Thursday, April 11, 2019

Proposal to Yank NCAA Tax Exempt Status (with a sure-fire escape hatch for the NCAA) Avoids the Real Issue

Well, March Madness has come and gone.  The intoxicating aura of victory is no doubt still wafting -- like cannibis in the hallways of many a college dormitory -- over the UVA campus.  And the annual protestations regarding the NCAA's tax exempt status will fade again until the College football season returns.  According to In Re:  National Collegiate Athletic Association Athletic Grant-In-Aid Cap Antitrust Litigation, a case handed down last month in which a district court judge all but concluded that there is nothing "amatuer" about D-1 basketball and football, the NCAA rakes in $1,000,000,000 (that's one billion dollars) every year.  Coaches are paid handsomely, Nike, Adidas, Coke and Pepsi make gazillions from their "sponsorship" and exclusive pouring agreements, but the athletes get nothing other than preferential admission and the cost of attendance.  Granted, admission  -- which might otherwise be completely out of the question for some (but not all) the athletes -- is apparently worth a whole lot of money judging by the  Varsity Blues scandal.  But that is not how markets work.  The people exploiting another's skilled or unskilled labor don't get to unilaterally decide that the laborer is paid enough and shall receive no more.  That's more like slavery than capitalism.  No, markets work by arm's length bargaining where each party -- especially the party in possession of rare skill -- is entitled to demand as much as the law of supply and demand will tolerate.  

Anyway, before I put down my NCAA indignation, at least until college football season arrives, I thought I would share one more tidbit related to the cartel's tax exempt status.  A few weeks ago, Tarheel (i.e., North Carolina) Representative Mark Walker introduced a bill in Congress that would require the NCAA to revoke its rule preventing athletes from exploiting their "name, image or likeness (NIL)" or lose its tax exempt status.  Here is the text:

H.R. 1804

"To amend the Internal Revenue Code of 1986 to prohibit qualified amateur sports organizations from prohibiting or substantially restricting the use of an athletes name, image, or likeness, and for other purposes.

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,


This Act may be cited as the “Student-Athlete Equity Act”.


(a) In General.—Section 501(j)(2) of the Internal Revenue Code of 1986 is amended by adding after the period at the end the following: “Such term does not include an organization that substantially restricts a student athlete from using, or being reasonably compensated for the third party use of, the name, image, or likeness of such student athlete.”.

(b) Effective Date.—The amendments made by this section shall apply to taxable years beginning after the date of the enactment of this Act."


So the bill would make the NCAA allow student athletes to get paid when EASports and Madden Football use a student athlete's likeness.  Seems like a drop in the bucket as far as the athletes are concerned.  The bill was filed only about a week after the NCAA's latest antitrust loss in court so somebody on Representative Walker's staff must be a tax or antitrust geek.  Or maybe he is none to happy that Carolina didn't make it to the final four after beating the Zion-less Blue Devils two times during the regular season.  I have no idea whether this bill will pass or not.  But even if it does, the bill does not really address the real issue regarding whether the subsidy of tax exemption is something without which the supply of college athletics would dry up.  When the Intercollegiate Athletic Association (the IAA) -- the predecessor to the NCAA -- first organized in 1905, there was no doubt an insufficient market to sustain college athletes.  And yet athletic competition is an undeniable "public good" to be efficiently subsidized if it were not to occur in the absence of public subsidy.  Clearly times have changed.  The rest of us are willingly and in absurd amounts paying handsomely to watch D-1 football and basketball.  You ever try to get a ticket to a Final Four basketball or a College Football national championship game?  And what's the going rate for a minute of advertising time during one of broadcasts on even the least watched channel?  In any event, if the bill made it to law, the NCAA would be crazy to give up tax exempt status on an annual one billion dollars in revenue just to prevent a small percentage of their D-1 athletes from demanding market rates for their services (or in this case, the exploitation of their name, image, or likeness, the value of which derives from their rare skill).   It is certain the cartel would not think paying students for the use of their NIL is such a bad idea.  So the bill might resolve the exploitation issue insofar as intellectual property rights are concerned but it would make no repair to the tattered holes in the socio-economic theory that justifies tax exemption.  The NCAA's tax exempt status, particularly during March Madness and the College Football bowl season, is a semi-annual reminder that tax exempt status is unmoored from any real logic or theory.  

Darryll K. Jones


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Thank you for this article! We shouldn't stop talking about the "nonprofits" that take advantage of tax-exemption laws.

Posted by: Jan Masaoka | Apr 16, 2019 3:22:33 PM

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