How Taxpayers Subsidize March Madness
As the National Collegiate Athletic Association men's basketball tournament kicked off last week, U. S. Secretary of Education Arne Duncan penned an op-ed in the Washington Post noting that graduation rates among the major college hoops powers are notoriously low. Even as Duncan's boss, President Obama, was revealing his own March Madness bracket predictions to ESPN, Duncan suggested that the NCAA adjust its distribution of television money from the tournament to reward schools that graduate more players.
Duncan might have gone one step further, however, and noted that the schools participating in the tournament, both private and public universities and colleges, enjoy non-profit status ostensibly designed to support their educational purpose. But the major sports programs of Division 1 schools make liberal use of that nonprofit status to burnish their bottom lines at the expense of the taxpayer, a 2009 Congressional Budget Office report noted. Increasingly, these major sports programs look like for-profit commercial enterprises that have little to do with an educational mission that might justify their hefty and multiple tax exemptions, the CBO said.
In other words, whether or not you like what's going on in big-time college basketball as described by Secretary Duncan, you're helping to subsidize it.
There are many ways that federal subsidies work. In his op-ed, Duncan drew on a report by the Knight Commission on Intercollegiate Athletics which noted that the NCAA has distributed $409 million in television rights fees to participating March Madness teams in the last five years. But of far more interest is what Duncan didn't note, which is that the mega-revenues the athletics programs derive from television contracts are not taxed.
That exemption is nothing to sneeze at. A new, 14-year deal between the NCAA and four networks to broadcast every March Madness game is worth nearly $11 billion. The networks have their eye on a big prize: TV advertising over the last decade has totaled some $5 billion for the tournament, which now boasts the second largest post-season sports TV deal, next to the National Football League's playoffs. But although the NFL post-season generates about 25 percent more in ad revenue, once you figure in the tax exemption, you can argue that March Madness is perhaps the most lucrative post-season sports deal on TV.
Big-time college athletics have available another source of income not shared by pro sports, namely tax-deductible contributions by boosters to programs. The CBO estimated that nearly 21 percent of revenues from NCAA Division 1A programs come from contributions presumably enabled by our tax code, while an investigation by the Indianapolis Star in 2006 estimated that some programs get as much as 40 percent of revenue from contributions. The CBO added, however, that these donations to major college sports programs increasingly "seem to be related to the exchange of goods or services and therefore are primarily commercial," not charitable, in nature. They are ‘donations' in which donors receive a host of tangible benefits, from eligibility to purchase tickets to programs that sell out 100 percent of their tickets every year, to preferential seating for donors.
Back in 2006 the Star catalogued donations to 164 of the 215 Division 1 public university athletic programs (none of the private university Division 1 programs disclose their athletic budget and so they weren't included in the Star's calculations). The newspaper found those 164 programs received $714 million in athletic contributions the previous year that were tax deductible. Tax experts the paper consulted estimated the hit to the federal treasury was north of $100 million, which by the standards of today's federal deficits is puny, I guess.
The endowments that athletic departments build up through these contributions provide the linchpin for even more fiscal maneuvering in the form of what the CBO calls higher education's "indirect" tax arbitrage. Here's how it works. Our universities and colleges are eligible to use tax-exempt debt to finance many of their capital projects, including building sports facilities. As the CBO noted in a 2010 study about arbitrage on campus, universities engaged in these construction projects often have big endowments but still prefer to use tax-free debt to finance building. The advantage is obvious: Muni bonds carry a lower interest rate than comparable taxable bonds, so our institutions of higher learning gather donations, invest them in taxable securities that produce a higher rate of return than the interest the schools must pay out on their muni borrowing, and then they bank the difference. While it's illegal to use to proceeds from low-cost muni debt to invest directly in higher yielding taxable securities, building a university field house becomes an opportunity to skim off a few extra dollars in so-called indirect arbitrage, courtesy of the taxpayer.
Universities defend their various athletic-related tax subsidies on the grounds that major sports programs contribute to their overall educational mission by enriching the student experience and by helping to finance other, less lucrative sports programs. But the exemptions get harder to justify when the money-makers like football and basketball at the Division 1 level seem increasingly to be functioning as minor leagues for pro leagues rather than as paths to diplomas, and as universities' exploitation of tax-subsidies gets bigger and more sophisticated. As the sports economist Andrew Zimbalist told the Star several years ago, the subsidies "grossly overestimate the role of intercollegiate athletics in higher education."
I suppose it's possible for most of us, including the President of the United States, to brush aside the hypocrisy and enjoy, even celebrate, March Madness because our tax code has become so complex and so filled with special interest giveaways that we'd be virtually paralyzed if we tried to arrange our life in a way that protests every deception and every exploitation of the code.
Still, you have to wonder what prospect we have for serious special interest reform in Washington when every year an event like March Madness, which pretends to be an amateur event and which operates so lucratively by exploiting loopholes in our tax code designed for educational purposes, is celebrated as some national rite of spring.