In April 2025, Arkansas became the first that taxes income to exempt NIL income from taxation. Questions arise about why they did this and whether more states will follow their lead.
The Taxation of NIL Income
According to On3, Arch Manning has a name, image, and likeness (NIL) valuation of $6.5 million. Meanwhile, Athlon Sports reports heralded basketball player PJ Haggerty is requesting a $4 million NIL deal in the transfer portal. The NIL money that the current group of college players demands is growing at a staggering rate, and their net take-home pay may be getting bigger as many states may soon be exempting this income from taxation.
As suggested by its name, NIL income is earned income and subject to taxation. This income is not taxed differently than a barista at a coffee shop or an executive receiving a multimillion-dollar bonus. Athletes will need to pay income taxes on their NIL money at the federal level (top individual tax rate of 37% in 2025) and the state in which they earn the money. While most states tax athletes on the income earned while playing in their state for road games (also known as the jock tax), athletes tend to face the greatest tax consequences from their state of residence. For college athletes, this is the state where their school is located.
As previously reported on Forbes, athletes earning NIL money in a state with no income taxation have a financial advantage over states with an income tax. While athletes still face taxation at the federal level regardless of where they live, state income tax can drastically cut into their take-home pay, as state income tax is as high as 13.3%. For instance, if PJ Haggerty were to play at the University of Florida next season, he would pay $0 in Florida state income tax. However, if he were to play at UCLA, he would owe hundreds of thousands of dollars in state income tax to California.
Under the Arkansas Student-Athlete Publicity Rights Act, an Arkansas athlete’s NIL income will no longer be subject to taxation in Arkansas. This bill was signed into law in April of 2025 by Governor Sara Huckabee. The 2025 income tax rate in the top tax bracket in Arkansas is 3.9%, meaning that elite athletes will save thousands of dollars by playing for Arkansas over a school in a state that does not exempt NIL income. This law will also now allow Arkansas universities to better compete for recruits against the three nearby states that have no state income tax (Texas, Tennessee, and Florida).
Why States Should Not Exempt NIL Income from Taxation
Most principles governing a tax system suggest vertical equity (people who make more money should pay more in income taxes than people who make less) is critical to ensuring fairness. By exempting income from athletes who are potentially earning millions of dollars, Arkansas appears to be violating the vertical equity principle. Sports Illustrated reports that many everyday taxpayers living in Arkansas question why their income is subject to taxation while rich young athletes no longer need to pay state taxes on this income.
Furthermore, states do not have unlimited funds, and unlike the federal government, it cannot operate at a deficit. This means that as a state’s tax revenues decline, it may need to make up for the shortfall by taking funding away from other investments and programs. Coming out of the pandemic, an academic study in the Accounting and the Public Interest journal highlights that many states continue to struggle with managing their budgets. Exempting tax on NIL could exacerbate these issues.
Why States May Want To Exempt NIL Income from Taxation
Even though the downsides to exempting NIL income from taxation are clear, according to a Poole Thought Leadership article, there are at least two reasons why states may want to follow Arkansas’s lead.
First, the costs may not outweigh the benefits. Many states tax income at fairly low rates. For instance, a state like North Carolina may only be missing out on $9 million per year in tax revenues if NIL income becomes tax-exempt. Meanwhile, states’ additional financial benefits from their schools’ strong athletic programs likely far exceed these lost tax revenues. For instance, Spectrum News 1 reports that the Ohio State University home college football playoff game in December 2024 brought in $12 million in additional revenues that the school would not have had if the team did not make the playoff.
Second, there may be a higher cost of not acting. The schools in the few states without an income tax currently have a financial advantage over the rest when recruiting elite talent. However, as more states like Arkansas pass laws exempting NIL income from taxation, the financial penalty for not doing so will increase.
Will States Follow Arkansas In Making NIL Tax-Exempt?
Even though Arkansas was the first state to act, many other states are considering laws exempting NIL income from taxation. For instance, Sports Illustrated has reported that Illinois, Louisiana, Alabama, and Georgia proposed bills along these similar lines. The North Carolina legislature has not proposed a bill yet. However, Bloomberg reports that they are seriously considering exempting NIL income. Many of these states also happen to have elite college athletics programs, such as the top football programs like the University of Alabama, the University of Georgia, and Louisiana State University, which combine for 20 national championships. On the basketball side, these states include the Tobacco Road basketball programs of Duke University, the University of North Carolina, North Carolina State University, and Wake Forest University, which combine for 13 national championships.
Exempting NIL income from taxation clearly signals a commitment to their school’s athletics. In states where collegiate sports are financially important aspects of their economy, states may benefit far beyond the revenue they forgo from collecting taxes on NIL. Schools in states that levy an income tax are already at a competitive financial disadvantage relative to schools in states like Texas, Florida, and Tennessee that do not tax income. Other states may imitate Arkansas’s actions to give their schools that same advantage.
However, if more states follow Arkansas’s lead, the financial advantage will steadily decline, leaving college athletes a uniquely protected class of taxpayers. Questions might arise about why this tax advantage does not spill over to pro athletes. In fact, Forbes reported that All-Pro WR Tyreek Hill chose to play for the Miami Dolphins over the New York Jets due in part to state income taxes. If high-impact college athletics programs are good for a state’s finances, could the same arguments also be made for high-impact pro sports teams?
Whether and to what extent states should exempt NIL income from taxation presents a unique perspective on the ever-evolving college athletics landscape. As schools continue to balance NIL, the transfer portal, and conference realignment, the fundamental question remains whether these student-athletes are, in fact, student-athletes. Leaders in Congress, athletic conferences, athletic departments, and school administrations are continuously exploring this era of college athletics. While income tax laws are just one piece of this puzzle, they reflect a domino falling in real-time.
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