Major League Baseball was formed when the National League and the American League merged in 1903. But the business story of the dominant American baseball league began in 1890. That year, Congress passed and President Benjamin Harrison signed the Sherman Antitrust Act, which became fundamental. anti -monopoly law in the United States. Its intended use was to prevent businesses from creating anti -competitive agreements and monopolizing the industry – unless, as it turned out, the industry was a national pastime.
In 1913, 10 years after the AL-NL merger, a rival circuit called the Federal League emerged. The NL and AL owners teamed up to push the Federal League out of business by buying its team and paying the Federal League owners to stop its operations. At this time, MLB also has a reserve clause that binds players to the team for the entire career, as long as the team does not cut players. The clause severely reduces competition for talent and thus allows teams to save money for player salaries. Both of these practices – the reserve clause and the pursuit of competing leagues – lead some stakeholders and observers as a classic monopoly behavior that should be illegal.
The owner of the Federal League’s Baltimore Terrapins did not take a payout, and he sued NL and AL for anticompetitive behavior. The Baltimore owners won the trial, but an appeals court and the Supreme Court both viewed 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.” “Instead of the sort of” interstate commerce “that the Sherman Act was written to regulate. So began Baseball’s antitrust independence, which allowed it to collect big league markets for the rest of the century – and maintain a reserve clause until the sports player’s union overcame it in 1975 This is arguably a classic example of American government propping up favored sports organizations.
But Andrew Zimbalist wants to make a difference.
Zimbalist is a Smith College economics professor, author of twelve books, and a longtime consultant for sports organizations on economic issues. He picked up the phone one day in May, and reporters told him that we would discuss many of the ways that have been done by the federal and local governments over the years to financially support the top teams and leagues. the level of American sports. The first thing that Zimbalist notes is how – at least on one level – our government goes out of its way and does not subsidize sports.
“In the United States, unlike other countries in the world, the U.S. Olympic Committee and some sports federations do not receive government support,” he said. “The money that is used to train and support, and sometimes to pay bonuses or pay prizes to Olympians, all that money is raised personally. And every other country in the world, it’s done by the government.”
The U.S. is not familiar with how its local and national governments treat sports. Zimbalist is right that our national team – which in theory is a public good and not intended to profit – has almost no government support beyond words of encouragement. But the professional teams in the country’s biggest leagues have been huge beneficiaries of government giving for decades. Similarly, big-time college sports often receive some form of self-help.
Some gifts from the government were obvious. Others are hidden. Some involve leagues getting special attention and dispensation, while others are rooted in government getting out of the way. Some give money, while others offer status. Some were born in legislatures and executive offices; someone out of the court system.
The result, regardless of mechanics, is a contemporary American sports scene that cannot be known without government courtesy.
Public housing for private teams
The most visible government aid to American sports is the kind you see – the giant stadiums that adorn the city’s landscape and suburbs. Since the 1950s, Zimbalist says, taxpayers have tended to take at least a few tabs for new stadium construction and renovations. At first, it was common for the government to pay 70%, 80%, or even 90%of the total cost of a project. To see also : Sandra Bullock, Justin Bieber and Other Stars Lost Money on Real Estate in a Booming Market. “That number has shrunk,” he said, around 45% now. It matches a widely distributed fan research project in NFL stadiums that were built from 1996 to 2016, which pegged the community share at 46%.
Of course, it can still work up to tens of millions of dollars – and in many cases, it’s up to hundreds of millions, such as the $ 850m state and local funds that will build a new stadium for the Buffalo Bills. .
One way to pay the public for stadium construction is for members of the state or state legislature to make line items in the budget and spend directly. Another way is for the local government to issue municipal bonds and use the results of the project. The federal tax-exempt status of these bonds causes the project committee to pay lower interest rates to borrow money, because the buyer gets a tax break. The value of Uncle Sam, however, is because the interest paid by the government for the bond was not charged after the buyer collects it. Members of Congress who in March introduced a bill to ban the practice said that the issuance of tax -exempt bonds for stadiums has cost U.S. taxpayers $ 4.3 billion since 2000. The Obama administration is also trying to ban the practice, to no avail.
The current bill is not the first time Congress has sought to reduce 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 are lobbying for new venues, sports executives were quite worried about it. Finally, the bill did not pass.
“People thought that they killed them,” Zimbalist said. “It’s not just sports. People who are captains of industries, people who are CEOs of defense firms, they have great power. They have a lot of money that supports them, and they can make donations to political campaigns, and they do other things. Being the ones who started strong finally affects government policy.And we don’t yet know how to stop that.
“To some degree, if you want a sports team now, in the four major leagues, you pay a billion dollars-plus for it. And (you) have to be rich to be able to do that. And if you’re fairly rich, that means you have the resources to affect policy.
Zimbalist says that there are non-economic cases for the government to raise money for sports facilities. He compares 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 it’s an important value there. At the same time, Zimbalist also acknowledges the key difference between a football stadium and town square: Many of the proceeds from the former become wealthy team owners, while the latter are public goods that are not intended to generate.
Congress can pass national legislation that effectively prohibits public subsidies for professional sports stadiums or that require taxpayers to receive real results on whatever is paid to build. Until that happens, team owners will always leverage for training with local politicians: Give me this stadium, or my team will find another city. George Steinbrenner famously threatened to move the New York Yankees from the Bronx to New Jersey in the 1990s if New York did not meet funding demands. New York held the firm, Zimbalist says, and the team remains in the Bronx anyway.
Conversely, Bills owners Terry and Kim Pegula will be the largest taxpayer contributions to pro football stadiums. “If you’re a fan and you have Buffalo Bills,” said Zimbalist, “you’ve got cities out there offering you that are willing to build your new stadium in a market that’s bigger and richer than Buffalo and Erie County. Munding doesn’t have it. almost a bargain leverage that the largest city has ”.
Big subsidies on campus
State politicians have done a lot of weight lifting to help their favorite college sports program. 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 increase funding for the school’s football team. When Long wanted money in the state budget for the expansion of Tiger Stadium in the 1930s, legislators spurned him. This may interest you : Sports medicine fellowship program. But members of parliament did not allocate money for dormitories, so Long simply put dorms in football stadiums and built extended seating on top of them. In a situation where a lot of football is good, it’s the passionate governor who removes the doubt that LSU will be a resilient heavyweight class.
State support for college sports is no better now. 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, licenses, donations, ticket sales, and sometimes athletic fees paid by the student body. But the athlete program still has a critical relationship between the university and the state government, where the legislature can have many alumni and enthusiasts of a special program. The tie will not be lost, and it could pay dividends for the entire university – including its sports programs.
“If it’s the case that three-quarters of the state senate are huge LSU Tiger fans, is there a chance that LSU thought it could receive some better treatment in allocation time than McNeese, or Northwestern State, who thought it didn’t have as many friends in Congress. who really cares about the football team? ” says Matt Brown, publisher of the extra point college sports industry newsletter. “In many words, [the athlete director] can tell you that. The success of an athlete, in a circular way, can translate into success in building the state capital.
Some of the biggest government assistance for college sports comes from Washington DC, 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 college’s athletic department revenue comes from ticket sales, television deals, merchandise licenses, and other activities not provided by Uncle Sam. . Why not the income tax? Historically, Congress and the Internal Revenue Service have mandated that college sports have educational purposes. Most American colleges enjoy 501 (c) (3) status, which exempts most school income from federal income taxes.
This includes many donations to universities – including to athlete departments or booster organizations, who can enroll in the same tax -exempt designation. Donor fundraising is about 20% of athlete department revenue in Football Bowl Subdivision schools and slightly more at the top level of Power Five, according to a Knight Commission 2020 study. It can work into millions of dollars per year, per department.
A lot of the money came because alumni care about their school and want to make sure the team has a good stadium, the desired facilities, and a budget to pay the best coaches. Getting a juicy tax break doesn’t hurt, though. For top dollar donors who give more standard Internal Revenue Service deductions ($ 12,550 in 2021), dollars given to athlete departments can translate into an income dollar that is lower than federal taxes – savings that rise to thousands or even. millions of dollars.
“I think it’s very important, the ability to go to someone and say,‘ Hey, if you give us this money, it will help us build this thing in the place you want, and in addition to that, you’re going to get a tax deduction was, ’” says Mit Winter, a sports attorney at Kansas City -based law firm Kennyhertz Perry. “It’s a good selling point to get others to donate money to something they’re already inclined to donate.”
Not every donation is a dollar-for-dollar tax deduction, said Katie Davis, a partner in James Moore accounting who works with colleges and athletic programs. If donors receive something of value in return for their money, like game tickets, donating some of the donation won’t come off their tax burden. Most of the time, though, deductions will follow. “Schools don’t really have control over what donors do on their personal taxes,” Davis said. “But I would say, in most cases, if you only make a public donation to put your name on the building or for another campaign, then true, it can be reduced.”
It doesn’t matter if donations to the athletic department seem such awkward to exempt from taxes. For example, if a donor gives the athlete department $ 5m with a clear understanding that it will work to pay for the purchase of coaches, it still won’t eliminate the deductibility of donations, Davis said.
The economics of college sports are changing rapidly, but new vehicles that handle money seek to benefit from the same tax status. Names, images, and “collective” equivalents that raise money for athletes in a quasi-pay-to-play system have been frequently formed and filed for 501 (c) (3) status, often under the explanation that they will pay athletes for charity. appearance.
Lawyers and accountants who are familiar with emerging markets are highly skeptical that the designation will last for the long term. “I think you’ll see some (collectives) receive 501 (c) (3) status, but the big problem is how do you keep it?” says Peter Schoenthal, chief executive of Athliance, a consultant to the school on compliance with National Collegiate Athletic Association rules. “I’m not sure many of them are 501 (c) (3) s. I think it says that you pay student-athletes and also provide education while also paying an individual, a student-athlete, to do something, to promote a brand or really promote Your university – That is, I don’t understand where it falls under 501 (c) (3) s.
Under federal law, 501 (c) (3) organizations are private foundations and nonprofits with religious or charitable purposes. The Internal Revenue Service has various detailed criteria of what constitutes a charity, and a number of tax and sports lawyers doubt that the collective actually meets their standards. “Just saying you’re 501 (c) (3) doesn’t make you wrong,” Schoenthal said. “And I think a lot of these collectives will struggle to maintain that designation in the long run when they know what they’re doing.”
Sugan. Or thought the close relationship between MPs, schools, and college sports would be played out again. Previous efforts by federal lawmakers to reduce tax subsidies for radio and television deals and bowl game sponsor 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 asked Congress to make an 80% deduction that still exists today – and it costs American taxpayers an estimated $ 100m -plus per year.
Above the (antitrust) law
The Supreme Court’s antitrust exemption for Major League Baseball is important for a league that is growing to be its power, Zimbalist said. Zimbalist doesn’t believe that antitrust exemptions are important for MLB right now beyond the avoidance of defending costly lawsuits that would win any. On the same subject : A Freshman’s Guide to Playing Casual Sports on the UNC Campus. But you never know how MLB would look now if it didn’t receive a significant boost from the federal government 100 years ago.
“You’re going to have more competition,” Zimbalist said. “Salaries will go up. So who knows what will happen at that time? Will there be a reunion? Will there be another antitrust suit? What will be decided by the Supreme Court?”
The Supreme Court is not the only branch of the federal government that awards antitrust prizes in high-level sports leagues. Decades later, the National Football League, the National Basketball Association, and the National Hockey League later adopted their own legislation. In 1961, the NFL signed its first league-wide TV contract. A federal judge further struck down the deal on antitrust grounds, ruling that a league-wide sale spared the team from having to compete in the broadcast market, in turn increasing costs for gaming television. Within three months, Congress passed the Sports Broadcasting Act, which gave pro sports leagues a limited antitrust exemption for selling its broadcasting rights. The Senate report said that consolidation is important for teams in smaller markets.
It was a coup for the league, which found that they could maximize television revenue by selling a huge package instead of having teams compete for air time and deals. “It’s very important, because it allows them to raise national television revenue,” Zimbalist said. “It’s going to start growing very rapidly. And it provides at least some foundation for a financial and competitive balance.
The Sports Broadcasting Act also got carrots for college football. This is to say that the NFL’s free makes will not apply within 75 miles of a college game. As a result, Saturday in the fall is the domain of football, with the NFL playing Saturday games only at the end of the season, when the college schedule has receded.
For years, the NCAA also received federal deferences on antitrust issues, although it never received such an official exemption as MLB. Neither Congress nor the courts challenge the concept of amateurism, allowing schools to compete for the labor and services of college athletes while enforcing national rules that limit compensation.
In recent years, however, things have changed. Beginning with California in 2019, lawmakers in about two dozen states passed legislation banning the NCAA’s national ban on players raising money to use names, pictures, or the like. That led the association to remove the ban in July 2021, as it continued to expect congressional intervention that may or may not ever come. Meanwhile, the NCAA defended a lawsuit that seeks damages for previous denials of third party payment opportunities for athletes.
They thought it was not the most existential problem for traditional economic models. The 2014 district court decision in O’Bannon v NCAA eliminated national caps on fee-attendance payments to college athletes, and the NCAA v Alston 2021 case is similar to “education-related” benefits. A biting concurrence from Brett Kavanaugh carries no actual power but leaves some court-supervisors and sports attorneys with the impression that justice was eager to take another district out of the NCAA in future cases. The American government doesn’t often make life more difficult for top -level athlete governing bodies, but the NCAA has been the most notorious exception. The pain probably won’t go away.
“I think a lot of people in the college sports industry think that they’ll be able to operate on that model forever and be able to push away any model challenges that come at any point in the future,” Winter says. “And, obviously, that’s not a problem anymore, but because it’s been a long time, it takes some time for people to understand that maybe college sports can’t operate in the way it is. In the past, in the future.”
This paper was originally published by Global Sport Matters, a project from the Global Sport Institute at Arizona State University. For more stories like this, visit the Global Sport Matters web page.
