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1986 Tax Reform and Stadium Finance

2010 November 23
by Skip Sauer

At the Chicago Tribune, Ameet Sachdev discusses the Ricketts family’s petition to issue tax exempt bonds for renovations at Wrigley Field.  Most of the story is an account of standard tactics in shifting costs from team owners onto federal, state, and local taxpayers.  But his discussion of the impact of the 1986 tax reform bill adds an interesting chapter to the story.

It starts with the federal provision that allows state and local governments to issue tax-exempt bonds on behalf of a business.  The tax-exemption reduces the interest cost of the bonds, and the business behind the bonds pockets the savings, ceteris paribus. The 1986 tax reform attempted to limit this ploy, among others.  But in the case of stadium finance, it left a gaping loophole.  Sachdev discussed the issue with Dennis Zimmerman, a retired economist who studied stadium subsidies when he worked at the Congressional Budget Office:

Funny thing is when Congress in the 1980s tried to rein in tax-exempt financing for stadiums, it may have made things worse for taxpayers, Zimmerman said.

Before 1986, professional teams generally repaid publicly financed stadium debt through revenue generated by the facility, such as tickets, parking and concessions. Such user fees met little resistance from taxpayers because general taxes were not being levied to pay for the stadium, Zimmerman said.

The 1986 Tax Reform Act placed limits on bonds issued for private activities by determining that no more than 10 percent of the debt service can be repaid by revenues from the project itself. Congress also removed sports facilities from the list of projects that remain eligible for tax-exempt financing.

Yet stadiums still manage to qualify for the tax exemption. A loophole allows owners and host cities to push 90 percent of the construction costs onto taxpayers. In other words, public revenues such as sales taxes, lottery proceeds or amusement taxes must be used to repay the bulk of debt. And owners pocket the stadium revenues.

“You have to invert your logic in dealing with this,” Zimmerman said. “It defies common sense.”

Indeed it does defy common sense.  The 1986 tax reform is regarded as sound, sensible policy.  In general, it reduced  the burden put on the public by special interests.  But the reverse took place with stadium finance, as stadium costs were shifted from those who attend the game to the general public.  What a country!

2 Responses
  1. November 28, 2010

    Is this the case for the Yankees PILOT bonds as well? ie, are the Yankees dipping into the NYC/NYS (1) sales tax pool, (2) lottery proceeds, (3) amusement taxes to make interest and principal payments on the PILOT bonds?

    Where can I find more information on this?

    Thanks.

  2. Skip Sauer permalink*
    November 29, 2010

    Yes, the Yankees bonds qualify for the tax exemption. Your main question is how the bonds are funded, i.e. if sales & amusement tax receipts are diverted to the stadium; there may be a quid pro quo (i.e. offsetting revenue from the Yanks), so I’m not sure about that.

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