Tax-Exempt Status and College Athletics

A study by Stanford students and directed by Robert Reich indicates the IRS approves over 97% of applicants for tax-exempt status. The key bits:

In 2008 Americans donated more than $300 billion to 501(c)(3) organizations,costing the United States Treasury an estimated $50 billion in foregone tax revenue.

Overall, the rate of disapproval for 501(c)(3) status has increased over the past decade from .74% in 1998 to 2.17% in 2008, with the disapproval rate peaking at 2.29% in 2007. The rather surprising result: even in the year with the most rejections, nearly 98% of applications were approved.

Prof. Reich et al. go on to make a few prescriptions including allocating more funding to the IRS so they can conduct more thorough oversight, raise the (monetary) barrier to apply (possibly with a partial refund upon approval), and “that Congress and the broader public should initiate a dialogue about the wildly diverse purposes currently permissible for public charity status.”

On that last point, Gilbert Gaul’s recent New York Times op-ed opines on college athletics’ tax-exempt status:

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.

I’m skeptical that even decades ago that was the actual reasoning, but it does raise an interesting point. As of now, college athletics programs are classified as charities, but charities to whom? If one argues that it is a public good to have vibrant college athletics, then their tax-exempt status makes sense, particularly, as ESPN’s Gregg Easterbrook notes, the National Football League and Major League Baseball both qualify as non-profits as well. This state of affairs often leads to expensive subsidies for highly paid football and basketball coaches. Pop quiz, who is the highest paid federal employee? Barack Obama? Rahm Emanuel? Robert Gates? Hillary Clinton? No, it’s Ken Niumatalolo, the U.S. Naval Academy’s football coach.

But, if as Gaul asserts, the justification is that tax-exempt status creates an institution that is to the benefit of student-athletes, then the reasoning falls apart. Simply put, universities rip off the elite athletes. A Mercury News article from a few years ago estimated then-Cal running back Marshawn Lynch’s value to the unversity at $800,000. While Lynch was a standout talent, it is easy to see how that dwarfs his full scholarship, which would have been worth under $20,000.

For a graduate of Oakland Tech High School to be paid under 1/40th of his value hardly seems in his best interest. While everything worked out for Lynch who became a first round draft pick, netting a big contract, why shouldn’t athletes be able to get some money upfront? At the very least, royalties on jerseys bearing their number, and perhaps a small “windfall profits” bonus to athletes in sports that make money would be more equitable. At the very least, we should take the athletes’ opinions into concern if we’re going to say they are the benefactors of this tax-exempt policy. Former UConn basketball player Ben Gordon sums it up:

“Look, I plan on making some big money someday regardless. So I don’t always worry about that small change kinda stuff,” he said. “Having said that, when you’re in college, a couple thousand dollars would certainly help. Anything would help.”

Any body that regards the Mississippi Magnolia Cloggers and the Renegade Rollergirls of Oregon as charities worthy of public funding and one that can be bullied into submission by the Church of Scientology needs to be seriously reexamined if we are to trust it with hundreds of billions of tax dollars.

Subscribe to the Stanford Review