Sports team ownership has been a winning bet over the past three decades, with 102 North American franchises now worth $1 billion or more. But a new tax plan would hit these owners hard.
On Monday, the White House formally unveiled its budget proposal that included a plan for households with $100 million in wealth—the top .01%—to pay a minimum tax on their income, “Ensuring that billionaires and large corporations pay their fair share,” President Joe Biden said in a statement. The budget calls the “special treatment” of incomes of the wealthy a “glaring” problem and that these multimillionaires and billionaires pay “indefensibly” low tax rates.
Biden’s plan caused waves because of how income is defined. It would include unrealized gains from stocks, bonds and private businesses, such as sports teams. This wealth tax follows past plans from senators Elizabeth Warren and Bernie Sanders. Capital gains are currently taxed at 23.8% at the top rate, and the ordinary income top bracket is 37%; the additional tax would apply to both ordinary income and the increase in value of assets in a given year.
“There’s no way to fix our broken tax code without getting at the problem of billionaires avoiding taxes for decades, if not indefinitely,” Ron Wyden, the Senate Finance Committee chair, said in a supportive statement. The proposal is expected to face strong resistance in the evenly divided Senate.
For sports teams and other private businesses, it remains to be seen how an owner is supposed to value an illiquid asset. “My guess is some sort of formula approach, perhaps the assumption that the fair value of the asset is, perhaps, a multiple of its book value, might be employed,” Robert Willens, tax expert and Columbia Business School adjunct professor, said in an email. “I doubt that the matter will be left to appraisals and other forms of guesswork.”
“A tax on ‘unrealized appreciation’ in an asset creates concerns about how exactly the tax will be funded,” Willens added. “Presumably, the owner of an illiquid asset, which has nevertheless appreciated significantly, will have to sell other assets or even incur debt to raise the funds to defray the tax.”
Sports team values have appreciated significantly because of the scarcity value, valuable media content and ability to own a non-correlated asset to the market. Taxes don’t typically drive purchase decisions, according to bankers, but they can impact what someone might pay.
Team owners have long enjoyed certain benefits from the tax system and taxpayers. New owners can write off nearly their entire purchase price and offset other income thanks to the current tax code. That will likely mean a $3 billion write-off in the case of the upcoming sale of the Denver Broncos.
The Buffalo Bills announced plans for a new $1.4 billion stadium on Monday. If the proposal stands, taxpayers will foot a record $850 million of the financing, topping the previous high of $750 million Las Vegas committed to construction for the Raiders’ Allegiant Stadium. Tax-exempt financing was the foundation for the $1.1 billion Yankee Stadium that opened in 2009.
Willens says his biggest issue on the proposal is the constitutionality of such a tax, citing the 16th Amendment that states: “Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.”
He points to the 1920 U.S. Supreme Court case of Eisner v. Macomber, decided in 1920. “Income may be defined as the gain derived from capital, from labor, or from both combined, provided it be understood to include profit gained through a sale conversion of capital assets,” per the ruling. “Mere growth or increment of value in a capital investment is not income; income is essentially a gain or profit, in itself, of exchangeable value, proceeding from capital, severed from it, and derived or received by the taxpayer for his separate use, benefit, and disposal.”
“Clearly, unrealized appreciation in assets is not ‘income’ but is merely a growth or increment of value in the investment,” Willens said. “It’s hard to see how the Biden tax would pass muster, as it seems clearly to violate the tenets of Eisner v. Macomber. I’m sure, on the off chance the tax were enacted, it would be challenged in the courts and almost certainly be set aside.”