One provision would eliminate tax-exempt financing of pro sports facilities.
The proposed tax plan unveiled Thursday by Republicans in the House of Representatives could have a variety of sports-related impacts, including how pro and college sports facilities are financed, the ability of college athletics departments to raise money and schools’ cost for employing highly compensated coaches and athletics administrators.
At least two provisions specifically target the professional or college sports industries. Others have broader aims, but would cover sports just the same.
The provisions taking direct aim at sports involve the elimination of tax-exempt financing of pro sports facilities and a repeal of the tax deduction that can be taken for donations to college athletics departments that are made for the right to purchase tickets for sports events.
The general sports world would be affected by an end to the deduction that companies can take for a portion of their spending on entertainment – such as attending a game – as long as it is associated with, or directly preceded or followed by, “a substantial and bona fide” discussion related to company business. This deduction has helped business write off part of the cost of luxury suites and season tickets.
Colleges would be affected by changes that would impact a variety of tax-exempt non-profit organizations. Private-activity bonds, a form of financing that colleges use for construction projects including athletic facilities, would no longer be tax exempt. Also, tax-exempt organizations would be subject to a 20% tax on compensation in excess of $1 million that’s paid to any of their five most highly compensated employees; that would cover scores of college coaches and athletics directors.
It remains to be seen whether all, or any, of these proposals will appear in an expected Senate tax proposal or will survive mark-up and/or a conference committee.
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But given that Republicans’ interest in tax reform appeared to have become primarily an interest in tax cuts, the bill unveiled Thursday “picked up a lot of tax reform proposals… and (could change) a lot of bad tax rules,” said Duke University law professor Richard Schmalbeck, who has been a longstanding critic of the so-called 80 Percent Rule pertaining to college-sports donations that provide seat-purchase privileges.
The end of tax-exempt financing of pro sports facilities – defined by the bill as a facility during at least five days a year as a stadium or arena for exhibitions, games or training – won’t keep cities from paying for them. But they potentially would have to pay an increased cost.
Because the NFL makes so much money, it won’t have as much of an impact on that league as it would on minor leagues and Major League Soccer, which make far less money. “The NFL is in a better position to absorb the impact,” said Marc Ganis, a sports consultant in Chicago who has worked with NFL owners.
The elimination of this tax break is estimated to raise federal tax revenues by $200 million over 2018-2027, according to an official estimate for Congress. Ganis said that amount is insignificant to the government budget and suspects the legislation is designed to punish or stop this sort of financing for other reasons.
“This is not a revenue-enhancement issue,” he said. “This is because some people think it is simply wrong for millionaire athletes and billionaire owners to benefit from tax-exempt financing. That’s why this is happening. It has nothing to do with raising revenue. The amount they have identified is so small that it is almost invisible.”
This legislation wouldn’t be applicable to the new $2.6 billion stadium being built in Los Angeles for the NFL’s Rams and Chargers. That stadium is being financed privately. In Las Vegas, a new stadium for the Oakland Raiders is being built that will cost nearly $2 billion, including $750 million in public funding. The project planned to use tax-exempt bonds to help finance it, but it’s unclear how this legislation would affect that. It would apply to bonds issued after Nov. 2.
If it passes, Ganis said team owners will have to contribute more to stadium projects or build smaller stadiums. Or they will have to find another revenue source to bridge the gap.
The change in the 80 Percent Rule for college sports donations had been proposed during the Obama administration, and Schmalbeck says he’d been approached by Obama-era Treasury Department officials seeking guidance on the matter.
The allowance is “completely indefensible,” Schmalbeck said. “There’s no good tax policy reason for it.” Since the deduction results in the provision of a benefit, Schmalbeck argues that under this reasoning, parents should be allowed to take a similar deduction for making tuition payments.
College officials, of course, see it otherwise.
During a conference call hosted by the National Association of College and University Business Officers, the organization’s director federal affairs, Liz Clark, said an end to the 80 Percent Rule could result in “a significant loss of revenue” to athletics programs. Vanderbilt vice chancellor for finance Brett Sweet said he hopes that if the rule is repealed, donors’ interest in supporting athletes will supersede the loss of the tax benefit.
Schmalbeck said the imposition of a tax on schools in connection with highly paid personnel would “inhibit or slightly reduce – maybe” the compensation given to coaches and administrators, “but not a lot.”
