Should the government tax college sports

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Economist.com NEW YORK
Categories:
Sports and games
UNIVERSITY sports are a big business in America. The NCAA men's basketball tournament added $143m in revenue for athletic departments, and football typically brings in even more. It is one of the more curious aspects of American universities that many run successful sports franchises in addition to providing education.

The government has taken notice. As it scours the economy for new sources of revenue, the CBO is exploring options to tax university sports franchises. University activities tend to be tax-free, yet college sports provide a non-trivial amount of revenue. The report offers three ways to tax sports: limiting deductions on charitable contributions to athletic programmes, limiting the use of tax-exempt bonds, and limiting the exemption from income taxation for these activities.

The first idea has some merit. Donors to college athletic programmes get priority to purchase season tickets. Bigger or frequent contributions entitle donors to better tickets. Many fans bcome donors for this reason alone, so the donation is effectively part of the purchase price. But because it counts as a charitable contribution it is also 80% tax exempt. The demand for tickets for die-hard fans is probably fairly inelastic, so this may be good source of tax revenue.

The other two options are more problematic. First, Jonathan and Peter Orszag (the latter now a former director of the CBO and now head of the OMB) with Bob Litan found most athletic programmes lose money for the university. But according to the CBO report, 101 out of 164 Division I teams turn a profit. Still, the profits average just $1.6m per school—not a huge source of revenue. Teams with successful basketball and football teams tend to do better, but athletic success can be unpredictable year to year. The CBO report also cautions that having some university activities non-tax-exempt may just incentivise accounting practices to circumvent the new tax treatment.

Further, we’ve written before that these franchises can have positive externalities for the university. Winning a championship increases interest in a university which can bring in donors and applicants. It can act as an advertisement for the university, improving academics. With lower endowments and less financial support from state governments, universities need all the help they can get these days.