Professional Sports Stadiums Subsidized with Public Funds, but is it Fair for Taxpayers?

There are not many questions of public policy that economists widely agree upon. The benefits of free trade, negative impacts of rent controls, and the infeasibility of returning to a gold standard, are a few.  Add to that list the use of tax-exempt municipal bonds to subsidize the construction of professional sports complexes, a practice that 85% of surveyed economists disagree with.

Under current federal law, state and local governments can issue municipal bonds to help pay for stadium construction and other major public works projects. Such bonds are exempt from federal taxes and also backed by city and state governments, which allow the bonds to be issued at lower rates due to their being low-risk investments and also ones that investors do not have to pay taxes on. (A good overview of municipal bonds can be found here).

While it may be a good deal for bond holders and local governments, under this system the federal government loses out on substantial amounts of uncollected tax dollars.  A report released this month by the Brookings Institute estimates that since 2000, 36 professional sports stadiums have been financed with municipal bonds, resulting in $3.2 billion of lost federal tax revenues.

According to the study’s lead author, Ted Gayer, such large federal subsidies make sense for public projects with clear cross-state public benefits, such as bridges, highways, and parks. “I might not go to a public park in Alaska, but it might mean something to me that it’s kept pristine”, Gayer noted. On the other hand, the benefits of the new Yankees stadium for residents in say, Indianapolis, are less obvious.

Additionally, research looking into the economic impacts of sports stadiums provides little evidence that professional teams and the complexes that house them have a measurable impact on local economies. Econometric studies have consistently failed to demonstrate a causal link between the construction of professional sports stadiums and employment, income gains, or economic development in their host cities. (A detailed review of the literature on this subject can be found here).

With little evidence of tangible economic benefits and ample evidence of the costs to taxpayers, why do policy makers keep approving the use of municipal bonds to fund these projects?

One explanation is that impact assessments, which are usually conducted by for-hire research groups and used to justify public investment in construction projects, often paint an overly optimistic picture of economic benefits that come with professional sports teams.  Such assessments have been shown to greatly exaggerate the amount of visitors sporting events bring to town as well as how much money they spend, and also to ignore substitution effects, whereby money spent at sporting events would have otherwise been used on other forms of entertainment, thus having a neutral aggregate effect on the local economy.

Another factor may be the intangible benefits that result from building large stadium complexes and attracting or retaining professional teams. City pride, a stronger sense of community, and increased visibility on the national stage are all reasons that might entice elected officials to invest public funds in stadiums.

Regardless, some government leaders are pushing back on this issue. In California, for instance, the new Rams stadium in Inglewood is slated to be built without any public funding, as is the case with a proposed stadium to house the Golden State Warriors. In Oakland, the city is considering infrastructure improvements and real-estate deals, as opposed to municipal bonds, in an effort to keep the Raiders in town. “There is not support from my residents to subsidize stadium construction”, Oakland Mayor Libby Schaaf noted.  

The Obama administration has also proposed eliminating the tax exemption on bonds used for sports venue construction in its most recent budget proposals, though it is unclear whether Congress will approve of the measure.