Sports, Jobs, & Taxes: Are New Stadiums Worth the Cost?

    For more information, see Roger Noll and Andrew Zimbalist’s edited book, Sports, Jobs, and Taxes: The Economic Impact of Sports Teams and Stadiums.

    The United States is in the midst of a sports construction boom. new sports facilities costing at least $200 million each have been completed or are under construction in baltimore, charlotte, chicago, cincinnati, cleveland, milwaukee, nashville, san francisco, st. louis, seattle, tampa and washington, d.c., and are in the planning stages in boston, dallas, minneapolis, new york and pittsburgh. Major stadium renovations have taken place in Jacksonville and Oakland. industry experts estimate that more than $7 billion will be spent on new facilities for professional sports teams by 2006.

    Most of this $7 billion will come from public sources. The subsidy starts with the federal government, which allows state and local governments to issue tax-exempt bonds to help finance sports venues. the tax exemption reduces the interest on the debt and thus reduces the amount that cities and teams have to pay for a stadium. since 1975, the interest rate reduction has varied between 2.4 and 4.5 percentage points. Assuming a 3 percentage point spread, the federal tax discounted present value loss for a $225 million stadium is approximately $70 million, or more than $2 million per year over a 30-year useful life. Ten facilities built in the 1970s and 1980s, including the Superdome in New Orleans, the Silverdome in Pontiac, the now-obsolete Kingdome in Seattle, and the Giants Stadium in New Jersey’s Meadows, each cause an annual federal tax loss greater than $1 million.

    state and local governments pay even higher subsidies than washington. sports facilities now cost the host city more than $10 million a year. Perhaps the most successful new ballpark, Oriole Park at Camden Yards, costs Marylanders $14 million a year. Renovations aren’t cheap either: the net cost to the local government of restoring the Oakland Coliseum to the raiders was around $70 million.

    Most major cities are willing to spend a lot to attract or retain a major league franchise. But a city doesn’t need to be among the nation’s largest to win a national competition for a team, as evidenced by the NBA’s Utah Jazz Delta Center in Salt Lake City and the Houston Oilers’ new football stadium. nfl in nashville.

    why cities subsidize sport

    The economic rationale for cities’ willingness to subsidize sports facilities is revealed in the campaign slogan for a new stadium for the San Francisco 49ers: “Build the stadium, create the jobs!” Proponents claim that sports facilities improve the local economy in four ways. First, the construction of the facility creates construction jobs. Second, the people who attend the games or work for the team generate new expenses in the community, expanding local employment. Third, a team attracts tourists and businesses to the host city, further increasing local spending and jobs. Ultimately, all this new spending has a “multiplier effect” as increased local revenues generate even more new spending and job creation. Advocates argue that the new stadiums stimulate economic growth so much that they are self-financing: subsidies are offset by revenue from ticket taxes, sales taxes on concessions and other out-of-stadium spending, and increases in fees. property taxes derived from the economic impact of the stadium.

    Unfortunately, these arguments contain poor economic reasoning that leads to exaggerating the benefits of stadiums. Economic growth occurs when a community’s resources (people, capital investments, and natural resources such as land) become more productive. Increased productivity can arise in two ways: from the economically beneficial specialization of the community for the purpose of trading with other regions, or from local value added that is greater than other uses of local workers, land, and investments. building a stadium is good for the local economy only if a stadium is the most productive way to make capital investments and use its workers.

    In our forthcoming book on brookings, sports, jobs and taxes, we and 15 contributors examine the local economic development argument from every angle: case studies of the effect of specific facilities, as well as comparisons between cities and even neighborhoods that they have and have not invested hundreds of millions of dollars in sports development. In all cases, the conclusions are the same. a new sports facility has an extremely small (perhaps even negative) effect on overall economic activity and employment. no recent installations seem to have earned anything approaching a reasonable return on investment. no recent facility has been self-financing in terms of its impact on net tax revenue. Regardless of whether the unit of analysis is a local neighborhood, a city, or an entire metropolitan area, the economic benefits of sports facilities are minimal.

    As noted, a stadium can stimulate economic growth if sport is a major export industry, i.e. if it attracts outsiders to buy the local product and if it results in the sale of certain rights (broadcasting, licenses of products) to national. companies but, in reality, sport has little effect on regional net exports.

    Sports facilities attract neither tourists nor the new industry. Probably the most successful export facility is Oriole Park, where about a third of the crowd at each game comes from outside the Baltimore area. (Baltimore’s baseball exports increase because it’s 40 miles from the nation’s capital, which doesn’t have a major league baseball team.) Still, the net gain to the Baltimore economy in terms of new jobs and incremental tax revenue is only about $3 million a year — not a huge return on a $200 million investment.

    Sports teams earn substantial revenue from national broadcasting and licensing, but this must be balanced against funds leaving the area. most professional athletes do not live where they play, so their income is not spent locally. In addition, players earn inflated salaries for only a few years, so they have large savings, which they invest in national companies. finally, although a new stadium increases attendance, ticket revenues are shared across both baseball and football, so some of the revenue gain goes to other cities. In general, these factors largely offset each other, leaving little or no net local export gain to a community.

    A promotional study estimated the annual local economic impact of the Denver Broncos to be nearly $120 million; Another estimated the combined annual economic benefit of the Cincinnati Flare and Reds to be $245 million. such promotional studies exaggerate the economic impact of a facility because they confuse gross and net economic effects. most spending inside a stadium is a substitute for other local recreational spending, such as movies and restaurants. Similarly, most tax collections within a stadium are surrogates: as other entertainment businesses decline, their tax collections fall.

    Promotional studies also do not take into account the differences between sports and other industries in the distribution of income. most sports revenue goes to the relatively few players, managers, coaches and executives who earn extremely high salaries, all well above the earnings of people working in the industries that substitute sports. most stadium employees work part-time for very low wages, earning a small fraction of the team’s revenue. therefore, substituting sports spending for other recreational spending concentrates income, reduces the total number of jobs, and replaces full-time jobs with low-wage, part-time jobs.

    A second justification for subsidized stadiums is that stadiums generate more local consumer satisfaction than alternative investments. there is some truth in this argument. professional sports teams are very small businesses, comparable to large department or grocery stores. they capture public attention far out of proportion to their economic importance. print and broadcast media pay so much attention to sports because so many people are fans, even if they don’t actually attend games or buy sports-related merchandise.

    thus, a professional sports team creates a “public good” or “externality,” a benefit enjoyed by consumers who follow sports regardless of whether they help pay for it. The magnitude of this benefit is unknown, and it is not shared by all; however, it exists. As a result, sports fans are likely to accept higher taxes or reduced public services to attract or keep a team, even if they don’t attend games themselves. These fans, complemented and mobilized by teams, local media and local interests that benefit directly from a stadium, constitute the political support base for subsidized sports facilities.

    the role of monopoly leagues

    Although sports subsidies may come from externalities, their main cause is the monopolistic structure of sports. leagues maximize profits for their members by keeping the number of franchises below the number of cities that could support a team. To attract teams, cities must compete through a bidding war, with each offering their willingness to pay for a team, not the amount needed to make a team viable.

    Monopoly leagues turn the willingness of fans (and thus cities) to pay for a team into an opportunity for teams to earn revenue. teams are not required to take advantage of this opportunity, and in two cases—the charlotte panthers and, to a lesser extent, the san francisco giants—the city’s financial exposure has been the relatively modest costs of site acquisition and infrastructure investments. But in most cases, state and local governments have paid more than $100 million in subsidies for the stadium and, in some cases, have financed the entire enterprise.

    The trend of sports teams looking for new homes has intensified with new stadium technology. The fairly ordinary multi-purpose facility of the 1960s and 1970s has given way to the elaborate single-sport facility that presents numerous new revenue opportunities: luxury suites, skyboxes, elaborate concessions, catering, signage, advertising, themed activities, and more. including bars, restaurants and apartments with a view of the countryside. a new facility can now add $30 million annually to a team’s revenue for a few years after the stadium opens.

    Because new stadiums produce substantially more revenue, more cities are now economically viable franchise sites, which explains why Charlotte, Jacksonville and Nashville have become NFL cities. as more locations bid on equipment, cities are forced to offer ever-increasing subsidies.

    What can be done?

    The abuses of exorbitant stadium packages, preferential leases and unscrupulous franchises have left many citizens and politicians crying over their lack. What remedy, if any, is available to curb the rise in subsidies and protect the emotional and financial investments of fans and cities?

    In principle, cities could negotiate as a group with sports leagues, thus counteracting the monopoly power of the leagues. in practice, this strategy is unlikely to work. efforts by cities to form a sports hosts association have failed. the temptation to cheat by secretly negotiating with a mobile team is too strong to sustain concerted behavior.

    Another strategy is to insert clauses into a facility lease that prevent relocation of equipment. Many cities have tried this approach, but most leases have escape clauses that allow the team to move if attendance is too low or the facilities are not in the best condition. other teams have provisions that require them to pay tens of millions of dollars if they vacate a facility before the lease expires, but these provisions also come with qualifying agreements. Of course, all clubs are legally required to abide by the terms of their lease, but with or without these safeguard provisions, teams have generally not considered the terms of their lease to be binding. rather, the teams claim that a city or stadium authority’s breach of contract relieves them of their obligations. almost always these provisions do not prevent a team from moving.

    Some leases give the city a right of first refusal to purchase the equipment or to designate who will purchase it before the equipment is relocated. the big problem here is the price. Owners typically want to relocate a team because it’s worth more elsewhere, either because another city is building a new facility with strong revenue potential, or because another city is a better sports market. If the equipment is worth, say, $30 million more if it moves, what price should the equipment accept from local buyers? if it is market price (its value in the best location), an investor in the hometown would be foolish to pay $30 million more for the franchise than it is worth there. if the price is the value of the franchise at his current address, the former owner is deprived of ownership rights to him if he cannot sell to the highest bidder. in practice, these provisions often specify a right of first refusal at market price, which does not protect against loss of equipment.

    Cities trying to maintain a franchise can also invoke eminent domain, as Oakland did when the Raiders moved to Los Angeles in 1982 and Baltimore did when the Colts moved to Indianapolis in 1984. In Oakland’s case, the California appeals court ruled that condemning a football franchise violates the us commerce clause. uu. Constitution. In the Colts’ case, the conviction was upheld by the Maryland Circuit Court, but the United States District Court ruled that Maryland lacked jurisdiction because the team had left the state when the conviction was entered. Eminent domain, even if constitutionally feasible, is not a promising vehicle for cities to retain sports teams.

    end of federal subsidies

    Whatever the costs and benefits to a city of attracting a professional sports team, there is no reason for the federal government to subsidize the financial push and pull between cities to host teams.

    In 1986, Congress apparently became convinced of the irrationality of granting tax breaks for interest on municipal bonds that financed projects that primarily benefited private interests. the 1986 tax reform law denies federal subsidies for sports facilities if more than 10 percent of the debt service is covered by stadium revenues. if congress intended that this would reduce sports subsidies, it was sadly wrong. if anything, the 1986 law increased local subsidies by reducing rents below 10 percent of debt service.

    last year, senator daniel patrick moynihan (d-new york), worried about the prospect of a tax break for up to a billion dollars in debt for a new stadium in new york, introduced a bill to eliminate tax-exempt funding for professional sports facilities and thus eliminate federal subsidies to stadiums. the theory behind the bill is that raising a city’s cost with the gift of a stadium would reduce the subsidy. while cities could respond in this way, they would still be competing with each other for the few franchises, so to some extent the likely effect of the bill is to pass higher interest charges on to cities, not teams. /p>

    antitrust and regulation

    Congress has considered several proposals to regulate the movement of teams and the expansion of the league. The first came in the early 1970s, when senators from Washington left for Texas. The unhappy baseball fans on Capitol Hill commissioned an investigation into professional sports. the resulting report recommended removing baseball’s antitrust immunity, but no legislative action followed. Another round of ineffective investigation occurred in 1984-1985, following the relocations of the Oakland Raiders and the Baltimore Colts. Major League Baseball’s efforts in 1992 to thwart the Giants’ move from San Francisco to St. Petersburg again tabled proposals to withdraw baseball’s cherished antitrust exemption. as before, nothing was of interest to the congress. In 1995-96, inspired by the departure of the Cleveland Browns to Baltimore, Representative Louis Stokes of Cleveland and Senator John Glenn of Ohio introduced a bill to give the NFL an antitrust exemption for franchise relocation. this bill did not come to a vote either.

    The relevance of antitrust laws to the problem of stadium subsidies is indirect but important. private antitrust actions have significantly limited the ability of leagues to prevent teams from relocating. teams relocate to improve their financial performance, which in turn improves their ability to compete with other teams for players and coaches. therefore, a team has an incentive to prevent competitors from moving. consequently, the courts have ruled that leagues must have “reasonable” relocation rules that prevent anti-competitive relocation denials. baseball, because it enjoys an antitrust exemption, is freer to limit team movements than other sports.

    Relocation rules can affect competition for teams because, by making relocation more difficult, they can limit the number of teams (usually one) a city can bid on. in addition, the competition between cities for teams is further intensified because the leagues create a shortage in the number of teams. legal and legislative actions changing relocation rules affect which cities get existing teams and how much they pay for them, but do not directly affect the disparity between the number of cities that are viable locations for a team and the number of teams. therefore, the expansion policy poses a different but important antitrust problem.

    As the nearly simultaneous consideration of creating an antitrust exemption for football and denying one for baseball on precisely the same issue of franchise relocation attests, congressional initiatives have been plagued by geographic chauvinism and myopia. Except for representatives from the affected region, members of Congress have been reluctant to risk the wrath of sports leagues. even legislation that is not hampered by the region’s obvious self-interest, such as the 1986 tax reform law, is usually sufficiently riddled with loopholes to make effective implementation unlikely. while net global welfare is arguably higher when a team relocates to a better market, public policy needs to focus on balancing supply and demand for sports franchises so that every economically viable city can have a team. Congress could mandate expansion of the league, but that’s probably politically impossible. Even if such legislation were to pass, deciding which city deserves a team is an administrative nightmare.

    A better approach would be to use antitrust rules to break up existing leagues into competing business entities. the entities could collaborate on rules of the game and interleague and postseason play, but they could not divvy up metropolitan areas, establish common draft or player market restrictions, or collude on broadcast and licensing policy. under these circumstances, no league is likely to vacate an economically viable city, and if it did, a competing league would likely enter. other beneficial consequences for the consumer would flow from such an arrangement. competition would force ineffective owners to sell or fail in their fight with better-managed teams. taxpayers would pay lower local, state, and federal subsidies. teams would have lower revenues, but because most of a team’s costs are driven by revenue, most teams would remain solvent. player salaries and team earnings would fall, but the number of teams and player jobs would increase.

    Like Congress, the Justice Department’s antitrust division is subject to political pressure not to upset sports. thus, sports leagues remain unregulated monopolies with de facto immunity from federal antitrust prosecutions. others file and win antitrust lawsuits against sports leagues, but their goal is usually cartel membership, not divestment, so the problem of too few teams remains unresolved.

    citizen action

    The last potential source of reform is grassroots discontent leading to a political backlash against sport subsidies. stadium policy has proven to be quite controversial in some cities. some citizens apparently know that the teams do little for the local economy and are concerned about the use of regressive sales taxes and lottery revenues to subsidize wealthy players, owners and executives. Voters rejected public support for stadiums on ballot initiatives in Milwaukee, San Francisco, San Jose and Seattle, though no team has failed to get a new stadium. still, more cautious conditional support from voters may make political leaders more careful in negotiating a stadium deal. Initiatives that place a greater share of the financial burden on facility users, through revenue from luxury or club boxes, personal seating licenses (PSLs), license fees, are likely to be more popular. name and taxes on tickets.

    Unfortunately, despite citizen resistance, most stadiums probably cannot be financed primarily from private sources. first of all, the use of money from psls, naming rights, pouring rights and other private sources is a matter of negotiation between teams, cities and leagues. The fees imposed by the NFL on the Raiders and Rams when they moved to Oakland and St. louis, respectively, were an attempt by the league to capture some of this (unshared) revenue, rather than pay for the stadium.

    Second, revenues from private sources are unlikely to be sufficient to avoid large public subsidies. At best, like the NFL’s Charlotte Panthers, local governments still pay for investments in supporting infrastructure, and Washington still pays an interest subsidy for local government participation. and the charlotte case is unique. no other stadium project has raised as much private revenue. At the other extreme is the disaster in Oakland, where a supposedly break-even financial plan left the community $70 million in the hole due to cost overruns and disappointing PSL sales.

    Third, despite increased citizen awareness, voters still face equipment shortages. fans may realize that subsidized stadiums redistribute income regressively and do not promote growth, but they want local teams. Unfortunately, it’s usually better to pay a monopoly an exorbitant price than to give up your product.

    Prospects for cutting sports subsidies are not good. while citizen opposition has had some success, without more effective intercity organizing or more active federal antitrust policy, cities will continue to compete with each other to attract or retain artificially few sports franchises. Given the deep penetration and popularity of sports in American culture, it is difficult to see an end to the increase in public subsidies for sports facilities.

    for more on the economics of sport, see andrew zimbalist’s 2015 book circus maximus: the economic gamble behind the hosting the olympics and the world cup .

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