major campus athletic industry benefits from our direct and indirect largesse—even as television networks shell out $10.8 billion to broadcast the NCAA tournament, the association itself posts a record $80.5 million surplus during the 2014 fiscal year, Duke basketball coach Mike Krzyzewski earns close to $10 million a year, and association president Mark Emmert clears a cool $1.7 million per while traveling by private jet.

Remember that ticket donation deduction that Silva and others enjoy? Three years ago, Bloomberg estimated that it costs Washington more than $100 million annually—roughly enough money to fund a year’s worth of food stamps for needy military families. And that’s the important point: every public dollar that goes to big-time college sports though a government giveaway or tax break is a dollar that has to be made up through higher taxes, slashed public services or both.

“It’s sort of astonishing,” says Ken Stern, the author of With Charity for All: Why Charities Are Failing and a Better Way to Give. “The bowl games jump out at me as crazy. They’re these hilarious marketing institutions that pop up once a year to entertain people in a hugely commercial manner, and pay the guys in funny-colored jackets. They get public subsidies.

“Everything in college athletics is tied up with a fundamental question—why are we subsidizing this, either directly or indirectly?”

Stern knows subsidies. The former chief executive of National Public Radio—a non-profit media organization that receives federal funding—Stern discovered while researching his book that New York City’s Metropolitan Opera—an entertainment outfit priced higher than the average citizen can afford—qualified for federal largesse. He realized that nonprofit hospitals which had been founded by religious orders in the late 19th Century to provide free health care to the poor now made up the biggest sector of the multibillion-dollar hospital industry, and enjoyed generous tax preferences despite mimicking their for-profit counterparts in everything from hefty staff salaries to aggressive bill collection.

“And then I wrote about the bowl games,” Stern says with a sigh.

The bowl games were a show. Only unlike other programs, they weren’t taxed for the money they made. Sweetening the deal, Stern discovered, the Sugar Bowl received over $5.4 million in direct federal funding between 2007 and 2009. Similarly, Varsity Green author Mark Yost reports that between 2001 and 2005, seven bowls received more than $21.6 million in government aid. And all of this happens even though bowl games (a) generate lots of surplus cash selling tickets to fans and live reality programming to sports networks; (b) aren’t exactly charitable, unless you consider former Fiesta Bowl CEO-cum-convicted felon John Junker’s political kickback/strip club slush fund to be the sort of criminal activity that also serves a larger public good.

Like the bowls, the NCAA itself is a nonprofit. And like the aforementioned Sugar Bowl—which reportedly had tens of millions in reserve cash yet received a $1.4 million state subsidy in 2009, a year that saw fiscally-strapped Louisiana slash funding for schools and health care—the association is more than happy to suckle at the public teat.

How so? San Antonio reportedly spent $7.1 million to host the 2008 Final Four, while Houston promised the NCAA $13.6 million to host the same event in 2011. When the Association moved from Overland Park, Kan. to Indianapolis in the late 1990s, it reportedly received $25 million in state and local funding. Indianapolis built the NCAA a 142,000-square-foot headquarters and a 35,000-square-foot “Hall of Champions” sports museum; gave the association gratis land and 500 free parking spaces; promised to pick up the tab for landscaping (no, really, they did); and agreed to charge the association exactly $1 per year in rent until 2060, a 50-year agreement that will save Emmert’s organization an estimated $44.5 million. Small wonder, then, that a member of a Kansas City group that also was bidding on the NCAA’s move later said that Indianapolis “may be a little beyond sane in what they have done.”

A little?

Of course, the craziest, costliest, most egregious College Sports Welfare isn’t the money our elected officials and government agencies rain on the well-manicured shrubs outside Emmert’s office. Rather, it’s all the cash they fail to collect in the first place. When a professional sports team like the San Francisco 49ers sells its stadium naming rights to Levi’s for $220 million over 11 years, that money is taxed. As it should be. And all of us benefit. But when universities do the same thing—as Maryland did in 2006 by inking a $20 million football stadium name deal with Chevy Chase Bank (since acquired by Capital One)—that money isn’t taxed, thanks to a 1997 Congressional rule that specifically exempts college sports. And that’s not all. According to a 2009 Congressional Budget Office white paper titled Tax Preferences for Collegiate Sports, about two-thirds of the athletic department revenue at large universities comes from ticket sales, television deals, merchandise licensing, and other activities that aren’t taxed, but would be if college sports were treated by Congress and the Internal Revenue Service as ordinary businesses.

Guess what? The money adds up. In all sorts of I had no idea ways.

In 2006, the Wall Street Journal broke down how campus stadium renovations and expansions—like a $147 million University of Texas project that added 47 luxury suites to the school’s football stadium—actually double-dip into taxpayers’ wallets: first by financing construction via tax-exempt bonds that were intended to encourage building things like classrooms and dormitories; then by using money from tax-deductible athletic department donations to pay off said bonds. If that sounds like a financial plan devised by Escher—two accountant’s hands, framed by expensive wristwatches, drawing each other’s tax loopholes—well, that’s exactly how it works. Three years ago, Bloomberg writer Curtis Eichelberger calculated that the University of Washington’s $250 million renovation of its 92-year-old football stadium would end up costing the federal treasury $154 million over 30 years through a combination of construction bonds, donations for construction, and increased athletic department contributions tied to ticket and luxury box purchases.

Oh, and about those donations: according to Duke professor Charles Clotfelter, they’re the largest single source of income for many top college sports programs. To wit: in 2008, contributions accounted for 40 percent of all athletic revenue at the University of Florida and 45 percent at the University of Kansas. Last year, Bloomberg reported that the University of Louisville men’s basketball team made $40.5 million in revenue—with $21.7 million of that coming from donations. “I looked at the six biggest conferences in the 2008 fiscal year, and for the team in each conference with the most revenues, the most important source was contributions,” Clotfelter said. “That was pretty striking.”

Even more striking? In a 2011 Washington Post article, Clotfelter listed some of the perks those “donations” are buying—and calculated the extent to which taxpayers are helping to pay the freight:

… to see exactly what’s on the menu, simply go to the website of your favorite college team’s booster club. At the site for the Arkansas Razorback Foundation, for example, you’ll find that a gift of $5,000 will put your picture in the football game-day program. At Syracuse, $10,000 will get you an invitation to a VIP reception with the athletic director and head coaches. At Stanford, you can travel with the football team to an away game for a donation of $50,000 …

… all these donations are subject to the same tax subsidy we reserve for charitable and educational institutions like hospitals, food pantries, arts organizations and universities. When a taxpayer at the 35 percent tax rate makes a donation of $10,000, he ends up shouldering only $6,500 of the cost, since his tax bill is trimmed by $3,500 …

As previously mentioned, ticket and seat-linked donations—such as the $700 one that Silva made to Maryland—are only 80 percent deductible. Should taxpayers count their blessings? Not quite. Eichelberger reports that contributions to buy new suites and premium seating at Washington’s stadium could deprive the IRS of $3.6 million annually. After examining reported seat donations for 34 state schools in the six power football conferences during the 2011 fiscal year, Bloomberg calculated that those schools alone were costing the federal government as much as $105 million a year. Meanwhile, Smith College economist and college sports finance expert Andrew Zimbalist told the news service that total giving to schools related to sports tickets may total $1 billion a year—a number that would mean a $200-plus million loss for the federal government, year after year.

College of the Holy Cross economics professor Victor Matheson argues that the ticket donation deduction basically acts as college sports mail-in rebate, funded by Uncle Sam. Follow the logic: Suppose you’re the University of Alabama. You could sell a football season ticket for $2,000. Alternately, you could sell the same ticket for $500, but require the purchaser to make a $1,500 donation to your athletic department. Either way, you end up with a cool, tax-free $2,000. Not bad.

With option No. 2, however, the purchaser also will get back about $300 from the IRS on their tax return—a discount that makes people more likely to buy tickets, and/or allows schools to charge more for tickets than they otherwise would. “If you’re Alabama, you’re making extra money on this,” Matheson says. “I don’t think there’s any economist who doesn’t believe this isn’t a large loophole.”

How large? At Duke, Bloomberg reports, the ticket donation tax break for men’s basketball is worth about $2,218 per seat for fans in the top federal income tax bracket.

At this point, you’re probably wondering: why does the ticket donation loophole exist? And why is the public giving money to a college sports industry that doesn’t need any help? (After all, the $5.64 billion ESPN is spending to broadcast the new College Football Playoff ain’t exactly Monopoly money).

The answer lies in the tax code. Broadly speaking, colleges and universities as a whole enjoy nonprofit status and tax preferences because they serve a public purpose, one the Congressional Budget Office describes as “advancing higher education and promoting myriad forms of research.” With a few exceptions, the money schools take in isn’t taxed; contributions to schools can be written off; and all of this makes sense, because educated citizens and labs that produce things like better cancer treatments broadly benefit society. In 2010, total charitable contributions to educational institutions—about 70 percent of those to colleges and universities—cost the federal treasury an estimated $6.6 billion. Given that the United States has one of the world’s best higher education systems—and that said system has been a major driver of both economic growth and social progress—few economists or policymakers would argue that the return on investment isn’t worth it.

It’s hard to say the same about elite campus athletics.

The NCAA and its members schools insist that big-time sports enrich education. Plenty of evidence suggests they mostly enrich coaches and athletic directors. Degraded academic standards and outright fraud are distressingly commonplace at high-level athletic programs—see the University of North Carolina’s wide-ranging “paper classes” scandal—and a study in the 2003 book Reclaiming the Game: College Sports and Educational Values found that after accounting for the influence of race, field of study, individual scores on the Scholastic Aptitude Test (SAT), and the average SAT score at the institution, athletes who were recruited achieved a lower class rank relative to their academic credentials than did walk-on athletes or the general student body. The effect was most pronounced among football players (and, oddly enough, rowers). It’s easy to understand why. Ruling last year in favor of Northwestern University football players who are attempting to unionize, National Labor Relations Board regional director Peter Sung Ohr determined that major college football is, in fact, a full-time job—and a physically-demanding, time-sucking one at that, a daily grind that makes it much tougher to excel in the classroom.

“These sports are big businesses making millions of dollars. They have nothing to do with education. The players are not there to get an education and play sports in their free time. They are there to play football,” says Dean Baker, co-director of the Washington-based Center for Economic and Policy Research. “So the idea that somehow we should be giving people a break on their taxes if they contribute to [University of] Michigan football is a little hard to understand. It’s hard to see what the public interest is.

“It makes no sense.”

Waving the bloody shirt—or, in this case, the sweat-soaked diploma—of education is also how big-time college sports programs avoid paying something called the Unrelated Business Income Tax (UBIT), which basically exists to tax things like … big-time college sports. Go back in time. In 1950, New York University bought Meuller’s, a pasta-making company, and began funneling its profits back into the school. Before the purchase, Meuller’s paid taxes on its business, just like other pasta companies. No longer. Now, it could hide its profits and expenses under NYU’s charitable umbrella—and conveniently undercut its competitors.

In response, Congress enacted the UBIT, which requires that a nonprofit’s business enterprises be “substantially related” to its tax-exempt purpose—otherwise, said business are subject to the regular corporate income tax. Now, is Michigan football coach Jim Harbaugh’s job substantially related to the school’s self-professed mission of “creating, communicating, preserving and applying knowledge, art and academic values, and in developing leaders and citizens who will challenge the present and enrich the future?” Probably not, unless the enriching the future part applies to former Wolverines quarterback Harbaugh returning to run his alma mater’s football team for a reported $7 million per year. Only never mind that, because Congress also made sure that college football and men’s basketball would be specifically excluded from UBIT consideration.

As Duke professor and tax law expert Richard Schmalbeck noted in a recent paper and talk on tax preferences for college sports, historical records show that lawmakers seem “to have agreed to use something of a zone defense of college sports,” with the House protecting football ticket revenue and the Senate shielding basketball tournament money. Following Capitol Hill’s lead, the IRS subsequently ruled that radio and television revenue generated by college sports isn’t taxable, because “the educational purposes served by exhibiting a game before an audience that is physically present and exhibiting the game on television or radio before a much larger audience are substantially similar.”

Every time the federal government has moved toward reducing major college sports subsidies, lawmakers and agencies quickly have backtracked. In 1991, the IRS ruled that bowl game sponsorship income was taxable under UBIT. Congress subsequently passed a law exempting the same money. In 2006, outgoing House Ways and Means Committee Chairman Bill Thomas sent a harshly-worded letter to the NCAA, questioning the tax-exempt status of megabucks college sports sponsorships and television deals. He planned to hold hearings. Nothing happened. The next year, outgoing Senate Finance Committee Chairman Charles Grassley gave a written statement to the Chronicle of Higher Education reading “When I hear stories about top donors to college athletic programs getting a free seat on the team plane, I wonder what the public gets out of that. We need to make sure that taxpayer subsidies for college athletic-program donations benefit the public at large.” Again, nothing happened.

Baker studies politics and policy for a living. He’s not surprised.

“I think the reason for the protection college sports gets is a classic case of diffuse winners and concentrated losers,” Baker says. “Someone proposes to take away the tax exemptions. People who are big fans and who benefit the most will be up in arms. Schools will tell alumni and ticket holders, ‘this will hurt our program and you will pay more.’ Congressional members will catch hell from their constituents.”

Case in point? In 1986, Bloomberg reports, the IRS ruled that any gifts (read: money) given to charities or tax-exempt organizations in return for “substantial benefits” was not deductible—a ruling that included college sports ticket donations. Enter Theodore L. Jones, a longtime Louisiana State University football season ticket holder and Washington lobbyist, who asked then-Louisiana Senator and Finance Committee member Russell Long to exclude LSU from the ruling. Long, an LSU graduate, was happy to oblige. Meanwhile, then-Texas Representative and Ways and Means Committee member J.J. Pickle felt the same way about his alma mater, the University of Texas. Together, the two lawmakers slipped an amendment into the larger Tax Reform Act of that same year, a few lines of legislation that excluded two schools—their schools—from the new IRS ruling.

When the rest of the college sports world realized what had happened, colleges and universities were pissed. They complained to Congress, which in 1988 created an 80 percent deduction and expanded it to all schools. Three years ago, Jones told Bloomberg that the deduction saved him $1,036 on the $3,700 he had to donate for the right to purchase four LSU football season tickets. He also defended the tax break, claiming that it helps the school fund women’s sports and send a few million dollars to the school’s academic fund.

“Those kinds of deductions are like fertilizer to a farmer,” Jones told Bloomberg. “They increase the yield.”

If College Sports Welfare increases the cash yield within athletic departments, then who enjoys the literal cash crop? In 2013, USA Today reported that athletic directors at big-time football schools were paid an average of $515,000 annually, an increase of more than 14 percent since 2011. Similarly, Clotfelter’s book Big Time Sports in American Universities reported that the average salaries of football coaches at 44 Division I schools rose from $273,300 in 1985-86 to just over $2 million in 2009-10.

Obviously, some of this staggering rise is attributable to the massive influx of television money into major campus sports over the last two decades. And much of it stems from the simple, inarguable economic fact that while coaches and athletic directors are free to sell their talents and services to the highest bidder, the athletes who make up their on-field workforce—and would command bigger dollars if not for the collusive restraint of NCAA amateurism—are not. Still, government largesse plays a part. As Baker asserted in a recent Huffington Post column, Michigan’s Harbaugh is essentially a “food-stamp beneficiary.” Why? Baker writes:

… most of the money the university gets comes from people in the highest tax bracket, the government is effectively paying 40 cents of each dollar that these people contribute to the university, in the form of lower taxes. If all of Coach Harbaugh’s $7 million salary were covered by donations from high-income individuals, the government would effectively be subsidizing his pay to the tune of $2.8 million … this is equivalent to 20,000 months of food stamps.

Earlier this year, the Obama administration proposed eliminating the 80 percent ticket donation, a move the White House says would save federal taxpayers $2.5 billion over 10 years. Political will to reduce or eliminate Sports Welfare—from a popular petition to end the NFL’s nonprofit status to proposed legislation that would do just that—is growing, slowly but surely. Could lawmakers eventually decide to stop kicking in for Jones’s tickets and Harbaugh’s salary? Or at least not give bowl games any more money? Two years ago, lawmakers in South Carolina banned athletics officials at state schools from using state planes for recruiting athletes—a prohibition that was put into place after Clemson University football coach Dabo Swinney used said planes more often than Governor Nikki Haley from October 2011 through September 2012. The same lawmakers recently considered reversing the ban, reportedly on the condition that schools would have to reimburse the state for recruiting trips with money that “does not come from state taxpayers—tuition money or athletics donations, for example.”

(Alas, South Carolina lawmakers don’t seem to understand that some athletics donation money does come from taxpayers, both state and federal. Such is the power of Sports Welfare.)

Even though shutting off the public spigot seems logical, Matheson isn’t optimistic. “Every single loophole in the tax code, sports-related or not, is in there for a reason,” he says. “It benefits some organization or some group of organizations. Trying to get rid of one makes a small group very, very angry, while the total amount of money it generates for the government is relatively small.

“In this case, we’re talking about maybe a dollar per person for everyone in the United States. No one is going to march across the bridge in Selma, Alabama, for a dollar. But the people who are getting the subsidy—[Alabama football coach] Nick Saban and his boosters—will cry bloody murder if it’s taken away.”

Silva, the Maryland basketball season ticket holder, can relate. He already received his tax return for 2014, and when he files next year, he’ll again deduct his athletic donation. He’s not sure the law makes sense. But he’s not about give his extra money back.

“Since the team started being good again, people are going to start donating a bunch of money,” Silva says. “For the people who don’t like college sports, I guess that’s not such a good deal.”

But does it at least feel good knowing that taxpayers who root for Duke—Maryland’s hated former Atlantic Coast Conference rival—are helping to pay for your tickets?

“Well, at the same time I’m helping those Duke fans, too,” Silva said with a laugh. “So I guess we’re all in it together.”