Tax-Exempt Municipal Bonds and the Financing of Professional Sports Stadiums
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National Tax Journal, March 2020, 73 (1), 157–196 https://doi.org/10.17310/ntj.2020.1.05 TAX-EXEMPT MUNICIPAL BONDS AND THE FINANCING OF PROFESSIONAL SPORTS STADIUMS Austin J. Drukker, Ted Gayer, and Alexander K. Gold This paper examines the role of federal tax subsidies in the form of preferences granted for bonds that state and local governments issue to finance the construc- tion of professional sports stadiums. We examine 57 stadiums built since 2000, 43 of which were funded, at least in part, with federal tax expenditures in the form of tax-exempt municipal bonds. We estimate that the present value subsidy to the bond issuers was $3.6 billion and the total revenue loss to the federal government was $4.3 billion. We conclude with suggested reforms to reduce or eliminate this inefficient subsidy for professional sports stadiums. Keywords: sports, stadium, subsidy, tax exempt, municipal bond JEL Codes: H21, H42, H71 I. INTRODUCTION his paper examines the public provision of professional sports facilities through tax- Texempt municipal bonds, which are bonds issued by state and local governments to support infrastructure and other public goods projects. The interest earned by holders of such bonds is exempt from federal taxation; hence, tax-exempt municipal bonds confer an indirect federal subsidy to the issuers. Most academic papers and popular news cov- erage focus on local subsidies to build professional sports facilities. This paper brings attention to and formally estimates federal subsidies for professional sports stadiums. A growing body of research on the economics of sports stadiums has emerged since the important work of Noll and Zimbalist (1997) and Siegfried and Zimbalist (2000), though a literature on federal subsidies for sports stadiums has been scant. Ours is the first paper to calculate the federal subsidy for professional sports stadiums conferred through the use of tax-exempt municipal bonds. We extend the seminal work of Zim- merman (1985, 1991, 1996, 1997, 2008) and attest to its relevance in a modern setting. Austin J. Drukker: Department of Economics, University of Arizona, Tucson, AZ, USA (adrukker@ email.arizona.edu) Ted Gayer: Economic Studies Program, Brookings Institution, Washington, DC, USA ([email protected]) Alexander K. Gold: Economic Studies Program, Brookings Institution, Washington, DC, USA (akgold@ brookings.edu) 158 National Tax Journal Public funding for stadiums is a topic of considerable public policy interest. Profes- sional sports leagues are private enterprises controlled by small groups of wealthy owners, and sports teams yield considerable monopoly power over their home cities, allowing them to extract hundreds of millions of dollars in local subsidies through tax- able and tax-exempt municipal bonds. While the large local subsidies often receive the bulk of media attention, almost no attention is paid to federal subsidies implicit in every tax-exempt municipal bond. Since the interest earned on municipal bonds is exempt from federal taxation, bondholders receive a tax break for holding them and the sav- ings are passed along to the local governments in the form of lower interest payments. The justifications for publicly funding stadiums are weak, and the justifications for federal government subsidies are even weaker. Generally, provision of public goods is justified if the private sector would fail to provide socially desirable amounts — that is, services whose social benefits exceed social costs but which are privately unprofitable — or when the activity is subject to continually decreasing average costs. The degree to which a public project is likely to be underprovided by private firms suggests the degree of responsibility the government should take in providing the project. This analytical frame- work also suggests the conceptual basis for determining the appropriate division among federal, state, and local funding for public goods. To the extent that economies of scale or public benefits cross jurisdictional borders, there is a justification for the larger juris- diction in which the benefits fall to subsidize the subjurisdiction considering the project. The use of the tax code to subsidize public goods has two budgetary implications. First, the lost tax revenue from tax-exempt bonds is not part of the computation of federal spending and, therefore, is not included in the federal budget. This reduces the transparency of the federal allocation of resources to these projects. Second, and related, the federal government’s control over the tax subsidy is limited because the amount of the tax expenditure is not decided through the annual appropriations process. It is, in effect, a form of entitlement spending whose amount is largely determined by circumstances outside the federal government’s control (Congressional Budget Office and Joint Committee on Taxation, 2009). Additionally, the use of tax-exempt bonds is an inefficient form of subsidy, since the loss of federal tax revenue exceeds the reduc- tion in the bond issuers’ interest costs (more on this to come). Little effort has been given at the federal level to ending federal stadium subsidies since the 1990s, until 2015, when a provision to remove the subsidy was included in President Barack Obama’s budget proposal (U.S. Department of the Treasury, 2015).1 Since then, several bipartisan bills to remove the subsidy have been intro- duced in Congress.2 While the value of the federal revenue loss from subsidizing 1 deMause, Neil, “Is Obama Really Going to Kill Sports Stadium Subsides?” VICE, March 18, 2015; Lueck, Thomas J., “Moynihan’s Tax-Break Bill Could Foil Dreams of Fields,” New York Times, July 14, 1996. 2 The bills introduced were H.R. 811 (February 2017), S. 1342 (June 2017), H.R. 1 (December 2017), S. 1242 (April 2019), and H.R. 2446 (May 2019). Tax-Exempt Municipal Bonds and the Financing of Sports Stadiums 159 sports stadiums is relatively small compared to the whole of the federal budget defi- cit, it is a “small but egregious misuse of federal tax dollars,” and so deserves some attention.3 In light of the economic and public policy interest, this paper presents an analysis of federal subsidies for professional sports stadiums. We examine the size of the sub- sidy and the total federal tax expenditure for all professional sports stadiums newly constructed or majorly renovated in the United States since 2000 for the four largest American sports leagues: Major League Baseball (MLB), the National Football League (NFL), the National Basketball Association (NBA), and the National Hockey League (NHL).4 Of the 57 stadiums that fit this description, 43 were funded, at least in part, with federal tax expenditures in the form of tax-exempt municipal bonds. We estimate that the total tax-exempt bond principal issued to fund these stadiums was approximately $16.7 billion, the present value subsidy to the bond issuers was $3.6 billion (assuming a 3 percent discount rate) or $3.0 billion (assuming a 5 percent discount rate), and the present value federal tax revenue loss was $4.3 billion (3 percent discount rate) or $3.5 billion (5 percent discount rate), with all values expressed in 2018 dollars.5 We con- clude the paper with suggested reforms to reduce or eliminate this inefficient subsidy for professional sports stadiums. 3 Reuters staff, “Republican Tax Plan May Mean Slightly Less Grand Sports Stadiums,” Reuters, November 2, 2017. 4 Our starting year of 2000 is arbitrary; the oldest stadium in our data set is Minute Maid Park, which opened on March 30, 2000. We include all stadiums that — as of this writing, to the best of our knowledge, and if applicable — have had tax-exempt bonds issued or that have broken ground. What qualifies as amajor renovation is subjective but generally means a renovation that is newsworthy and used tax-exempt financing. We include all renovations designated as major by Long (2012) and Baade and Matheson (2012), excluding Hard Rock Stadium (Sun Life Stadium), which went through extensive, privately financed renovations in 2015; we also exclude KeyArena, which is currently undergoing extensive, privately financed renovations. Chesapeake Energy Arena is the lowest-cost renovation in our data set, at $141 million; and Soldier Field is the highest-cost renovation, at $860 million. Two stadiums — Marlins Park and Yankee Stadium — used tax-exempt bonds to finance parking facilities, which we also include in our data set. 5 Theory suggests that the discount rate should be the opportunity cost of the stadium relative to other invest- ments. Since a city or county may invest in other projects or capital investments, municipal bond interest rates are a good measure of this opportunity cost. The 20-year municipal bond interest rate at present is roughly 3 percent. But a stadium’s opportunity cost may also be considered against other private invest- ments. In this case, the opportunity cost would be close to the 20-year corporate bond interest rate, which at present is roughly 4 percent. Given the current low-interest-rate environment, a discount rate in the 2 percent range is probably too low. Paul Scheuren recommends a discount rate of between 4 and 5 percent. Our estimates using a 3 percent discount rate, then, assume the municipality is relatively patient, while our estimates using a 5 percent discount rate assume the municipality is relatively impatient. Finding the correct discount rate is nearly impossible, but we believe 3 and 5 percent are reasonable choices. Scheuren, Paul, “Choosing a Discount Rate,” blog post, September 12, 2001, https://impactdatasource.com/choosing- a-discount-rate/. 160 National Tax Journal II. BACKGROUND In granting stadium subsidies, governments claim that stadiums are public goods that generate benefits that flow to the community rather than to team owners (Decker, 2019). Stadium subsidies require some economic justification because private activities take place in the stadiums and professional sports are not pure public goods (Hum- phreys, 2019).6 Sports stadiums do not exhibit economies of scale, so there is no natural monopoly justification for government subsidies.