Why the federal tax overhaul plan could have a major impact on college sports

In the end, given the flurry of budget blows that threatened public higher education, the change amounted to a minor punch that couldn’t be dodged. Over the next decade, it’s projected to yield a relatively paltry $2 billion in federal taxes to offset $1.5 trillion in cuts that, by neutral analysis, primarily benefit businesses and high-wealth individuals.

Yet the impact could stagger college athletics.

“It’s surprising how this has been somewhat under the radar, and it could prove to be one of the most significant impacts on college athletics in a long time,” says Amy Perko, executive director of the Knight Commission on Intercollegiate Athletics. The drain in revenues, says Tom McMillen, who runs the Lead1 Association, an organization representing FBS athletic directors, “is probably hundreds of millions of dollars.”

The massive federal tax rewrite revealed in detail only last Friday is scheduled for a final Congressional vote this week. Included, at last report, is eliminating the deduction “for amounts paid in exchange for college athletic event seating rights.” Previously, 80 percent of the money given to athletic departments or booster clubs in order to qualify to buy tickets – a longtime practice in these parts since the days such gifts bought entre into the sold-out ACC tournament – was tax-deductible.

Across 130 FBS schools, contributions comprise an average of 22 percent of athletic revenues, the Knight Commission found. That portion matches a combination of NCAA, conference and TV funds as the largest single income segment for athletics at public, nonprofit colleges and universities. In 2015, donations to college athletic programs and booster clubs totaled $1.2 billion, according to the Council for Aid to Education.

To get a sense of the pending cut’s possible impact, mean athletic donations were $28.4 million in 2014-15 among the echelon of public FBS schools with the largest annual expenses ($94-173 million) – a cohort that includes ACC members Florida State, Louisville, Clemson, Virginia and North Carolina.

At Duke, a private university that reveals limited fiscal information, an $8,000 contribution qualifies a buyer for the right to purchase two basketball season tickets. Gifts comprise 25-30 percent of athletic revenue. The ticket tariff is $6,000 at North Carolina, where last fiscal year the Rams Club took in more than $69 million, a school-record amount, from nearly 15,000 donors.

“No one knows what impact losing the (deduction) rule will have on college athletics,” N.C. State athletic director Debbie Yow said in a text message. “Will it be slight? Or will it have a chilling effect?”

The concern is that many contributors will quit giving to the dear old puce and white if they don’t get a tax break out of the deal. How far will brand loyalty go even as overall attendance at many venues already is sliding?

The “Tax Cuts and Jobs Act of 2017” also includes a change requiring the payment of a 21 percent excise tax on the top five salaries above $1 million paid by any nonprofit. This would be levied on an athletic department, not a coach or assistant coach. (There are 15 FBS assistant football coaches paid in excess of $1 million.) The excise tax is non-controversial, a minor inconvenience when doling out salaries that leave coaches as the highest-paid public officials in 39 of 50 states.

There’s no obvious explanation for the sudden tax hits on intercollegiate athletics, other than a need to find revenues to offset high-end cuts. However unlikely, perhaps the changes reflect long-overdue recognition college sports are far closer to business operations than to educational activities and should be treated accordingly. It’s tough to sustain the facade of education-related enterprise when coach Mike Krzyzewski, paid millions by Duke, complains regarding men’s college basketball, as he did in October, “We are not running this the way a billion-dollar industry should be run.”

What McMillen, a former Congressman, calls “the optics” of excess is another factor working to college sports’ detriment. Several members of Congress challenged him recently on the need for tax breaks when schools currently are able to fund $70 million just to buy out fired coaches.

Others see the alignment of increased tax vulnerability with “an increasingly vocal campaign to transform American higher education,” perceived in some quarters as full of “elitist, politically correct institutions,” as the Washington Post stated last month.

The Post noted that funding of public colleges and universities has been cut $5.7 billion nationwide since 2008, while enrollment has increased by 800,000. In North Carolina, the portion of educational cost borne by students and their families through tuition has risen from 16.2 percent in 1991 to 34.5 percent in 2016, according to the State Higher Education Executive Officers Association.

“This clearly to me represents a changing attitude relative to higher education in America,” Kevin White, Duke’s AD and a university vice president, says of the federal tax overhaul. “This is just a shifting wind in our country that’s affecting lots of different subsectors, and unfortunately, higher ed’s just become the target. It’s highly unfortunate, but that’s the reality. We’ll persevere and figure it out.”

McMillen, the executive director and chief executive officer of Lead1, says $2.5 billion of the $8 billion spent annually by FBS athletic programs is devoted to Olympic sports and their 57,000 student participants. That’s where he expects schools will turn to make up lost revenues. “I would see cuts, and a lot of it going against the Olympic sports. You’re not going to cut your football program because that’s your revenue,” he says. “That’s the inexorable slippery slope that you have to deal with as (schools) are put into more of a business box.”

A rollback in broader participation is exactly what the Knight Commission’s Perko fears as athletic departments scramble to adjust to new fiscal constraints. Any reductions in Olympic-sport spending are apt to have an inordinate effect on female athletes and enforcement of Title IX, which mandates equal opportunity, just as attention to women’s rights is resurgent.

“There needs to be a recalibration of how the business is done, and the recalibration should not just be to cut sports,” Perko says. “I think that would be a terrible outcome.”

This story was originally published December 18, 2017 at 12:31 PM with the headline "Why the federal tax overhaul plan could have a major impact on college sports."