Federal Efforts to Discourage Public Financing of Sports Stadiums Have Backfired

Federal laws passed in the 1980s that were intended to at least discourage, if not end, public financing for the stadiums major league sports teams play in have been circumvented, resulting in even more regressive burdens on taxpayers, Mildred W. Robinson argued to students at the semester's first session in the Student Scholarly Lunch Series. The lunch conversations give interested students a chance to examine and comment on faculty scholarship still in its draft stages.

"I began this research predisposed to think [a new stadium] was indefensible as a public expense. I think now that it is perhaps defensible, primarily as a matter of state and local prerogative, and I have an intermediate suggestion that I think is workable."

The problem arises through the bond financing of construction, Robinson said. Bonds borrowed against the public credit can be either "general revenue bonds," which must be agreed to by taxpayers in a referendum, or "revenue bonds," typically issued by special public agencies. Revenue bonds are repaid from income generated by the project the loan built and thus are not first put to taxpayers for approval. Government-issued bonds are popular because interest income earned from them is not federally taxable.

In the 80s, to discourage the use of local or state revenue bonds to build new stadiums for sports teams, Congress imposed a 10 percent limit on the private use of a project, and restricted localities from using a facility's gate receipts toward repaying its construction costs. Stadiums were also not defined as a qualifying exempt activity.

"By not using money generated by the stadium to repay its construction costs, teams are able to get around the 10 percent rule," Robinson said. "Localities then raise 'sin' taxes, as well as those on hotel rooms and rental cars, and externalize the cost onto those who do not use the stadium." Sin taxes are notoriously regressive and are locally felt, she noted.

"It is, in my view, indefensible and a lot of it is fixable. Take away the 10 percent limit and let stadium income be applied to the bonds," she said.

One student observed that since the teams now capture all the ticket income, there is no incentive for them to cooperate with a change in the limit. "Franchise owners would be the big losers," Robinson conceded. They would either be forced into the private credit market for stadium funds, she said, or obliged to share revenues with local government partners more equitably.

"The cleanest way to fix this is to rearrange revenue streams. Not much good is accomplished by trying to outlaw such construction. We've learned that it will happen anyway and perhaps in an even more offensive way."

When another student observed that similar problems arise when local governments lavish tax breaks on industries shopping for new plant locations, Robinson agreed. "No, you can't distinguish between them. That's another specie of the same behavior. There's a lot of literature out there that says that none of these economic incentives work."