An intriguing item in President Obama's budget proposal will hurt the stadium subsidies scam, but it'll take much more to put it all to an end.
Image via Tech. Sgt. Dawn M. Price, USAF, WikiMedia Commons
If you've been anywhere near a computer in the last two days, you've probably seen the reports that President Obama has declared war on sports stadium subsidies. This is actually old news—the provision to ban the use of federally tax-exempt bonds for sports venues was included in Obama's budget plan way back in early February—but it's gotten new life thanks mostly to a USA Today headline on Monday that asked the question: "Is Obama proposal the end of taxpayer-subsidized sports stadiums?"
Much as I'd love to tell you that the revolution is at hand, and taxpayer-funded stadiums will soon become a relic of the past like segregated ballgames and hockey goalies not wearing facemasks, the answer is: NO. Obama's proposal, if it manages to get through a hostile Congress, would close a major loophole that team owners and city officials have used to fob off billions of dollars in stadium and arena costs onto federal taxpayers—but it's going to take much, much more to shut off the stadium subsidy loophole.
The loophole in question actually came about as an attempt to close another loophole, way back in the Tax Reform Act of 1986.
Sen. Daniel Patrick Moynihan, who was spearheading the Tax Reform Act, decided to do something about cash-starved Reagan-era cities using their low-cost borrowing power on behalf of private businesses threatening to skip town—this applied not only to sports stadiums, but to auto plants and computer chip factories as well. Moynihan wrote into law that henceforth, any project that was 1) used more than 10 percent of the time by a private entity and 2) funded more than 10 percent by a private entity was a private use, and would be ineligible for tax-exempt bonds. And to drive the point home to money-hungry sports team owners, the new law specifically spelled out that this applied to sports stadiums.
And then Moynihan sat back and watched the whole thing go to hell.
The new loophole was found in item no. 2, the private funding test. This was meant to weed out public bonds that were just fig leaves for private operators: No city would actually use its own money to pay off more than 90 percent of a project's costs, the thinking went, if it was just going to help some local rich guy with a sports team. That would be crazy, right?
Crazy, it turned out, was the new normal, as cities responded to the new law by straight-up agreeing to cover whatever it took to keep stadium bonds tax-exempt. One gruesomely amusing example took place in Baltimore, where the owners of the Orioles—grandfathered in under the old rules because their stadium was planned before the 1986 law—learned that the Ravens were getting more of their stadium costs covered by the state of Maryland in exchange for covering operating expenses on the new building. The Orioles promptly sued the state for playing favorites. (They lost.)
Moynihan spent the rest of his career trying to close the loophole he'd created, to no avail.
Into this breach stepped Obama, who inserted a simple clause into his proposed 2015 budget: Eliminate the "public cost" provision. From now on, any sports project used more than 10 percent of the time by a private entity would have to pay taxes on its bonds, no two ways about it. The White House estimated that the new rule would save the federal government $54 million a year, though Bloomberg News has estimated it as worth nearly triple that.
But would it end sports stadium subsidies? Not so much. The tax-exempt bond dodge may be a sizable benefit to team owners, but it's hardly the most important one.
Let's take a look at a pair of projects that I've studied in way too much detail: the new stadiums that New York City built for the Yankees and Mets in 2009. (In this case, the teams managed to use tax-exempt bonds even though they were paying them off largely with private funds by exploiting a "put our rent money in a box and write 'property taxes' on it" scheme that is way too convoluted to go into here; if you want to read about it in all its nutso detail, start here.) According to calculations by the City's Independent Budget Office, the total bond tax break amounted to $326.5 million for the Yankees and $137.4 million for the Mets.
That's a sizable chunk of change, and both the Steinbrenners and the Wilpons would have been sad to lose it. (Well, the Wilpons would if they'd been paying close enough attention to notice.) But take a look at some of the other benefits the teams got in the deal: $232 million in city funds to move public parks for the Yankees stadium. Another $61 million in state funds to build parking garages in the Bronx that no one wants to use. And a whopping $768 million in forgone city property taxes, thanks to the city agreeing to own the new stadiums (while not collecting any money from game revenues or naming rights or anything like that). All told, the two teams collected more than $1.8 billion in cash, tax breaks, and other subsidies—making the bond loophole more than a drop in the bucket, but still much less than the whole enchilada.
If Obama's plan goes ahead, then, we can expect to see teams and cities face having to pay more to build stadiums, but that's been the case for decades now, and hasn't put an end to the subsidy game. Maybe team owners, without a way of smuggling out federal dollars under the table, will have to cough up a bit more of their own money for their new pleasure palaces. Maybe cities, as they did in 1986, will just sigh and cover the difference. Maybe sports leagues will need to trim some of the costly bells and whistles that they've been packing into new buildings now that money will be more of an object. We won't know until we see it in practice, but it will take a lot more than pricier bond financing costs to stop this entirely.
So, could Obama have done anything to put an actual dagger through the heart of the ongoing money suck that has siphoned off more than $50 billion from taxpayers to sports teams since the 1980s? The answer is: Actually, yes, though there are clear reasons why he didn't try it. Back in 1999, a U.S. Congressmember from Minnesota, David Minge, introduced a bill that would have taken on not only sports subsidies, but all local corporate subsidies in one fell swoop: The Distorting Subsidies Limitation Act would have established a new excise tax on all special benefits that private corporations got from state or local governments. In other words, you can have your $1.8 billion, Steinbrenners and Wilpons, but you're going to owe tax payments to the IRS on that full amount.
Minge's bill died immediately, as you might expect—there's no way that Congressional lobbyists would let some junior representative from Minnesota threaten their gravy train. But there's nothing stopping it from being reintroduced by, say, the Leader of the Free World. It may not be the battle that Obama wants to choose—at least the tax-exempt bond thing has a chance at winning over a few free-market Republicans—but if America ever hopes to put an end to plutocrats playing cities against each other for the biggest payoff, it's the best solution that Washington has to offer.