Donald Trump's proposed tax breaks for private construction investors and contractors could mean additional multimillion-dollar public subsidies for sports stadiums.
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Of the many, many strong feelings people have about the looming Trump administration, few are related to potential infrastructure policy. In fact, the president-elect's position on the matter—as he inimitably declared in his acceptance speech, "We're going to rebuild our infrastructure, which will become, by the way, second to none"—was probably the closest thing to a broad-based appeal that he has managed to make. Nobody of any political persuasion likes it when bridges fall down.
In recent days, however, we've discovered that this "infrastructure" plan may not actually result in any additional public infrastructure being funded or built. Instead, Trump's proposal provides tax breaks to private-sector investors and contractors who back and work on profitable construction projects. As former Obama administration adviser Ronald Klain put it, this means "fattening the pockets of investors in previously planned projects," and no help for municipal water-system overhauls, repairs of existing roads, replacement of bridges that do not charge tolls, and other needed upgrades that are not attractive to private investors.
It also means that President-elect Trump's proposed $137 billion in tax kickbacks, taken from the federal treasury, could help subsidize private sports stadiums and arenas.
I briefly noted this possibility on Monday at my website, Field of Schemes; having spent most of the day since then talking to some of the nation's foremost economic-development Trumpologists, I'm now in a position to explain in greater detail how this is likely to play out. And we'll get to the stadiums soon, I promise.
But first, bear with me as we plunge into the arcane world of tax incentives and government privatization.
The centerpiece of the Trump infrastructure spending plan, as described in a policy paper released last month, is that rather than giving states money to spend on roads and bridges and other stuff like President Obama did with his 2009 stimulus package, the feds would provide income tax credits instead. On one level, this isn't a huge difference, since providing a rebate on taxes comes out of the federal treasury the same as actual budget expenditures do. (It's why the Office of Management and Budget classifies tax breaks as "tax expenditures.")
There's one big difference between tax credits and cash, though: in order to use tax credits, you need to be paying income taxes. That rules out not only local government agencies doing the construction work themselves but also entities like pension funds that have helped finance public projects in the past, for example, when voters have balked at funding them with tax hikes. The only way to get a hold of the Trump infrastructure cash, then, is if you're a private development firm. And that means public-private partnerships—or, as they're known in development lingo, P3s.
P3s are having a bit of a heyday right now, as local governments experiment with having private investors build everything from toll roads to water projects. The method has limitations. For one, notes Carl Davis, research director at the D.C.-based Institute on Taxation and Economic Policy, it can only be used on projects that generate significant revenue via tolls or fees. "We're not going to have private companies filling our potholes or expanding our bus system," he says, "because those things aren't profitable."
And while some P3 projects have worked out well, the failures have been of epic proportions. A few years ago, Texas contracted out State Highway 130 to a private developer, which skimped on construction costs by installing cheaper asphalt rather than sturdier concrete, resulting in what the Austin Statesman described as "a rumbling, dangerous washboard effect that tends to last for a couple of seconds each time." Despite a much-ballyhooed 85-mile-per-hour speed limit, the road's builders filed for bankruptcy earlier this year, sticking the federal government with a half-billion-dollar tab for its piece of the P3.
Under Trump's proposal, more for-profit companies getting involved in building public roads would probably be the best-case scenario. Without strict limits on what qualifies for the Trump tax breaks, all sorts of projects for private benefit could end up being rebranded as "infrastructure." We've already seen mayors and business leaders propose everything from affordable housing (this from the mayor of D.C.) to "Internet of Things technology" (this from the CEO of IBM, which makes—you guessed it—said technology) as infrastructure projects.
Given the long history of sports stadiums and arenas being sold as public benefits, it seems only a matter of time before they're added to the list.
"If you want to leverage private activity by making it more profitable, you've got to be strategic about it," says Greg LeRoy, the executive director of Good Jobs First, a D.C.-based corporate subsidies watchdog group. "Why would we incentivize another football stadium or another pharmaceutical boondoggle? Creating a tax credit is a sledgehammer when we need a scalpel."
You can probably see where this is going. John Q. Governor decides that he wants a slice of that sweet, sweet Trump money so he can show voters that he can get benefits for his state. He doesn't need another toll road, and no private investors are looking to build a new sewage system because sewage doesn't pay the bills (and also, ick). However, the local arena shuffleboard team is asking for a new stadium, and shuffleboard arenas are infrastructure, right? Like, the kids can use them to practice for pro shuffleboard careers? Plus, jobs. Jobs are totally infrastructure!
If you're a pro sports team owner or stadium construction company, you have to be salivating at this notion even more than that IBM CEO trying to sell her smart lampposts. Right now, the main way that the federal government subsidizes stadiums and arenas is via tax-exempt construction, the longstanding tax loophole that Obama tried to eliminate, only to be blocked by Congress. Tax-exempt bonds for stadiums cost the federal government about $230 million a year; Trump's plan calls for $137 billion in tax credits, so even a small sliver going to sports venues could multiply exponentially the amount of tax dollars that fans in one city would end up devoting to funding buildings for their rivals elsewhere. (Thanks to tax-exempt bonds, remember, Americans nationwide are right now helping to pay off about $200 million worth of the New York Yankees' new stadium; yes, you too, Boston Red Sox fans.)
None of this, mind you, is written in stone, or even in pixels. The ten-page policy paper that is Trump's only official statement on the matter—co-written by a UC-Irvine economist and a leveraged buyout king—is silent on pretty much all details, including, crucially, which private projects would qualify for tax kickbacks, and who would decide on the winners. It does promise to "provide maximum flexibility to the states" in choosing what to fund, though, which sounds great if you're a governor with a pet project that could use an infusion of cash, and significantly less great if you're a taxpayer concerned about LeRoy's sledgehammer being used to jar loose your tax dollars for anything and everything under the sun.
All we can say for sure, then, is that with a proposed $137 billion infrastructure slush fund reserved entirely for private developers, the only person standing in the way of sports team owners tapping into it is the former owner of the New Jersey Generals. These are interesting times, indeed.
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