The National Collegiate Athletic Association (NCAA) recently decided to allow student-athletes to profit from the use of their name, image, and likeness, though specifics remain to be settled. In light of that decision, Senator Richard Burr (R-NC) announced he would be introducing legislation to treat student-athletes’ scholarships like income. This would be an odd divergence from the way the taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. code currently treats scholarships.
Currently, if a student receives a scholarship (or a fellowship grant or other grant) and uses it to pay for tuition, fees, books, or other supplies, the scholarship is tax-free. The Joint Committee on Taxation estimates that this exclusion will reduce federal tax revenue by $3.2 billion in 2019. However, if the scholarship is used to pay for room and board, travel, or other incidental expenses, it is treated as taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income. .
The idea at work here is that the portion of the scholarship being used to invest in education is tax-free, while the portion that is used for consumption is taxable. If we view education as an investment in human capital, made in order to earn higher income in the future on which taxes will be paid, then education is the cost of investment in human capital. However, if students obtain “utility” from pursuing higher education, this portion of education-related expenditures represents consumption and shouldn’t be tax-free.
Debating the tax treatment of scholarships along these lines—what portion is investment versus consumption—would be a legitimate and worthwhile exploration of the policy. However, singling out a group of students—athletes—and making the tax treatment of scholarships contingent on whether they earn some other type of income is not sound tax policy. Treating similarly situated taxpayers differently violates the tax policy principle of neutrality and disproportionately burdens one over the other.
Many students hold jobs while they pursue their college education, pay income taxes due on their wages, and receive scholarships. Any compensation a student-athlete received because her image was used would likewise be subject to income tax.
Differentiating tax treatment of scholarships between these groups of students—athletes and non-athletes—is not neutral and is not sound tax policy.
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