President Obama’s most recent budget proposal takes aim at a tax exemption that has helped drive an explosion in publicly-financed sports facilities across the United States, a move that would end federal taxpayers’ role in subsidizing the construction of stadiums and arenas that often provide little economic benefit to their cities and states.
As it stands now, cities and states can help pay for stadiums by accessing tax-free government bonds that have below-market interest rates subsidized by the federal government. The budget Obama released Monday, however, repeals the tax-exemption from the bonds that finance sports facilities if more than 10 percent of the arena or stadium is dedicated to private business use.
Because almost all professional sports stadiums and arenas would fail that test, the Obama proposal would virtually eliminate a tax exemption that provides millions of dollars in federal subsidies each year to sports facilities. States and cities would instead have to finance stadiums with bonds that are not tax-exempt, raising the cost of an already pricey endeavor in a way that could affect the way lawmakers and local taxpayers view the deals.
“Perfect. You couldn’t do it any better if you believe like I do that we should not finance these things with tax-exempt debt,” said Dennis Zimmerman, a retired economist who worked for the Congressional Research Service and Congressional Budget Office and now serves as the director of projects for the American Tax Policy Institute. In a 1996 paper for CRS and in other publications, Zimmerman examined the tax exemption on government bonds used for sports facilities and recommended eliminating it.
The federal subsidies are an often overlooked piece of debates around stadium financing, which largely focus on costs at the state and local level. But the tax exemption means that federal taxpayers also have a hand in subsidizing most pro sports facilities, even those for teams they don’t support in cities far away from where they live. The biggest effect of the Obama proposal is that should it pass, it would remove federal tax dollars from the equation.
“Cities can still pay for stadiums,” Zimmerman said. “But there would be no federal subsidy paying part of the interest cost. That’s what’s at stake here: it’s will the federal government pay a share of the interest costs?”
The exemption is a result of the Tax Reform Act of 1986, and its creators thought its restrictions on financing — specifically, that no more than 10 percent of the debt can be repaid with revenues created inside the stadium, like those generated from tickets or concessions — would limit public subsidies by making cities more reticent to raise general taxes (or dip into general funds) to offer money to sports teams.
Instead, the opposite happened: low-interest bonds became attractive as owners sought new stadiums and cities bought the idea that the facilities were good economic investment vehicles, and a surge of new stadiums followed as cities, states, and teams figured out how to manipulate the 10 percent revenue requirements to keep the bonds eligible for the exemption.
Perfect. You couldn’t do it any better…
Between 1986 and 2012, sports facilities commanded at least $17 billion in tax-exempt bond debt; by the time the existing debt is paid off nearly 30 years from now, the exemption Obama wants repealed will have cost federal taxpayers roughly $4 billion, according to a 2012 Bloomberg analysis. That analysis found that as of 2012, 21 NFL teams and 67 major league teams overall played in stadiums or arenas financed with tax-free bonds, and while most academic research shows that those facilities have little economic benefit for cities and states, the spending spree has helped double the value of franchises in the last 15 years alone.
Obama’s proposal would take federal taxpayers off the hook for any bonds issued after December 31, 2015. The savings are relatively small — an estimated $542 million between 2016 and 2025, according to the budget’s calculations — but the idea is not: that federal taxpayers should not be in the business of subsidizing lower costs for cities and states that build new stadiums or for the owners who benefit from them.
It is unlikely that the exemption, which has survived Congressional scrutiny before, will face the ax immediately, as Obama’s budget as a whole faces a certain death in a Republican-controlled Congress. But it is possible that the president’s proposal could put it on the radar for Congress and future tax reform discussions, especially as politicians from both parties, including now-retired Rep. Dave Camp (R-MI), have taken a closer look at other tax exemptions for professional sports leagues in the last year.
The main effect would be somewhat less luxurious stadiums and arenas.
Aside from modest federal savings and an end to the federal government’s biggest role in the public financing of sports stadiums, repealing the exemption could also affect how cities and states approach public funding for such facilities, economists said.
The major allure of tax-exempt bonds is their lower interest rates, with the difference between those and the market rates paid for by the federal government. That subsidy “virtually requires state-local governments to offer more favorable lease terms” to professional teams, Zimmerman wrote in his 1996 paper. In other words, the federal government’s willingness to pick up part of the cost leads cities and states to hand out even more.
Eliminating the federal subsidy, though, would put all of the cost burden on cities and states where the stadiums are actually being built, making it their choice alone. It could raise the interest rate on bonds by “30 to 50 percent” for states and localities, potentially adding millions of dollars in annual interest payments to the overall price tag, said Roger Noll, a Stanford University economist who has studied stadium financing. A city or state that takes on a $500 million subsidy, for instance, could see around $5 million in additional annual interest costs without the federal tax exemption, Noll calculated.
For cities that are already committing to plans that force them to spend well in excess of that paying off the stadium each year, an extra few million won’t likely cause them to reconsider the project altogether. But it could have some effect on how cities approach these projects by raising the price of stadiums in a way that could, in theory, make cities and states more hesitant to hand over such large amounts.
“It probably does put a somewhat lower upper-bound on how much cities would be willing to pay for a sports stadiums,” Noll said. “My expectation would be that the main effect would be somewhat less luxurious stadiums and arenas. I doubt it would get them out of the business entirely, but it might mean that you don’t have quite as much spent on Jumbotrons and the fancy luxury boxes and things like that.”
Right now, that could influence cities and states like St. Louis, Oakland, and Wisconsin that are proposing plans to finance new stadiums for NFL and NBA teams. In future situations, the added cost to city and local governments — and thus to local taxpayers — could make them more conscious of the larger problems financing stadiums can cause, especially when it comes to other budget priorities.
“It raises the opportunity cost to local governments,” Zimmerman said. “That’s [more money] devoted to a stadium instead of to all of the other public services they could be providing. It might make people think a little more.”
“Every dollar now, a bigger share of that is going to stadiums, and isn’t available for highways, or prisons, or schools, or facilities for seniors, or whatever they’re doing with their budget,” he added.