Like the Vikings of Old: Pillaging Minnesota's Budget

May 23, 2012
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This week in Minnesota politics has been instructive in what kinds of projects warrant state money and attention.  Governor Dayton signed a bill approving the construction of a new stadium for the Minnesota Vikings which he boasted would create thousands of jobs and would not use "a single dollar of General Fund tax revenues". The state agreed to pay $498 million of the $975 million price tag for the new stadium, with $150 million of their contribution coming from the revenues of Minneapolis's "hospitality tax" (a sales tax surcharge) and $348 million from electronic pull tabs.

Dayton championed the deal despite the growing body of research that, as academics have observed, "contains no evidence supporting the idea that sports facilities are important engines of economic growth." That is in part because, as analysts at UBS note, the economic analyses used to support sports stadiums tend to over-estimate the benefit of stadiums by ignoring the substitution effect; individuals who would travel to spend money on live music and restaurants in the downtown area instead spend them on the professional sports team.  This means that the net economic impact of the stadium cannot simply be counted as the economic activity that occurs around game day, but instead it is the difference between stadium economic activity and the amount that would have occurred anyway without the existence of the stadium. This measure is vitally important, but it is difficult to estimate and many studies simply ignore it.

Even overlooking the stadium's economic benefits, the claim about not touching the general fund hides the fact that this money must be diverted from somewhere. The hospitality tax on downtown Minneapolis businesses was originally created to pay for the Minneapolis Convention Center.  The Minnesota House Tax Committee chair recently proposed to reduce or eliminate the tax once the debt on the convention center was repaid.  As we have previously reported, the 3 percent tax on restaurants currently gives downtown Minneapolis the highest meals tax in the nation among large cities.  The hospitality tax also adds a number of other taxes including a 0.5 percent citywide sales tax and a 3 percent liquor tax.  If the stadium were not built with public money, this revenue would either be returned to the taxpayers or spent elsewhere by the government. Either way, diverting these funds to the stadium represents a real opportunity cost to Minneapolis.

Additionally, the revenue adequacy of the charitable pull tabs is tenuous.  As the Minnesota Post explains, the market demand for these new pull tabs is entirely uncertain, with the Minnesota Department of Revenue having to make some heroic assumptions to come up with a yearly estimate of $72 million. The head of one of the state's largest charitable gambling operations said he would be "shocked" if the new electronic pull tabs were successful in raising the revenue needed by the new stadium. Any revenue shortfalls from the electronic pull tabs would be made up by a number of backup taxes including another state lottery game (sports themed) and taxes on stadium luxury boxes.   

The Governor proclaimed that the new stadium would not be paid for by money the general fund, but it is likely that the new electronic pull tabs or backup sports-themed state lottery will cannibalize some of the state gaming revenues.  Sixty percent of the net proceeds of the Minnesota Lottery, for instance, go directly to the general fund.  Some of the dollars spent on electronic pull tabs to fund the stadium may be dollars that do not go to other state services.

What we are left with is a $498 million potential public subsidy flop paid for with the highest meals tax in the nation and a new state gaming tax that could compete with other state gaming revenues.  The Vikings of old never did half this well.

For our previous coverage of the Vikings saga, click here.

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