A favorite debate over Fourth of July barbecues is whether football has replaced baseball as our national pastime. (Sorry basketball and hockey.) Each year newspapers run hand-wringing articles lamenting or extolling the change.
However, America’s true pastime has become sports subsidies, despite economists’ nearly unanimous belief that they are a terrible deal for taxpayers.
Between 1990 and 2010, 84 new facilities were built for the 122 teams playing in the four largest professional sports leagues. The combined construction cost was $34 billion, with $20 billion coming from public funding. Furthermore, 36 of the 45 new facilities built since the year 2000 were financed using municipal bonds, which are exempt from federal taxes, meaning taxpayers across the nation will contribute at least $3 billion more to subsidizing professional sports.
This federal subsidy of sports facilities is the subject of legislation proposed last month by Sens. Cory Booker, D-N.J., and James Lankford, R-Okla. Their bill would remove the tax exemption for municipal bonds issued to pay for sports facilities. This idea is not new – President Barack Obama suggested the same thing in his 2016 budget proposal and Rep. Steve Russell, R-Okla., proposed a similar bill last year. Nor is the idea unpopular – a 2014 poll found that around 70 percent of Americans were against subsidizing professional sports teams.
Proponents argue that stadium construction and sports fans spending money at businesses around the stadium create local economic growth that wouldn’t otherwise occur. They also argue that a stadium can be an anchor for urban renewal projects, revitalizing downtowns.
They cite a steady stream of economic impact studies projecting astonishing benefits. One last month suggests that a new Oakland A’s stadium just four miles from their current home would create $3 billion in local economic activity over 10 years.
Rather than a cost-benefit analysis typically conducted for business deals or government projects, the consulting firms conducting these studies generally do not account for the full costs of the proposed subsidy. It’s a “benefits-only” analysis.
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Academic research, meanwhile, considers both benefits and costs, based on actual after-effects of stadium subsidies, rather than merely predictions. Not surprisingly, the optimistic forecasts of economic growth don’t pan out.
Roger Noll and Andrew Zimbalist found that a new sports facility “has an extremely small (perhaps even negative) effect on overall economic activity and employment. No recent facility appears to have earned anything approaching a reasonable return on investment. No recent facility has been self-financing in terms of its impact on net tax revenues.”
Dennis Coates and Brad R. Humphreys report that “we find near unanimity in the conclusion that stadiums, arenas and sports franchises have no consistent, positive impact on jobs, income, and tax revenues.”
In fact, there are few policy topics on which economists agree more – only one out of 35 of the top economists polled by the University of Chicago Booth School of Business believes that the benefits of sports subsidies outweigh their costs to taxpayers.
If academic scholars find that subsidies aren’t worth the cost, why do they persist? The answer is likely found in public choice economics. Known as “politics without romance,” public choice is the study of how policymakers and special interest groups respond to incentives when creating policy or lobbying for it, just like any normal buyer or seller.
Seen through this lens, a professional sports team enjoys an unusual amount of public favor, and the owners can leverage fans’ loyalty and their fear of losing the team to lobby for public funding to support their private business.
In the same way, politicians see the controversy as an opportunity to identify with something that voters already support and solve a perceived “crisis.” Overly optimistic economic growth predictions provide political cover for the subsidy.
Sports subsidies are a perfect example of “concentrated benefits and dispersed costs.” The subsidy benefits a relatively small group – mostly team owners and politicians – while costs are spread among both current and future taxpayers. Individual taxpayers have less incentive to fight hard against the policy, while the smaller group can organize more easily to campaign for the handout.
My own research suggests several hidden costs not considered in the typical consulting firm analysis. First, gaining billions in (presumably) new economic growth from the investment of hundreds of millions in public funds sounds like a great deal, until you realize that tax revenue only increases by millions, at best. This means that virtually no stadium subsidy actually pays for itself.
Second, the net effect of the new stadium is probably much lower than suggested because local residents’ entertainment budgets are unlikely to increase. Increased spending at the stadium only replaces spending at theaters, restaurants, or music venues, costing other businesses who are already helping foot the tax bill to subsidize their competition.
Worse, no mention is ever made of public funding tradeoffs. Every tax dollar spent on the stadium can’t be returned to taxpayers or spent on the core responsibilities of government. Nevada’s $750 million subsidy to the future Las Vegas Raiders could have provided a year’s worth of schooling to 100,000 children in Clark County, fully funded the annual salary and benefits of 6,500 entry-level Las Vegas police officers or paid for more than six years of Nevada’s state highway maintenance.
So how do we escape this dysfunctional cycle?
The only sure way forward is changing the rules governing how we make political decisions. One federal example is Booker and Lankford’s bill. Another comes from economist Arthur Rolnick, who suggests that the IRS treat municipal subsidies as income, potentially even taxing them at 100 percent rate, thereby completely removing the motivation to seek subsidies.
A state approach could be laws requiring that all municipal funding benefiting sports teams be subject to a public referendum, or even be prohibited. However, because of the “arms race” between cities competing for teams, these laws would be difficult to pass. Therefore, a compact between states may be the best solution, especially if it contained a trigger clause whereupon it only took effect once all states had passed similar legislation.
On July Fourth we celebrate our independence from a government disinterested in our beliefs about fair play. After all, the Boston Tea Party was actually a protest over a tax decrease for one special interest group: the East India Tea Company. Until institutional reform gains support – hopefully this won’t require dumping a cargo tanker of sports memorabilia in the Potomac – the best option for unwilling sports subsidizers is learning to hum “Take Me Out to the Ball Game” through gritted teeth.
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