Since the start of the new millennium, the federal government has provided $3.2 billion in taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. exemptions for publicly-funded sports stadiums, implicitly subsidizing what has become a boom in stadium construction throughout the country. A bipartisan bill sponsored this week by Sen. Cory Booker (D-NJ) and Sen. James Lankford (R-OK) may bring an end to this practice, by explicitly applying federal taxes to all municipal bonds issued to pay for sports stadiums. As a form of compensation, the bill would authorize localities to tax sales of stadium tickets and goods as an alternative way to raise revenue.
These sponsors highlight the bipartisan nature of the stadium issue, as Sen. Booker objects to the subsidies as a regressive giveaway to wealthy sports franchises, while Sen. Lankford sees it as a needless addition to the national debt and a government intrusion into private industry. This new bill is just one of several efforts to repeal the tax break over the past few years, which notably includes its omission in President Obama’s 2016 budget and a bill proposed by Rep. Steve Russell (R-OK) in March of 2016.
The tax break for stadiums is actually an unintended consequence of the Tax Reform Act of 1986. The federal government provides a tax exemptionA tax exemption excludes certain income, revenue, or even taxpayers from tax altogether. For example, nonprofits that fulfill certain requirements are granted tax-exempt status by the Internal Revenue Service (IRS), preventing them from having to pay income tax. for municipal bonds that localities use to pay for schools, roads, and other infrastructure, and local governments would often take advantage of this tax break to pay for sports stadiums. At the time, Congress intended to end federal support of stadiums by classifying bond initiatives as private if they were at least 10 percent privately owned or more than 10 percent of the initiative involved land used for private purposes. However, localities have bypassed that obstacle by paying for more than 90 percent of the costs of stadiums to maintain the federal tax exemption. Hoping to increase their profits, sports franchises increasingly began to demand more modern and larger stadiums from their cities, often threatening to relocate if they deemed their stadiums inadequate. Desperately trying to hold on to their teams, taxpayers have spent a staggering $12 billion on new stadiums just in the past 15 years.
Despite all the investment city governments have dedicated to sports, there is very little evidence that teams and stadiums are a worthwhile investment. Several studies have found that subsidized stadiums have a near-zero or even negative effect on local economic growth, and generally fail to attract tourists or new industry. Some studies have argued that people typically allocate a set budget for their total entertainment expenditures, making them fairly inelastic as a whole. This limits how much they contribute to economic growth, as the addition of stadiums results in reallocation among those expenditures rather than growth overall. In addition, studies show that sports teams employ very few people relative to their size, limiting how much they contribute to economic growth. Sports stadium subsidies are also regressive, as sports franchises are largely owned by wealthy investors. It is therefore unsurprising that the public is generally against stadium subsidies, with one poll showing that 69 percent of people oppose the practice.
Regardless of the merits of subsidized stadium construction, the federal tax break is particularly questionable policy. This is because the alleged benefits of stadium subsidies come from outbidding other localities for one of the country’s limited number of notable sports franchises. The value of winning a bidding competition should remain constant regardless of how much is actually bid, so providing all participants with a proportional benefit such as a tax break does not provide cities any meaningful benefits. In addition, the current law significantly distorts a city’s incentives by compelling the city to bid more than it values a franchise merely for the sake of qualifying for federal tax breaks.
Overall, this bill is a valuable opportunity for the government to reevaluate whether sports stadiums deserve the same treatment as schools and roads in our tax system.
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