Allen Kim

Exposing The NFL's Dirty Little Secret

Created on May. 22, 2013 6:00 AM EST

The NFL has a dirty little secret that you may not know. It’s not the type of story that is shared across Facebook, retweeted hundreds of times and plastered across front pages everywhere. You may see it mentioned in a few publications and hear it talked about in some circles, but it is largely one of those overlooked facts that get swept under the rug.

So what is it? The league qualifies for tax-exempt status as a non-profit organization.

OK, so maybe it’s not what you were expecting, and perhaps many of you already knew this (this isn’t breaking news). I imagine that some of you that were unaware are surprised, while the rest of you may be indifferent. As for those of you that are apathetic to this news, there’s more to this revelation than what you see on the surface.

For once, let’s take the spotlight away from the players that most fans typically blast as being overpaid and turn it on the people that pay them.

While others have spoken out against this tax exemption in the past, it was brought to the attention of the public at large by Oklahoma Sen. Tom Coburn back in October of last year in his Waste Book 2012 (it’s worth checking out the link to at least see the hilarious cover). More recently, he introduced an amendment to the Marketplace Fairness Act — you might be familiar with this name if you’ve been paying any attention to the Internet Sales Tax Bill that has made the rounds in recent weeks — called the Properly Reducing Overexemptions for Sports Act (PRO Sports Act) that would finally put an end to professional sports leagues from qualifying as tax-exempt organizations.

Coburn believes that “taxpayers may be losing at least $91 million subsidizing these tax loopholes for professional sports leagues that generate billions of dollars annually in profits.” $91 million may not sound like much when you consider the trillions of dollars of debt and the billions of dollars at stake in sequestration, but that’s still a lot of money that could be spent on better things rather than helping the rich keep even more of their money.

The NFL, which earned $9.5 billion in revenue last year, maintains that they’re a “trade association promoting interests of its 32 member clubs.” According to the IRS, the purpose of the NFL as a business league would be “to promote such common interest and not to engage in a regular business of a kind ordinarily carried on for profit.” The league can try to spin this and sugarcoat it all they want, but they’re clearly a business designed to make money, and it’s something that they excel at. After all, they generously compensate their executives: NFL Commissioner Roger Goodell alone made $11.6 million in 2010 and $29.49 million in 2011.

Now this is where the B.S. meter gets cranked all the way up to 11.

The league falls under Section 501(c)(6) of the Internal Revenue Code, which says that it is “not organized for profit and no part of the net earnings of which inures to the benefit of any private shareholder or individual.” That means that the NFL cannot pass along the financial benefits they receive to anyone else. However, that’s exactly what they do with each of the 32 teams.

While it’s true that the NFL itself doesn’t actually turn a profit, the mountains of cash that the NFL generates in revenue is split among the 32 teams, and each of those owners benefit greatly from the tax-exempt status of the league. The NFL collects close to $192 million (roughly $6 million per team) in annual membership fees from its 32 teams, but those payments are considered donations to a charitable organization — meaning that all of that money is untaxed — that each team can write off for tax purposes. These fees are then poured into a stadium fund that give the owners access to interest-free loans — provided that they secured public financing — for renovations or a new stadium.

The NFL also borrows money at lower interest rates than what individual teams get since it receives favorable rates as a non-profit organization. The league lends that money to the teams. These types of activities are typically frowned upon by the IRS as it gives them a competitive advantage and tiptoes along the line of what is permissible as a non-profit group.

Some of you may be applauding the NFL for using these tax loopholes to their advantage (perhaps it’s your inner-capitalist talking here). Whatever the reason, there’s a fine line between smart accounting and brazen theft.

So not only do the owners foot the bill to taxpayers to finance their stadiums, the taxpayers lose out on federal tax revenues while the owners sit back and stuff their pockets with even more money. Even worse is that if the owners face any resistance to using public funds to help out with stadium costs, they just threaten to move the franchise somewhere else (see: Minnesota Vikings, Miami Dolphins, Buffalo Bills, et al). They play on the emotions of diehard fans, and that pressure is usually enough to get the owners the funds that they want (but certainly don’t need).

According to Forbes, all 32 NFL teams are among the 50 most valuable sports teams in the world. At least half of the teams are valued at over $1 billion, and even the least profitable NFL team raked in well over $200 million in revenue.

So why are public funds being used to finance stadium costs when the owners are more than capable of putting together the capital to do it themselves? Well, they like to cite the positive impact it will have on the city as an excuse, but they fail to talk about the potential negative effects. They stick with the typical rhetoric and say that it will spur local development, attract businesses that create new jobs and generate new tax revenues. However, there’s no actual proof that these supposed benefits actually offset all the losses — it’s all anecdotal evidence.

Professors Robert A. Baade and Richard F. Dye actually conducted a study on the impact of stadiums and pro sports in metropolitan area development, and they came to the conclusion “that the presence of a new or renovated stadium has an uncertain impact on the levels of personal income and possibly a negative impact on local development relative to the region.” Their findings aren’t definitive, but it’s enough to counter the assertions of owners about the purported benefits these cities gain.

You can thank former NFL commissioner Pete Rozelle for the league’s tax-exempt status, which he secured back in 1966 during the NFL-AFL merger. However, a lot has changed over the last five decades and, along with using public funds to fuel their stadium projects, it’s time that we put an end to this absurd concession.

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