Breaks of the Game: How the Government Subsidizes American Sports

Major League Baseball formed upon the merger of the National League and American League in 1903. But the business story of America’s dominant baseball league starts in 1890. That year, Congress passed and President Benjamin Harrison signed the Sherman Antitrust Act, which became the bedrock of anti-monopoly law in the United States. Its intended use was to prevent businesses from making anti-competitive agreements and monopolizing industries – except, as it turns out, the industry of the national pastime.

In 1913, 10 years after the AL-NL merger, a competitor circuit called the Federal League emerged. The NL and AL owners banded together to push the Federal League out of business by buying up its teams and paying Federal League owners to cease their operations. At this time, MLB also had a reserve clause that bound players to their teams for their whole careers, so long as the team didn’t cut the player. The clause severely curtailed competition for talent and thus allowed teams to save money on player salaries. Both of these practices – the reserve clause and the chasing-off of a competitor league – struck a number of stakeholders and observers as classic monopoly behavior that should have been illegal.

The owner of the Federal League’s Baltimore Terrapins did not take a payout, and he sued the NL and AL for anticompetitive behavior. The Baltimore owner won at trial, but an appellate court and the Supreme Court both saw it differently: In 1922, Justice Oliver Wendell Holmes wrote a unanimous decision stating that MLB was not subject to the Sherman Act, because baseball was purely a “state affair” rather than the sort of “interstate commerce” that the Sherman Act was written to regulate. So began Major League Baseball’s antitrust exemption, which allowed it to consolidate the big league market for the rest of the century – and to keep the reserve clause until the sport’s players’ union overcame it in 1975. It is arguably the classic example of American government propping up a favored sporting organization.

But Andrew Zimbalist wants to make a distinction.

Zimbalist is a Smith College economics professor, author of two dozen books, and a longtime consultant to sports organizations on economic issues. He picks up the phone one day in May, and a reporter tells him that we’ll be discussing the many ways that federal and local governments have gone out of their way over the years to financially support the teams and leagues that make up the highest levels of American sports. The first thing that Zimbalist notes is how – at least on one level – our government goes out of its way not to subsidize sports.

“In the United States, unlike every other country in the world, the U.S. Olympic Committee and the various sport federations don’t get government support,” he says. “The money that is used to train and otherwise support, and sometimes to pay bonuses or to pay prize money out to the Olympians, all that money is raised privately. And every other country in the world, it’s done through the government.”

The U.S. is unusual in how its local and national governments treat sports. Zimbalist is right that our national teams – which in theory are a public good and aren’t meant to turn a profit – get almost no government support beyond words of encouragement. But professional teams in the country’s biggest leagues have been huge beneficiaries of government giving for many decades. Similarly, big-time college sports have often gotten their own forms of help.

Some of these gifts from the government are obvious. Others are hidden. Some involve leagues getting special attention and dispensation, while others are rooted in government getting out of the way. Some confer money, while others offer status. Some are born in legislatures and executive offices; others emerge out of the court system.

The end result, regardless of the mechanics, is a contemporary American sports scene that would be unrecognizable without government favor.

Public Housing for Private Teams

The most visible government assistance for American sports is the kind you can see – giant stadiums dotting the landscapes of our cities and suburbs. Since the 1950s, Zimbalist says, taxpayers have tended to pick up at least some of the tab for new stadium construction and renovations. Early on, it was common for governments to pay for 70, 80, or even 90 percent of a project’s total cost. “That number has shrunk,” he says, to around 45 percent today. That matches up with a widely circulated fan research project on NFL stadiums built from 1996 to 2016, which pegged the public’s share at 46 percent.

Of course, that can still work out to tens of millions of dollars – and in many cases, that goes into the hundreds of millions, like the $850 million in state and local funding that will be going to build a new stadium for the Buffalo Bills.

One way to have the public pay for stadium construction is for state or country legislators to make a line item in a budget and spend directly. Another way is for local governments to issue municipal bonds and use the proceeds on the project. The federal tax-exempt status of these bonds results in project organizers paying a lower interest rate to borrow money, because the buyer gets a tax break. It costs Uncle Sam, however, because the interest the government pays on those bonds is not taxed after the buyer collects it. Members of Congress who in March introduced a bill to ban this practice say that tax-exempt bond issuances for stadiums have cost American taxpayers $4.3 billion since 2000. The Obama administration also tried to ban the practice, without success.

The current bill isn’t the first time Congress has attempted to rein in federal tax subsidies for sports venues. Former New York Senator Daniel Patrick Moynihan introduced a similar bill aimed at tax-free bonds for stadiums in the mid-1990s; in an era when many teams across the country were lobbying for new venues, sports executives were quite worried about it. Ultimately, the bill didn’t pass.

“People thought that they were killing it,” Zimbalist says. “It’s not just sports. People who are captains of industry, people who are CEOs of defense firms, they have a lot of power. They have a lot of money backing them, and they get to make donations to political campaigns, and they do other things. And so people who start out powerful end up influencing government policy. And we haven't quite figured out a way to stop that.

“To some degree, if you want a sports team today, in the four major leagues anyway, you're paying a billion dollars-plus for it. And (you’ve) gotta be pretty wealthy to be able to do that. And if you're pretty wealthy, it means you have resources to influence policy.”

Zimbalist says that there is a non-economic case for governments to kick in some money toward sports facilities. He likens them to public parks: “It's a source of community communication and community cohesion. And I'm not saying it's magical in that regard, but this is significant value there.” At the same time, Zimbalist also acknowledges a key difference between a football stadium and a town square: Much of the revenue from the former goes to team owners who already are wealthy, while the latter is a public good that isn’t meant to generate private profit.

Congress could pass a national law that effectively banned public subsidies for professional sports stadiums or that required taxpayers to reap actual returns on anything they pay to build. Until that happens, however, team owners will always have leverage to exercise with local politicians: Give me this stadium, or my team will find some other city that will. George Steinbrenner famously threatened to move the New York Yankees from the Bronx to New Jersey in the 1990s if New York didn’t meet funding demands. New York held firm, Zimbalist says, and the team stayed in the Bronx anyway.

By contrast, Bills owners Terry and Kim Pegula will enjoy the largest taxpayer contribution ever for a pro football stadium. “If you’re the Pegulas and you own the Buffalo Bills,” Zimbalist says, “you’ve got cities out there courting you who are willing to build your fancy new stadium in a market that’s larger and richer than Buffalo and Erie County. Buffalo doesn’t have nearly the bargaining leverage that the largest city has.”

Big Subsidies on Campus

State politicians have done plenty of heavy lifting to help their favorite college sports programs. One of the most illustrative historical examples is at Louisiana State University, where former governor Huey Long powerhoused his way through the state legislature to dramatically enhance funding for the school’s football team. When Long wanted money in the state budget for an expansion of Tiger Stadium in the 1930s, the legislature spurned him. But legislators did allocate money for dormitories, so Long simply put dorms in the football stadium and built expanded seating on top of them. In a state with a lot of good football, it was a passionate governor who removed any doubt that LSU would be the enduring heavyweight.

State support of college sports is not quite as audacious today. Read through an athletic department’s revenue sources, and it’s rare to see direct state support in the budget. Departments get their money from television, licensing, donations, ticket sales, and sometimes athletic fees paid by the student body. But athletic programs are still a critical link between universities and their state governments, where the legislative halls might have a lot of alumni and fans of one particular program. That tie will never disappear, and it can pay dividends for an entire university – including its sports programs.

“If it just so happens that three-quarters of the state senate are big time LSU Tiger fans, is there a chance that LSU might maybe get some more favorable treatment come appropriations time than McNeese, or Northwestern State, who might not have as many friends in Congress who really care about their football team?” says Matt Brown, the publisher of the college sports industry newsletter Extra Points. “In so many words, an [athletic director] might tell you that. Success athletically, in a roundabout way, can translate to success in the state capitol building.”

Related: College Sports 2.0

Some of the biggest government help for college sports comes from Washington, D.C., via the federal tax code. According to a 2009 Congressional Budget Office white paper titled "Tax Preferences for Collegiate Sports," about two-thirds of the athletic department revenue at large universities comes from ticket sales, television deals, merchandise licensing, and other activities that aren’t taxed by Uncle Sam. Why not tax that revenue? Historically, Congress and the Internal Revenue Service have ruled that college sports serve an educational purpose. The vast majority of American colleges enjoy 501(c)(3) status, which exempts most of a school’s earnings from federal income tax.

This includes most donations to a university – including those to its athletic department or booster organization, which may register under the same tax-exempt designation. Donor fundraising accounts for about 20 percent of athletic department revenue at Football Bowl Subdivision schools and slightly more in the top tier of the Power Five, according to a 2020 Knight Commission study. That works out to millions of dollars per year, per department.

A lot of that money arrives because alumni care about their schools and want to make sure their teams have nice stadiums, desirable amenities, and a budget to pay the best coaches. Getting a juicy tax break doesn’t hurt, though. For the high-dollar donors whose giving exceeds the Internal Revenue Service’s standard deduction ($12,550 in 2021), a dollar given to an athletic department can translate into one less dollar of income subject to federal tax – savings that climb well into the thousands or even millions of dollars.

“I think that’s really important, the ability to go to someone and say, ‘Hey, if you give us this money, it’ll help us build this thing at this place that you’re passionate about, and in addition, you’re going to get this tax deduction,’” says Mit Winter, a sports attorney at the Kansas City-based law firm Kennyhertz Perry. “That’s a pretty great selling point to get someone to donate money to something that they might already be inclined to donate to.”

Not every donation is a dollar-for-dollar tax deduction, says Katie Davis, a partner at the accountancy James Moore who works with universities and athletic programs. If the donor receives something of value in return for their money, like game tickets, a portion of that donation won’t come off their tax burden. Most of the time, though, the deduction will follow. “Schools don't really have control over what the donors end up doing on their personal taxes,” Davis says. “But I would say, in most cases, if you're just doing a general donation to put your name on a building or for some other campaign, then yeah, that's deductible.”

It doesn’t matter if the donation to an athletic department might look like an awkward fit for a tax exemption. For instance, if a donor gives an athletic department $5 million with the explicit understanding that it’ll be used to pay a coaching buyout, that still would not eliminate the deductibility of the donation, says Davis.

College sports’ economics are changing rapidly, but new vehicles that handle money are seeking to avail themselves of the same tax status. Name, image, and likeness “collectives” that pool money for athletes in a quasi-pay-for-play system have frequently formed and filed for 501(c)(3) status, often under the explanation that they will pay athletes for charitable appearances.

Lawyers and accounting experts familiar with this developing market are highly skeptical that the designation will hold up for the long haul. “I think you’re going to see some (collectives) get 501(c)(3) status, but the big issue is going to be how do you keep it?” says Peter Schoenthal, the chief executive of Athliance, a consultant to schools on compliance with National Collegiate Athletic Association rules. “I don’t believe a lot of them are 501(c)(3)s. I think saying that you’re paying student-athletes and also providing education while also paying an individual, a student-athlete, to do something, to promote brands or really to promote your university — I mean, I don't understand where those fall under 501(c)(3)s.”

Under federal law, 501(c)(3) organizations are private foundations and nonprofits with a religious or charitable purpose. The Internal Revenue Service has detailed criteria for what constitutes charity, and a number of tax and sports lawyers doubt that collectives actually meet those standards. “Just saying you’re 501(c)(3) doesn’t make you one,” Schoenthal says. “And I think a lot of these collectives are going to struggle to keep that designation long term once it’s figured out what they’re actually doing.”

Perhaps. Or perhaps the close relationships between lawmakers, schools, and college sports will again come into play. Previous efforts by federal lawmakers to reduce tax subsidies for radio and television deals and bowl game sponsorship income have gone nowhere. In 1986, an IRS ruling that eliminated tax breaks for donations made by college sports fans in order to buy season tickets prompted Congress to create an 80 percent deduction that still exists today — and that costs American taxpayers an estimated $100 million-plus per year.

Above the (Antitrust) Law

The Supreme Court’s antitrust exemption for Major League Baseball was critical to the league growing into the powerhouse it became, Zimbalist says. Zimbalist doesn’t believe the antitrust exemption is essential to MLB today beyond sparing it from defending expensive lawsuits it would win anyway. But it will never be known what MLB would look like now if it had not gotten such a significant boost from the federal government 100 years ago.

“You would have had a lot more competition,” Zimbalist says. “Salaries would have been driven up. So who knows what would have happened at that point? Would there have been another merger? Would there have been another antitrust suit? What would the Supreme Court have decided?”

The Supreme Court was not the only branch of the federal government to bestow an antitrust gift on a top-tier sports league. Decades later, the National Football League, National Basketball Association, and National Hockey League later received a legal carve-out of their own. In 1961, the NFL signed its first league-wide TV contract. A federal judge subsequently struck down the deal on antitrust grounds, ruling that a league-wide sale spared teams from having to compete in the broadcast market, in turn driving up the cost to televise games. Within three months, Congress passed the Sports Broadcasting Act, which gave pro sports leagues a limited antitrust exemption to sell their broadcast rights. A Senate report had said consolidation was important for teams in smaller markets.

It was a coup for the leagues, which found that they could maximize television revenue by selling one big package rather than having teams compete with each other for air time and deals. “That was very important, because it enabled them to pool their national television revenue,” Zimbalist says. “This was about to start growing very rapidly. And it provided at least some basis for financial and competitive balance.”

The Sports Broadcasting Act also had a carrot for college football. It said that the NFL’s exemption wouldn’t apply within 75 miles of a college game. As a result, Saturdays in the fall are college football’s domain, and the NFL plays Saturday games only at the end of its season, once the college schedule has ebbed.

For decades, the NCAA also received federal deference on antitrust issues, though it never got a formal exemption like MLB’s. Neither Congress nor the courts challenged the concept of amateurism, allowing schools to compete for the labor and services of college athletes while enforcing national rules restricting their compensation.

In recent years, however, things have changed. Starting with California in 2019, lawmakers in about two dozen states passed laws that rendered illegal the NCAA’s national ban on players collecting money for the use of their name, image, or likeness. That led the association to drop the ban in July 2021, as it continues to hope for a congressional intervention that may or may not ever come. Meanwhile, the NCAA is defending a lawsuit that seeks damages for previous denials of third-party payment opportunities for athletes.

It may not be the most existential problem for the traditional economic model. A 2014 district court decision in O’Bannon v. NCAA did away with national caps on cost-of-attendance payments to college athletes, and 2021’s NCAA v. Alston case did the same with “education-related” benefits. A biting concurrence from Brett Kavanaugh carried no actual force but left some court-watchers and sports attorneys with the impression that the justice was eager to take another bite out of the NCAA in a future case. American government has not often made life more difficult for top-tier athletic governing bodies, but the NCAA has become the most notable exception. The pain might not be over.

“I think a lot of people in the college sports industry thought that they would be able to operate under that model forever and be able to push away any challenges to that model that came at any point in the future,” Winter says. “And, obviously, that’s not the case any longer, but because that was the case for such a long time, that it’s taken a while for people to grasp that maybe college sports is not going to be able to operate in the way it has in the past, in the future.”