With the NFL protests still prominently featured in the national news cycle, I thought it worthwhile to address another way in which the sports and government intersect: Taxpayer subsidies.
Public funding for sports stadiums is no new phenomenon. State and local governments during the 1950’s began to lure teams to their cities with lucrative offers, and the snowball has continued to roll. Since then it has been the norm to use Hotel taxes, lottery/gambling revenues, “game day” revenues (parking, concessions, etc.), sales taxes, cash grants, municipal bonds, etc to cover building costs.
The federal government subsidies come in the form of tax exempt interest from municipal bonds. The city issues the same bonds it would for a public works projects, and interest payments to the bond holders are not counted as taxable income. A study from the Brookings Institute looked at new stadiums built from 2000-2014. 36 of 45 new stadiums were financed with these bonds, the average cost of which was $618.5 million. The average amount financed with the bonds was $361.3 million. That’s an average of 58.4% financed with tax exempt bonds. Estimates of the average subsidy (lost tax revenue on the interest) range from $72.5 million – $89 million. The baseball stadiums in New York took the crown for the largest cost to the federal government: a combined $867 million. At the other end of the spectrum, the $1.6 billion dollar Metlife football stadium in NYC was entirely privately funded.
I’ve seen estimates of $7 billion – $12 billion in public funding over the last 20 years. This doesn’t even include game day costs such as extra police or traffic control. The study from the Brookings Institute estimates the federal taxpayers have covered $3.2 billion – $3.7 billion of that total. Cities and states are covering the rest with a combination of new tax increases, or even dipping into existing funds.
A common rationale is that some of the “tourist taxes” won’t negatively impact the locals (keep in mind those aren’t the only public funding sources used). The bulk of the argument given in favor of these subsidies depends on positive spillover gains into the local economy. The logic is that a new stadium/team will bring in new businesses, create jobs, increase property values, and spur income growth. Growth in economic output and an increase in tax revenue would theoretically outweigh the costs of the initial investment.
Academic studies, however, contain little to no evidence that this is the case. Team revenues are a small portion of a city’s output. Plus most individuals have a relatively inflexible discretionary budget so money spent at a game will be mostly offset by reduced spending elsewhere. Costs of attending sporting events (tickets, concessions, parking) are sharply increasing as well, further limiting consumers’ spending elsewhere in the local economy. It is effectively a zero-sum game.
Adverse Effects of Reform
The Tax Reform Act of 1986 was intended to eliminate bonds used to finance sports stadiums from tax exemption. Bonds would be private if they met the following conditions
- More than 10% of bond proceeds would be used privately (known as the private business use test)
- More than 10% of the debt service was secured by property used in a private business (known as the private payment test)
Stadiums will never receive exemption based on the first condition. Federal tax exemption would therefore exist if the state/local government finances at least 90% of the debt. Direct stadium revenue, such as concessions, ticket sales, and rent, were prohibited from being used to secure more than 10%. This forced cities/states to use other revenue sources. Tax increases to finance the stadiums, congress assumed, would be a political death sentence. The opposite has proven to be true.
This legislation, in conjunction with teams’ immense bargaining power, enables teams to receive more public money. Just 1 in the long line of cases where the government has exacerbated a problem it was attempting to solve. The Obama administration proposed getting rid of tax free bonds for stadiums in 2016, but it failed to pass as a part of their platform. It is unclear if President Trump will propose anything similar, but I don’t think it’s on his agenda.
Federal subsidies can be justified when infrastructure projects provide public goods across state lines. However the impact sports stadiums is locally contained so the federal subsidies definitely aren’t economically justified. Even the existence of a positive local impact is questionable at best, so the state/local subsidies aren’t worth the cost.
Sure, the owners have the funds to privately finance the stadiums, but who can blame them for not doing so? They are entitled to make as much profit as legally possible. It is up to elected officials to protect the interests of the taxpayer.
Time will tell if the trend reverses, but don’t hold your breath.