Lawmakers failed to do away with federal subsidies for professional sports stadiums and arenas using tax-exempt bonds in the 1986 tax reform bill, but an Oklahoma Republican wants a second chance with a new tax reform package.
That’s according to a spokesman for Rep. Steve Russell, R-Okla., sponsor of the No Tax Subsidies for Stadiums Act (H.R. 811), one of two bills in the current Congress that takes aim at the use of exempt bond financing for professional sports facilities. Along with the Eliminating Federal Tax Subsidies for Stadiums Act (S. 1342), introduced by Sen. Cory A. Booker, D-N.J., it would amend section 141(b)(2) to require that tax-exempt state and local bonds used to finance professional sports stadiums meet the private security or payment test. That test would be satisfied if no more than 10 percent of the bond’s principal or interest comes from or is secured by private property or a private user.
Both bills have bipartisan support, with House Ways and Means Committee member Earl Blumenauer, D-Ore., and House Freedom Caucus Chair Mark Meadows, R-N.C., signing on to Russell’s bill and Sen. James Lankford, R-Okla., cosponsoring Booker’s version.
If either bill were to become law, “it would undoubtedly stop the use of tax-exempt bonds for stadiums,” said Linda B. Schakel of Ballard Spahr LLP, a former attorney-adviser in the Treasury Office of Tax Policy.
But Schakel has her doubts about prospects for the legislation to be included in a tax reform package. “This has been proposed for years as a separate bill, so I would expect that it would be a stand-alone bill unless tax reform itself went into the tax-exempt bond area,” she said. “There were certainly major changes in the bond area with the Tax Reform Act of 1986, but I do not think we are expecting dramatic changes to that body of law based on the proposals so far.”
Republican taxwriters and the Trump administration are scouring the tax code for ways to raise revenue after jettisoning the border-adjustable tax. But they might not find much revenue by eliminating tax-exempt bonds for private stadiums, said Dennis Zimmerman, director of projects at the American Tax Policy Institute, who spoke to Tax Analysts on his own behalf.
The potential amount of revenue isn’t comparable to what can be obtained by changing large provisions like the mortgage interest deduction, and the amount of bond dollars going to stadiums is a small portion of total bond dollars, said Zimmerman, a former researcher with the Congressional Budget Office and Congressional Research Service, where he wrote a 1996 report on exempt bonds and stadiums.
Still, the merits should not be determined solely on the amount of revenue to be gained, Zimmerman said. “It’s such a blatant example of taking public monies and using them for private purposes,” he said.
Robert J. Eidnier of Squire Patton Boggs defended the current law, saying it enables those best suited to evaluate projects to make decisions about them. “Application of the long-standing private activity bond tests provides for consistency as applied to all types of infrastructure spending and leaves the decision-making where it should be — at the local level rather than with the federal government — as well as providing for simplicity rather than a patchwork of special rules,” said Eidnier, who has worked as bond counsel on multiple stadium projects, including NFL stadiums in Cleveland and the Phoenix suburbs.
Jocelyn Moore, senior vice president for public policy and government affairs with the NFL, said she doesn’t see a significant amount of bipartisan support for the legislation and doesn’t think Congress would have much to gain from advancing it. “The revenue is insignificant, but the harm that would be caused to local communities is pretty great,” she said, arguing that stadiums often generate economic development in areas that previously didn’t see much.
Coins in the Sofa Cushions
When President Obama proposed in his fiscal 2017 budget to make bonds used to finance stadiums and arenas taxable, the Treasury Department estimated the proposal would generate $542 million in revenue over 10 years. That amount of money is worth pursuing, Russell said through his spokesman.
“There is no such thing as too little savings,” the spokesman said, adding that Russell’s staff “has been studying tax reform closely to ensure this bill aligns with House leadership’s theme of promoting economic growth and balancing the budget.”
The Obama administration’s estimate is a projection likely based on expected new stadiums over the next decade, said Austin J. Drukker, a senior research assistant in economic studies at the Brookings Institution. Drukker was one of three Brookings researchers who coauthored a 2016 paper estimating that $13 billion in tax-exempt municipal bonds had been issued for 36 of 45 stadiums and arenas that had been newly constructed or majorly renovated or were under construction in the four major men’s professional sports leagues since 2000. The “present value subsidy” to the bond issuers was $3.2 billion, and the federal government lost more than $3.6 billion in revenue, according to the paper.
The paper’s figure is an estimate “based on actual bonds issued,” Drukker said. “The cost to the federal taxpayer relies heavily on the interest rate environment. Assuming the interest rate environment in 10 years will be about the same as it is now, the [Obama Treasury’s] $542 million estimate breaks down to about $50-$75 million a year, which is roughly equivalent to my estimate for Little Caesars Arena and Mercedes-Benz Stadium.”
Mercedes-Benz Stadium will house the NFL’s Atlanta Falcons and MLS’s Atlanta United FC and hosted its first Falcons game August 26. It will receive a $15 million federal subsidy at a cost of $36 million in revenue, Drukker said. Little Caesars Arena is expected to open in September, according to the arena’s website, and will house the NBA’s Detroit Pistons and the NHL’s Detroit Red Wings. The federal subsidy is projected to be $25 million, with a revenue loss of $50 million, Drukker said.
Stadium and arena exempt bonds comprise “a very small portion” of the total exempt bond issuance, Drukker said. He noted that the IRS Statistics of Income division’s 2013 spring bulletin says that between 2009 and 2010, state and local governments issued about $420 billion in exempt bonds; the Brookings paper says the principal value of exempt bonds issued in 2009 for stadiums and arenas was $2.1 billion.
Bidding Wars Still Allowed
Whether the issue is resolved within tax reform, the legislative proposals deal with public funding for high-profile cultural institutions. Boosters of public funding tout projections of the substantial economic impacts of stadiums and arenas and the development they can attract, while economists often argue that public subsidies for the venues don’t deliver the promised economic effects.
According to the 2016 Brookings paper, academic studies regularly show “no discernible positive relationship between sports facility construction and local economic development, income growth or job creation.” The common rationale for government subsidies for pro sports venues, especially local subsidies, is that the “spillover gains” to the local economy are greater than the value of the subsidy, the paper said.
Moore provided analyses predicting those gains from new NFL stadiums in Minneapolis and Mercedes-Benz Stadium in Atlanta. The report on the latter stadium cites a Georgia State University economist as its source and estimates the stadium project will result in more than 1,400 full-time jobs and generate more than $71 million in personal income in the city.
Booker, in a release announcing his and Lankford’s bill, seemed to suggest he’s comfortable leaving it to teams and state and local governments to decide whether to participate in transactions for new venues. The bill, Booker said, wouldn’t stop cities and states from bidding and providing incentives to teams, and it would allow local governments to fund stadium subsidies with taxes on tickets and purchases in the stadium — which he said is not currently legal.
Likewise, Lankford said in a June ESPN interview that teams and state and local governments should be able to do business on arenas and stadiums if they choose. He highlighted the experience of the Oklahoma City Thunder, his home state’s NBA team, which relocated from Seattle in 2008. Chesapeake Energy Arena, where the team plays home games, opened in 2002 and was the “premier project” of a capital improvement campaign to fund new sports and other facilities in Oklahoma City with a 1-cent sales tax, according to the arena’s website. Oklahoma City voters in 2008 approved another temporary 1-cent sales tax to fund improvements to the arena. “We did that in Oklahoma through our own tax dollars and revenue,” Lankford said.
Ticket taxes and taxes on purchases don’t make fans pay more money — instead, they simply require larger subsidies, said Stephen F. Ross, a Penn State Law professor and director of Penn State’s Institute for Sports Law, Policy, and Research. For example, he said, if the Thunder determined the average ticket price that generates the most revenue is $75 a game, and the city or state government decides to impose a $5 ticket tax to fund an arena, one step the team could take is to increase ticket prices by $5 per game.
“Or, the Thunder are going to say, ‘Hey, if we’re going to move to Oklahoma City and we can’t make $75 a ticket, you’re going to have to give us some other indirect subsidy,’” Ross said. “Because we are going to extract from you as much as we can possibly extract from you in a bidding war with other cities.”
Ross is opposed to most subsidies for stadiums and arenas and said the Booker-Lankford and Russell bills won’t necessarily save American taxpayers from making enormous stadium and arena expenditures. The bills would just shift the burden to local taxpayers, who may not be any better off, he said.
“If you’re going to allow a discriminatory tax, quite frankly I would rather have some wealthy guy from suburban New Jersey pay a little more in income tax than some poor person who is not a Thunder fan living in Oklahoma City pay more in sales taxes and rent through their state tax system,” he said.
Retracing 1986 Steps?
The law regarding tax-exempt bonds, including the private security or payment test, stems from the Tax Reform Act of 1986. Lawmakers decided in 1986 that governmental exempt bonds could be used for projects, if no more than 10 percent of the bond proceeds went to a private business use and no more than 10 percent of the debt service on the bonds came from private business users or was secured by property of private business users, Schakel noted.
“Thus, governmental tax-exempt bonds could be issued to finance a project with more than 10 percent private business use only if not more than 10 percent of the debt service payments derived from private business use payments,” she said.
However, the 1986 legislation “created perverse incentives” for stadium projects, Zimmerman said. Before the law passed policymakers were encouraged to tax stadium users on items like tickets and concessions when subsidizing venues. Passage of the 1986 law forced policymakers to instead use taxes like general sales taxes to subsidize arenas and stadiums, he said.
The Joint Committee on Taxation, in an analysis (JCS-2-15) of Obama’s fiscal 2016 budget regarding professional sports venues financed with bonds, said that “issuers have intentionally structured the tax-exempt bond issuance and related transactions to fail the private payment test.”
“In most of these transactions, the professional sports team is not required to pay for more than a small portion of its use of the sports facility. As a result, the private payment test is not met and the bonds financing the facility are not treated as private activity bonds, despite the existence of substantial private business use,” the report says.
To Eidnier, the changes made in 1986 simply removed an advantage for stadium projects.
“There were a lot of changes made in the ’86 act that cut back on tax-exempt financing for a variety of situations and facilities,” Eidnier said. “It put stadiums on a level playing field with all other governmental facilities and subjected stadiums to the same rules that apply to all governmental facilities with respect to the opportunity for tax-exempt financing.”
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