Tax-Exempt Bonds and the Economics of Professional Sports Stadiums

Publication Date: May 1996

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Banking and finance

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Abstract:

Users of publicly owned stadiums receive subsidies from both state-local and federal taxpayers. The federal subsidy arises when the stadium is financed with statelocal bonds issued at below-market interest rates paid for by exemption of the bonds' interest income from federal income taxes. A $225 million stadium built today and financed 100% with tax-exempt bonds might receive a lifetime federal tax subsidy as high as $75 million, 34% of construction costs. The total public subsidy for one year, 1989, of 21 stadiums with average construction cost of $50 million is estimated to have been $146.4 million, with $24.3 million, 17%, being federal subsidy. The federal subsidy will be at least quadrupled for the $200 million-plus stadiums now being built.

Proponents argue that these stadiums' economic benefits justify the subsidies. Economic analysis suggests this is not the case. One study found that a new stadium had no discernible impact on economic development in 27 of 30 metropolitan areas, and had a negative impact in the other three areas. The reasons for this can be illustrated with the Baltimore football stadium proposal. Economic benefits were overstated by 236%, primarily because the reduced spending on other activities that enables people to attend stadium events was not netted against stadium spending. And no account was taken of losses incurred by foregoing more productive investments. The state's $177 million stadium investment is estimated to create 1,394 jobs at a cost of $127,000 per job. The cost per job generated by the state's Sunny Day Fund economic development program is estimated to be $6,250. The economic case against federal subsidy of stadiums is stronger. Almost all stadium spending is spending that would have been made on other activities within the United States, which means benefits to the Nation as a whole are near zero. Non-economic benefits are sometimes used by state-local officials to support the political decision to provide subsidies. Such benefits might be of value to state-local taxpayers, but are less likely to be of value to federal taxpayers.

The change in treatment of tax-exempt bonds for stadiums made by the Tax Reform Act of 1986 has generated problems. It continues stadium financing as an open-ended matching grant for which the magnitude of the federal subsidy in any given year is determined without the input of federal officials and federal taxpayers; it virtually requires state-local governments to offer more favorable lease terms to its professional tenants; and it requires state-local governments to finance their subsidy with general revenue sources rather than benefit-type payments such as stadiumrelated user charges and rents.

Two options are considered to reduce the federal revenue loss from this subsidy. Elimination of stadium tax-exempt bond finance might be the solution Congress thought it was adopting in 1986. This would, however, restrict the independence of state-local officials in a way rarely invoked to control unproductive investments in private activities. A second option would allow stadium bonds to be issued only as tax-exempt private-activity bonds subject to the private-activity bond volume cap. Requiring stadiums to be financed with private-activity bonds would further reduce the incentive for such investments because these bonds are subject to rules that increase project costs, rules that do not apply to stadiums financed with governmental bonds. One of these rules is the prohibition on use of private-activity bonds to finance luxury seating.