The Implicit Federal Funding of Local Sports Facilities
July 20, 2006
Shea Stadium and Yankee Stadium will soon be baseball history as the Mets and Yankees will move into new stadiums within the next few years. And as is typically the case, the taxpayer has been asked to chip in with some assistance for construction of the new facilities. But as is often the case with local government projects like sports facilities, even if you are located in Honolulu or Anchorage, you may technically be paying for the the replacement of the House that Ruth Built. From Bloomberg News:
The U.S. Internal Revenue Service ruled in favor of New York City’s plan to issue $1.5 billion of tax-exempt bonds for baseball’s Yankees and Mets to build new stadiums.
The long-anticipated ruling follows the approval of the financing package by the New York City Industrial Development Agency July 11 and clears the way for the city to sell the debt.
“I’m glad the IRS confirmed we could help make these projects happen by authorizing tax-exempt bonds, the result of which actually will mean increased tax revenue for New York City,” Joshua J. Sirefman, the development agency’s interim chairman said in a statement.
The U.S. tax code limits the amount of tax-exempt bonds states and local governments may issue for private purposes. In its ruling, the IRS permitted the teams to pay off the bonds by making payments in lieu of taxes, or PILOT’s, which are structured to resemble a city property tax. (Full Story)
The Joint Committee on Taxation estimates that the tax-exempt status of state and local “public use” municipal bonds will cost the federal government $26.6 billion in revenue for FY 2006. This exemption drives up the tax rates that everyone else must pay, and it thereby forces all taxpayers across the country to help fund local projects that benefit primarily only a certain area. This exclusion also lowers the price to local governments of bond-financed projects, like sports facilities, which encourages even more projects.
In addition, this exclusion distorts the rate of return between municipal and corporate projects because returns on corporate bonds are still taxable as ordinary income. This exclusion thereby pumps more money than otherwise would be into these special tax-exempt municipal projects that are hand-picked by local governments (often where politics rules the day) and which in some cases have limited aspects of being a truly public good. On a positive note, there have been efforts made over the past forty years to crack down on local governments’ funding of questionable “public” projects. But policies like this specific case show that this tax-exempt provision of the federal tax code is still in need of fixing, if not elimination.
For more on the specific issue of the role of tax-exempt bonds in funding sports facilities, check out this CRS report from 1996 that addresses the topic.