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New York PILOT Decision, Part II

2008 September 22
by Brad Humphreys

I was in Washington DC last Thursday testifying in a hearing that is part of the ongoing investigation by the House Committee on Government Reform, Subcommittee on Domestic Policy into the financing of the New Yankee Stadium in the Bronx. For those who have not been following this controversy, here’s a brief summary:

  • 1986: Congress passes a law (the Tax Reform Act) that says sports facility construction projects can only be financed with tax exempt bonds if the principal and interest are paid using tax revenues.
  • 2006: The IRS issues Private Letter Rulings that allow New York City and the Yankees (and later the Mets) to finance the construction of two new baseball stadiums using tax exempt bonds and pay off the principal and interest on these bonds using payment in lieu of taxes (PILOTs), and not tax revenues collected by New York City or the State of New York. This ruling effectively guts the 1986 Tax Reform Act. The rationale for this decision was that these stadiums would generate significant positive economic impact in the community, and thus serve the public interest.

The Subcommittee web page has a lot of information on this issue, including video of the hearing and the written statements of all the witnesses. A lot of interesting information came to light in this hearing, including the fact that the justification given by the City of New York for pursuing this course of action was that both teams threatened to leave the city if they didn’t get what they wanted, and that the City fudged the assessed value of the New Yankee Stadium significantly in order to make the project qualify for PILOTs.

The PILOT issue is interesting for several reasons: it’s a clear example of the tensions that arise between the people who make the laws (Congress) and the people who implement the policies that are dictated by those laws (the IRS in this case); it makes for great political theatre, as the parties involved are high profile organizations; and as Dennis Zimmerman pointed out in his testimony at the March 29th 2007 hearing, the PILOT decision has a desirable, although probably unintended consequence of forcing the one group of taxpayes who benefit most from the new stadium (sports fans) to pay for the majority of the financing.

Somewhat predictably, the Yankees and NYC have stuck to their orginal claim that the tangible economic benefits justify the ruling, rather than the more creative position that, despite the bad intentions surrounding the PILOT decision, it actually results in almost good economic policy. I say almost good because the lower interest rates on those tax exempt bonds represent an implicit subsidy from every taxpayer in the United States to baseball fans in New York City.

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