CITIES IN DENIAL: THE FALSE PROMISE OF SUBSIDIZED TOURIST AND ENTERTAINMENT
COMPLEXES - Full text
Ronald D. Utt, Ph.D. - October
2, 1998
The popular perception about America's older cities is that their five-decade
decline has reached bottom and they are now on the economic rebound, yet the facts
indicate otherwise. Most older cities are still experiencing a loss of jobs and residents
as businesses and families seek safer communities and functioning schools elsewhere.
Eleven of the 12 top cities that lost population since 1970 saw those losses continue
through the 1990s. Contributing to the exodus are urban crime rates that are higher than
national averages and substantially higher than those of the surrounding suburbs, as well
as public schools whose student performance scores consistently measure well below
average.
Although the success of the suburbs in attracting jobs, residents, commerce, and
culture suggests that providing safe streets and good schools is the best way to reverse
the exodus of jobs and residents from America's central cities, only a handful of cities
have made any meaningful attempt to deal with these long-standing deficiencies. Instead,
most of these struggling cities continue to bet their futures (and limited revenues) on
costly infrastructure projects that focus on tourism and entertainment. In city after
troubled city, convention centers, stadiums, arenas, opera houses, aquariums, museums,
casinos, racetracks, and other places of entertainment are presented as powerful engines
of economic development that will pay for themselves in new jobs, paychecks, and taxes.
The mounting evidence suggests, however, that while such projects offer significant
benefits to a very narrow slice of the regional (including suburban) business community,
they offer very little to the urban community in general.
The roots of today's urban "edifice complex" go back to the 1950s and
the now-discredited federal urban renewal programs that were created to restore cities to
some measure of economic health by replacing residential neighborhoods with projects of a
commercial or public nature. Few, if any, of these programs were successful, but that has
not stopped civic leaders from attempting to impose more modern versions of these costly
schemes on their cities. Whereas the urban renewal efforts of the 1950s and 1960s relied
on the construction of office complexes, limited access highways, urban shopping
galleries, and public housing, and the 1970s and 1980s version relied on rail-based
transit systems, the efforts of the 1990s rely increasingly on tourism and entertainment
facilities.
These projects seldom pay for themselves, either in rental fees or
in additional taxes generated by the facilities; other broad-based taxes or state
lotteries must be dedicated to covering their operating losses and annual debt service
payments. State and city taxes on restaurant meals, hotel room rentals, and car rentals
are common sources of tax revenues to fund these projects.
A significant source of financial support for these efforts is the
U.S. Treasury (and, indirectly, the U.S. taxpayer), which provides a variety of subsidies
to many of these local projects. The chief form of federal support is the privilege to
issue bonds whose interest earnings are exempt from all federal taxes, as well as state
taxes for investors who live in the state or community issuing the bonds. The cost in
foregone tax revenues to the U.S. Treasury is estimated at $21 million for every $100
million in bonds issued. The privilege to issue such bonds has been controversial in
Congress, and Senator Daniel Patrick Moynihan (D-NY) has introduced legislation (S. 1880)
to prohibit communities from issuing tax-exempt bonds to finance the construction of
professional sports facilities.
Other subsidies can include direct appropriations from Congress, as
is the case with Washington's new convention center, which will receive federal money to
upgrade a nearby Metro station and to relocate utilities at the construction site. Federal
funding, such as money from the U.S. Department of Housing and Urban Development's
Community Development Block Grants program and from the U.S. Department of Transportation,
also can be used to help subsidize such facilities or related projects.
But because the vast majority of these projects are financed with
tax-exempt borrowing, federal tax policy plays an important role in encouraging this type
of urban revitalization scheme--and the federal taxpayer plays a part in subsidizing it.
Indeed, the estimated $7 billion needed to construct the 40 professional sports facilities
on the drawing boards or already underway in communities throughout the country could
entail a federal tax subsidy of as much as $2.4 billion over the life of the tax-exempt
bonds used to finance those projects.
Targeted by promoters, many cash-strapped cities are induced to finance, in
whole or in part, monumental entertainment-oriented infrastructure projects. A substantial
body of evidence exists to show just how successful these urban revitalization schemes
that depend on costly entertainment-oriented infrastructure projects have been. Much of
that evidence suggests that publicly funded mega-entertainment centers make a rather
unimpressive contribution to a community's economic vitality and employment opportunities.
A TALE OF TWO STATES AND ONE CITY
An instructive case study on the costs and benefits of different
regional revitalization schemes can be found in the Washington, D.C., area, which offers
as a type of social science experiment the experiences of citizens in a single
metropolitan market governed by the administration and laws of three separate
bodies--Maryland, Virginia, and the District of Columbia. These jurisdictions have reacted
to the glamorous promises of entertainment promoters in markedly different ways in their
quest for economic development, and each has achieved dramatically different results.
Their contrasting experiences raise questions about (1) the value of an
infrastructure-dependent revitalization strategy, compared with one that relies on nothing
more exotic than the provision of high quality services, and (2) the wisdom of a federal
policy that encourages these projects.
Recently, the District of Columbia's government and business
leaders formally committed to building a downtown baseball stadium, which may cost as much
as $330 million; the city's Sports Commission announced it has hired an architectural firm
to draw up the plans. The city also contributed $79 million to the newly completed MCI
Center--home to Washington's professional basketball and hockey teams--and to building a
new convention center, which could cost up to $800 million. The District's financial
commitment to these three projects alone should exceed $1.2 billion, but could rise to as
much as $2 billion if the city's offer to co-sponsor the 2012 Summer Olympics is accepted
and if work on a proposed opera house ($200 million), a 7th and 9th Street trolley line,
and proposed music and photography museums is initiated at city expense.
Such a financial commitment to an array of taxpayer-funded
mega-entertainment projects demonstrates that Washington, D.C., has embraced a
revitalization strategy whose implementation in other cash-strapped cities has left a
checkered performance history. It is not too late to rethink Washington's costly approach
by taking a closer look at just how meager the benefits have been in communities that have
made massive investments in monuments to public entertainment. A good place to start is
Baltimore, Maryland.
Baltimore: Still Suffering
Maryland's approach to urban revitalization was pushed to its
extreme when the state and local governments decided to invest hundreds of millions of
public dollars in a Potemkin Village of entertainment facilities located along the
southern edge of the city called the Inner Harbor. The new Orioles Park at Camden Yards
($200 million) and Ravens stadium (over $300 million), as well as the
government-subsidized Inner Harbor pavilions and the National Aquarium, offer charming
distractions to tourists and visiting families from the suburbs, but they have contributed
very little to the economic well-being of Baltimore or the shrinking number of residents.
As Washington Post writer Rudolph Pyatt noted, "economic spinoffs from Orioles Park
have yet to reach blighted communities just a few blocks away."
Despite the promise of urban revitalization from these projects,
the city of Baltimore is as troubled as ever. Its population has fallen by a quarter of a
million people since 1960 and is now at its the lowest level since 1915. The city
continues to lose an estimated 1,000 citizens per month as
businesses, workers, and residents leave for the suburbs or other communities that have
invested public funds in quality schools and law enforcement rather than in costly
infrastructure devoted to seasonally limited entertainment. Among America's major cities,
only St. Louis and Washington, D.C., have lost greater shares of their populations over
this decade.
As an analysis of the new Baltimore Ravens football stadium
conducted by the State of Maryland shows, the stadium demonstrates particularly well the
lackluster economic impact of major entertainment facilities on urban revitalization. An
early consultants' report prepared for stadium boosters presented an optimistic scenario,
partly assuming that a significant fraction of game attendees would rent a Baltimore hotel
room on game night. Yet a subsequent analysis by Maryland's Economic Development
Department concluded that the state's then-projected $177 million stadium investment would
produce only 1,394 full-time jobs. This implies a staggering cost to taxpayers of $127,000
per job. A more recent study by the Maryland General Assembly's Office of Policy Analysis
concludes that the new football stadium would create only 889 jobs, amounting to a cost of
$200,000 per job.
Dennis Zimmerman, the Congressional Research Service's expert on
stadium financing, puts this costly job-generating performance in perspective by noting in
a recent report that another Maryland jobs program, the "Sunny Day Fund," cost
the government $6,250 for each new job it created.
Baltimore's poor return on the public's investment in sports
stadiums is typical of the lackluster job-generating experience of such entertainment
facilities. Robert Baade, professor of economics at Lake Forest College, studied 48 cities
over a 30-year period. In the 32 cities that experienced a change in the number of sports
teams, 30 saw no change in per capita income, one improved, and one worsened. Of 30 cities
experiencing a change in the number of stadiums or arenas, 27 showed no influence on
income, but three experienced significant negative effects. A more recent study published
by the Brookings Institution in Washington, D.C., echoed these findings. It concluded that
"A new sports facility has an extremely small (perhaps even negative) effect on
overall economic activity and employment."
In explaining his findings, Professor Baade concluded:
Upon some reflection, sport's slow growth pattern should not be
surprising. The slower growth reflects the kind of economic activity that investments in
professional sports spawn. Sports diverts economic development toward labor-intensive,
relatively unskilled (low-wage), part-time jobs. Other cities in the region that invest in
economic activity that promotes full-time, non-seasonal, and high wage jobs can be
expected to capture a greater share of the regional economic pie.
Different Strategies. A comparison of the approaches of cities and
counties in Virginia and Maryland may serve to illustrate the difference in results
between alternative approaches to economic development uncovered by Professor Baade.
Virginia has no major league subsidized sports facilities, other
than those at its state-supported colleges and universities. Further, the state's focus on
technology and ordinary but financially self-sufficient commerce, rather than on
subsidized adult entertainment, is fostering a statewide boom in high-paying
technology-related jobs, as well as substantial private investment in resort and
entertainment complexes.
In contrast, Prince George's County, Maryland, a close-in suburb of
Washington, D.C., served as home to two professional sports teams and their arena for 25
years until the teams' relocation to the District of Columbia in 1998. But their presence
appears to have contributed little to the economic well-being of that county. In 1970,
Prince George's County's per capita personal income was equal to 82 percent of that of
Fairfax County, Virginia, another Washington suburb; by 1990, its per capita income was
only 70 percent of Fairfax County's.
Good schools and low crime, not proximity to professional sports
venues, determine where businesses locate and expand and where prosperous families choose
to live. Yet Prince George's County, whose schools are ranked the second worst in Maryland
(Baltimore City's were the worst), provided $70 million in infrastructure support to the
privately funded Jack Kent Cooke Stadium, new home of the Washington Redskins professional
football team.
Perhaps Art Modell, owner of the Baltimore Ravens football team,
was voicing the philosophy and priorities of many of Maryland's civic leaders and elected
officials when he observed that "The pride and presence of a professional football
team is far more important than thirty libraries, and I say that with all due respect to
the learning process."
Washington's "Field of Dreams" Strategy
The District of Columbia is administered by an elected city
government with both state and local responsibilities and resources and by the federal
government, whose constitutional mandate to oversee the affairs of the nation's capital
city often has led Congress and the President to view it as ground zero for the latest
initiative in urban revitalization. The substantial body of evidence demonstrating that
professional sports facilities and other structures dedicated to entertainment lead to
little or no meaningful economic improvement has not influenced the District of Columbia.
With the support and urging of its congressionally created Financial Control Board, the
U.S. Office of Management and Budget, and many in Congress, the District may soon spend
hundreds of millions of dollars on entertainment facilities that it can ill afford. The
city's commitment to this approach is evident, for example, in the recent formation of the
not-for-profit Washington Center Alliance, which hopes to jump start the city's economy by
encouraging the construction of music and photography museums and a baseball park.
In addition, last year, the federal government funded improvements
in the mass transit Metro system to facilitate access to the MCI Center and proposed
creating and funding a development bank to help finance the convention center and other
infrastructure projects. This year, it agreed to fund improvements in the Metro station
that will serve the prospective convention center. Heralded as an investment that would
help the District's downtown economy, the MCI arena seems to be having only a modest
impact on the surrounding neighborhood through a somewhat higher restaurant business.
Whatever its impact, it has not been sufficient to offset a city-wide loss of 7,700 jobs
in the 12 months ending in March 1998, when the city's unemployment rate reached 9.1
percent--the highest for the month of March in 15 years.
Low benefits for high costs are not limited to stadiums and arenas;
they also characterize the economic impact of most convention centers. As a key
component of its revitalization strategy, the District government intends to construct a
new convention center in the close-in Mt. Vernon Square residential neighborhood at a cost
(excluding the land) that the U.S. General Accounting Office estimates will be at least
$800 million. Debt service, operating losses, and foregone property taxes will require as
much as $60 million per year in subsidies.
Proponents of the center claim that its impact on tourism will
contribute to inner-city revitalization--an outcome not necessarily supported by data in a
recent consultants' report. Indeed, the 1997 Coopers & Lybrand study for the
Washington Convention Center Authority reveals some rather troubling estimates of just how
meager a return the city will get on its investment. Although much has been made of the
report's estimates of the regional sales the center may generate, these projections are
derived from generic spending multipliers that make rough guesses about the economic
impact of a new center. Such analysis assumes, for example, that $1.00 spent by a
conventioneer on a D.C. hotel room will yield a total of $1.40 in city spending by the
time the dollar is re-spent again and again by hotel employees, suppliers, investors, and
so on.
When such multipliers are applied to all the kinds of spending that
conventioneers are likely to make, the results are, by themselves, sufficiently
impressive. But the important question that is seldom asked in these studies--and
certainly not in the Coopers & Lybrand study--is how the returns from this investment
would compare with alternative uses of the $800 million up-front investment, the $60
million annual tax subsidy, and the well-located city land on which the center is to be
built. What economic benefits would flow to the city, for instance, if this sum were used
for a tax cut, or for public school improvements, or a new university, or the world's
largest indoor water slide park with live palm trees and monkeys? Nobody knows, because
such considerations were not part of the consultants' evaluation.
The consultants did, however, provide enough other specific
information to suggest that, on the whole, this convention center project would provide a
mediocre return to the city. In the report's appendix, the consultants estimate that the
new convention center will have its primary economic impact by initially producing 176,000
net new, or incremental, hotel room night rentals per year in the Washington, D.C., area,
which could rise to 200,000 in the future. In a city that is on track to hosting as much
as 25 million tourists in 1998, this represents an increase in visitors of less than 1.0
percent--a rather marginal return for an $800 million investment.
The report also estimates
that the new convention center will create between 4,380 and 9,100 net new full-time and
part-time jobs in the metropolitan area, but only 1,670 to 3,860 jobs within the District
of Columbia proper. Although no estimate is provided on how this total will be divided
between full- and part-time jobs, most of these jobs will be in the hotel and restaurant
sectors of the regional economy--areas of employment that typically pay below-average
wages, according to data compiled by the U.S. Bureau of Labor Statistics.
To understand the impact, consider the hourly wages in a number of
trades that would be found commonly in most communities. As Table 1 illustrates, the types
of jobs typically created by a convention center or other entertainment-oriented project
tend to be below the average of all trades--as much as 50 percent below for food service,
and substantially below other types of jobs suitable for an urban environment. Even with
the report's high-end estimate of 3,860 new jobs in the District, under the best of
circumstances the District will be investing $207,253 of scarce community financial
resources for each new low-wage job created by the new convention center.
According to Heywood Sanders of Trinity University, a leading
expert on convention centers, assuming (1) that the convention center probably will
require an annual tax subsidy of about $60 million per year to cover the expected
operating losses and service debt, and (2) that every one of the net new room rentals will
occur within the District, then District taxpayers will pay $340 in subsidies to induce
conventioneers to spend about $140 per night on a D.C. hotel room. However, the
consultants' report projects that about half of the economic impact of the center will
occur in the District's surrounding jurisdictions, which will not be taxed to support the
convention center. The subsidy per hotel room rented, then, could double to $680 if half
of the attendees take a suburban hotel room in Maryland or Virginia.
The city could get the same economic kick at half the cost simply
by offering free hotel rooms to a random collection of 176,000 prospective tourists who
agree to spend at least one night in the city and buy their own meals, taxi rides, and
mementos. Added benefits of this less costly alternative would be the preservation of the
residential integrity of the Shaw neighborhood and the opportunity to re-deploy the
now-vacant Mt. Vernon Square site for more productive use--such as unsubsidized
residential housing for workers who shop in the city's stores and pay sales, income, and
property taxes throughout the year.
Indeed, if the District improved basic public services to a level
of quality sufficient to re-attract just the 86,000 citizens who moved to the suburbs
since 1990, approximately $3.1 billion in new spending would be added to the city's
economy. This is far more than the $400 million the convention center is expected to add
each year to the entire metropolitan area, including the suburbs in Maryland and Virginia.
Now the city's "edifice boosters" are chasing after other
entertainment monuments: a new baseball stadium and the right to host, and pay for, the
2012 Summer Olympics. Although little analytic information is available on the economic
benefits of hosting the Olympics, it is worth noting that shortly after the 1996 Olympics
in Atlanta, an Atlanta Business Chronicle editorial on "Why the Olympics Hurt
Business" began by asking:
So were we duped by Olympic Organizers? Or is it still too early to
tell?... [T]he first days of the Olympics have left the Atlanta business community
wondering where to place the blame for what has been an economic disaster for some.
It seems that the traffic congestion problems chased away Atlanta's
normal day-to-day customers and replaced them with cash-strapped tourists on fast-food
budgets.
Although there is no assurance that a major league baseball team
could be acquired for the proposed D.C. baseball park, such technicalities often do not
stop fervent civic boosters from taxing and building. For example, in Oklahoma City the
recently built but never occupied NHL/NBA-scale arena stands as testament to how hot that
fervor can glow. And in several northeastern states, five cities spent $110 million of
public money to construct baseball parks to field teams in a newly formed minor league
that, as of a month before the scheduled opening of the season, existed only on paper.
Even though it has been 27 years since a major league baseball team
has changed cities, D.C.'s baseball boosters argue that the city could be the back-up site
for a group of Northern Virginia investors who are thought to be near the front of the
line of those hoping to acquire an expansion or relocated team. To date, these investors
have not had much luck getting Virginians to agree to pay for the ballpark or allow it in
their neighborhoods. Virginians simply do not believe that a $300 million,
taxpayer-subsidized stadium will spur economic development.
Virginia's Back-to-Basics Strategy
In contrast to citizens in Maryland and the District, Virginians'
skeptical attitude toward the economic benefits of costly infrastructure projects whose
use is limited to seasonal adult entertainment is unusual. Despite the occasional
seduction of state officials, they successfully resisted efforts by the Walt Disney
Corporation, the Washington Redskins football team, and a group of investors who want a
baseball team to entice them to agree to build costly accommodations for their
entertainment businesses.
To date, the state remains free of subsidized major league sports
facilities. The rejected suitors accused Virginians of a selfish "NIMBY" (Not In
My Back Yard) attitude toward development, yet Virginia is awash in the new construction
of factories, office buildings, shopping centers, campus buildings, golf courses,
privately financed conference centers, and other major projects that promise high-paying,
year-round, full-time jobs. The offer to create part-time, low wage, vendor-type jobs
typical of subsidized entertainment complexes simply is not attractive to citizens of
Virginia.
At the once-empty railroad yard in suburban Alexandria, Virginia,
where the late Jack Kent Cooke and former Governor L. Douglas Wilder tried to put a new
state-subsidized football stadium for the Washington Redskins, there now stands a major,
privately financed shopping center. It provides convenient retail services to an entire
community, hundreds of full- and part-time jobs, and a healthy flow of sales, income, and
property tax revenues to fund the community's basic public services. (Mr. Cooke finally
built Redskin Park in Prince George's County, Maryland, with taxpayer-subsidized roads and
infrastructure.)
The
state's focus on providing quality higher education and maintaining an attractive
environment both for residents and for a diverse mix of commercial enterprises is paying
off. In July 1998, Virginia's unemployment rate stood at 3.0 percent, and the state's
economy had created 196,600 jobs over the previous 12 months. By contrast, Maryland's July
1998 unemployment rate was 4.7 percent, and the state had created only 13,400 jobs over
the same 12-month period. Meanwhile, in the District of Columbia, the unemployment rate
was 8.3 percent, and job growth had turned positive (thanks largely to a nationwide boom
in tourism) after shrinking during the first three months of the year. In the 12 months
ending in July 1998, the District of Columbia created 4,900 jobs.
By encouraging the creation of new sources of tax revenue rather
than users of subsidies, Virginia has ample financial resources and the borrowing capacity
to fund the construction of new engineering, law, and science schools at its state
universities, and to pay higher-than-average salaries to its professors. These combine to
attract top scholars and students to its state-supported schools. When adjusted for
regional differences in the cost of living, the annual salaries of full professors at the
University of Virginia ($87,164), Virginia Tech ($74,733), and Virginia Commonwealth
($69,625) exceed by a significant margin the $62,450 earned by full professors at
Maryland's flagship public university, the University of Maryland at College Park.
As a result, these and other investments in quality education mean
that 20,800 Virginia undergraduates attend public universities rated by Barron's Profiles
of American Colleges as "most" or "highly" competitive, compared with
just 1,500 such students in Maryland. In addition, in August 1998, five of Virginia's
public universities were included in Kiplinger's 1998 list of the nation's top 25 public
universities and colleges. Maryland placed just one. Virginia's focus on higher
education also allows it to surpass Maryland in the proportion of undergraduate students
that can be accommodated in its state schools: Although Virginia's population exceeds
Maryland's by 32 percent, Virginia enrolls 74 percent more undergraduates in its four-year
state universities and colleges.
In the District of Columbia, which intends to divert tens of
millions in annual tax revenues to subsidize a convention center, the University of the
District of Columbia received the lowest qualitative rating ("non-competitive,"
according to Barron's Profiles) and has an undergraduate student body that has declined
from 11,000 students in 1991 to 4,800 today because of budget cuts and mismanagement.
HOW CONGRESS FEEDS THE BUILDING FRENZY
Virtually all publicly funded convention centers, stadiums, arenas,
and other infrastructure projects are financed with debt instruments that are exempt from
federal income taxes, and often from state income taxes if the investor resides in the
state that issued the bonds. Allowing investors in these bonds to earn interest income
that is exempt from federal income taxes enables the municipalities to borrow at lower
interest rates.
By permitting communities to use tax-exempt financing for
"public purpose" investments in this manner, the federal government, in effect,
provides a subsidy to the municipal bond issuer that is equal to the federal income taxes
that otherwise would have been paid if the investor, say, owned taxable bonds. As
subsidies go, the federal tax exemption on municipal debt is one of the most inefficient
because the loss in federal income tax revenues is generally higher than the interest rate
savings to the municipality provided by the tax-exempt status.
For a 30-year tax-exempt bond carrying an interest rate that is two
percentage points below a comparable taxable bond rate, the present value of the federal
tax subsidy over the life of the bond is equal to approximately 21 percent of the
principal borrowed--or $21 million for every $100 million of tax-exempt bonds issued. For
a typical $250 million ballpark being constructed in many cities, this federal subsidy is
worth about $52.5 million, and for the Washington Convention Center, the present value of
the federal tax subsidy could equal $110 million over the life of the bonds.
Recognizing that the high costs and subsidies of stadiums did not
compare favorably to the benefits they provide, compared with such other public
investments as schools, roads, and hospitals, Congress in 1986 enacted legislation that
eliminated the ability of communities and sports team owners to use tax-exempt financing
to build stadiums. Specifically, the Tax Reform Act of 1986 prohibits the use of
"private activity" tax-exempt bonds to finance sports facilities, because the
expanding use of such bonds for that purpose was crowding out bonds for other public
purposes, providing greater tax loopholes for the rich, and reducing federal tax revenues.
Unfortunately, this attempted legislative remedy backfired badly.
Tax lawyers discovered that stadiums could still use tax-exempt financing under another
provision of the U.S. tax code as long as no more than 10 percent of the funds used for
debt service was derived from the rental of the stadium--thereby requiring that 90 percent
of the funds be derived from city and state taxes, or other non-rental fees.
Ironically, the use of this alternative provision of the tax code
bestowed even greater benefits on sports team owners than the provision Congress had
rescinded. Under the former "private activity" provision, rent and other
revenues derived from a stadium could be used to pay the interest and principal on the
bonds used to finance a stadium. Communities had an incentive to offer stadiums to team
owners at rent levels that would at least cover the debt service costs on the tax-exempt
bonds. But under the alternative provision of the tax code that authorizes state and local
governments to issue tax-exempt bonds for public purposes, these bonds are exempt from
taxes only if no more than 10 percent of the debt service is derived from stadium revenue
sources. As a consequence, communities using such bonds to finance a stadium or ballpark
must find alternative sources of tax revenues to service the debt, since much of the rent
that would be collected could not be used to pay interest and principal on the bonds.
Although the purpose of this requirement was to ensure that only
bona fide public facilities would be eligible for the federal subsidy, in practice it has
induced communities to sign sweetheart deals with sports team owners, because any direct
rents derived from the stadium could not exceed 10 percent of debt service. In effect,
under current federal law, had the state of Maryland cut a tougher deal with Ravens owner
Art Modell for higher rent and revenue shares, it might not have been able to use
tax-exempt financing to build the stadium. As a consequence of this perverse
interpretation of the law, communities building sports stadiums must use tax revenues from
broad-based taxes--such as a hotel or restaurant tax or an add-on to the sales tax--to pay
off the loan for the stadium. Because such taxes are paid by everybody, and in most
communities are part of general revenues to be used for such services as schools and law
enforcement, the misuse of the federal tax code ensures that stadiums will continue, as
Modell observed, to take precedence over libraries in many communities.
Senator Daniel Moynihan's legislation (S. 1880) would end this
perverse misuse of the law by classifying bonds issued to finance professional sports
facilities as "private activity" bonds, thereby making them ineligible for
tax-exempt privileges. Sports team owners would have to finance the construction of their
own facilities, as is still done in some communities, and this in turn would allow local
officials to focus on effective urban revitalization strategies and free millions of
dollars in prospective public funds that could be redirected to legitimate public purposes
or tax relief.
CONCLUSION
The question of whether to subsidize a professional sports facility
is a contentious one wherever raised, and in many cases the community, through referendum
or the decision of elected officials, chooses to go forward with full or partial public
support for the facility. Unlike other forms of entertainment, professional sports
franchises create powerful emotional bonds within the community that elevate the aura of a
team to "public good" and enable easier access to public funds.
If a community's democratically determined priorities endorse such
spending, then few can argue with it. But advocates of subsidized sports, convention
centers, and other forms of public entertainment should be honest about what is at stake
and should not entice the public to believe they are supporting broad-based economic
development that will contribute heavily to a city's economy. At the same time, elected
officials in declining cities, however desperate they may be for new investment in their
communities, must realize that the revitalization boost from such projects is negligible
and that community resources and civic energy would be better directed to more productive
activities.
As the record from around the country indicates, the economic boost
from public investment in entertainment complexes is exceptionally modest at best, and
counterproductive at worst. It diverts scarce resources and public attention from the less
glamorous activities that make more meaningful contributions to the public's well-being.
--Ronald D. Utt is Grover M. Hermann Fellow in Federal
Budgetary Affairs at The Heritage Foundation.
Endnotes
1. For a comprehensive review, see Ronald D. Utt, "What to Do About the
Cities," Heritage Foundation Backgrounder No. 1216, September 1, 1998.
2. Joseph L. Bast, "Sports Stadium Madness: Why It Started, How to Stop
It," Policy Study No. 85, The Heartland Institute, February 23, 1998, p. 1, and
Dennis Zimmerman, "Tax Exempt Bonds and the Economics of Professional Sports
Stadiums," Summary, CRS Report for Congress No. 96-460E, Congressional Research
Service, May 29, 1996.
3. Rudolph A. Pyatt, Jr., "Sports Moguls Strike Out With Virginia's Gov.
Allen," The Washington Post, April 29, 1996. See also Jason Zengerle, "Up in
Schmoke," The New Republic, August 10, 1998, pp. 19-23.
4. "Baltimore Voter Loss Cuts Clout in Capital," The Washington Times,
August 25, 1998, p. C5.
5. Charles Babington, "Stadium's Benefits Overrated, Study Says," The
Washington Post, June 19, 1998, p. D1. With the expected cost of the stadium still rising,
these cost-per-job estimates will rise as well.
6. Zimmerman, "Tax Exempt Bonds and the Economics of Professional Sports
Stadiums."
7. Robert A. Baade, "Stadiums, Professional Sports and Economic
Development: Assessing the Reality," Policy Study No. 62, The Heartland Institute,
April 4, 1994.
8. Roger G. Noll and Andrew Zimbalist, "Sports, Jobs and Taxes," The
Brookings Review, Summer 1997, p. 35.
9. Robert A. Baade, Statement to the Subcommittee on Antitrust, Business Rights,
and Competition, Senate Committee on the Judiciary, November 29, 1995, reprinted in
"Should Congress Stop the Bidding War for Sports Franchises," Heartland Policy
Study, www.heartland.org/stadps4.htm.
10. U.S. Bureau of the Census, City and County Data Book for the years 1972,
1977, 1983, 1988, and 1994.
11. Quoted in remarks by Senator Daniel Patrick Moynihan (D-NY) in Congressional
Record, Vol. 43, No. 4 (January 21, 1997), p. S499.
12. Rudolph A. Pyatt, Jr., "Help Wanted in Washington--for a Failing Job
Market," The Washington Post, May 18, 1998, p. 4.
13. See Heywood T. Sanders, "Convention Center Follies," The Public
Interest, No. 132 (Summer 1998), p. 58.
14. Coopers & Lybrand L.L.P., Analysis for the Proposed Washington
Convention Center, December 30, 1997, p. 75.
15. The city-owned site slated for the convention center had been set aside for
a new downtown campus for the city's University of District of Columbia. Prior to that, it
was a residential neighborhood of houses and some stores, but the residents had been
evicted and the houses torn down as part of an uncompleted urban renewal project.
16. "Washington Hotel Market Analysis," p. 25, in Coopers &
Lybrand, Analysis for the Proposed Washington Convention Center.
17. U.S. Department of Labor, Bureau of Labor Statistics, Employment and
Earnings, Table B-15, "Average Hours and Earnings," Establishment Data, May
1998.
18. David Rubinger, "Why the Olympics Hurt Business," Atlanta Business
Chronicle, July 29, 1996.
19. "From Tragedy, a New Growth?" The Economist, May 2, 1998, p. 24.
20. Kirk Johnson, "Play Ball! Now Where Are All the Teams?" The New
York Times, April 10, 1998, p. A1. The league was organized as planned, and the minor
league teams now play in the ballparks.
21. On the U.S. Bureau of Labor Statistics website, www.bls.gov, as of August 24, 1998.
22. Jon Sanders, "Compensation of Campus Faculty: How Virginia Compares
Within the Region," A Study Commissioned by The Thomas Jefferson Institute for Public
Policy, Fairfax Station, Virginia, January 1998, p. 30.
23. Barron's Profiles of American Colleges, 1998 Edition (Hauppauge, N.Y.:
Barron's Educational Series, Inc., 1997).
24. "Lower-Cost Higher Ed," Free Lance-Star, Fredericksburg, Va.,
August 23, 1998, p. A6.
25. Enrollment data from Barron's Profiles of American Colleges.
26. Valerie Strauss, "UDC Progress," The Washington Post, March 25,
1998, p. A16.
27. See Dennis Zimmerman, "Local and Federal Subsidy of Sports Stadiums:
Who Benefits, Who Pays?" in Sports, Jobs and Taxes; The Economic Impact of Sports
Teams and Stadiums, The Brookings Institution, Washington, D.C., 1998, for an explanation
of how the subsidy is calculated and what factors will raise or lower the estimate.
28. Although stadium rentals cannot be applied to debt service, fees earned from
such ancillary services as pouring rights, naming rights, and seat licenses represent
revenues eligible for servicing tax exempt securities.
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