President Obama’s proposal to curtail tax exemptions for municipal bonds used to fund stadium construction would likely have little impact, according to experts.
“Obama’s proposal is a great sound bite that doesn’t have a lot of teeth in it,” David Fernandez, a public finance attorney with extensive experience in stadium subsidy deals, told The Daily Caller News Foundation. (RELATED: Obama Asks Congress to End Stadium Subsidies)
Currently, federal law allows state and local governments to issue tax-exempt bonds to subsidize projects like stadium construction as long as private financing covers less than 10 percent of the project’s cost and no more than 10 percent of the facility’s planned use is attributed to a private interest.
Both conditions must apply in order for the bonds to lose their exemption, which paradoxically creates an incentive for governments to absorb most of the expense of constructing venues that offer limited public utility. (RELATED: Illinois: Sweet Land of Stadium Subsidies)
As part of his 2016 budget proposal, Obama is asking Congress to eliminate the private payment test, meaning tax-exempt bonds could only be used to subsidize athletic facilities if at least 90 percent of their use is reserved for public entities.
Cities would still be allowed to finance private venues under the Obama plan, but would have to do so without the artificially low interest rates available on tax-exempt bonds, which advocates of the plan hope will make lawmakers and local taxpayers more reluctant to subsidize athletic franchises in the future.
Fernandez, however, claims that, “the tax benefit is not as great a nut as everybody wants to believe it is,” and is not a major factor in most stadium financing deals.
“Incentive programs are utilized primarily because a good businessperson will use all the tools that are on the table,” he explained, but they pale in comparison to the overriding consideration of whether a particular location is profitable.
For the very same reasons, Fernandez believes that the era of stadium subsidies is drawing to a close, anyway. (RELATED: Berkeley’s New Stadium Put it $445 Million in Debt)
For one thing, the boom in stadium construction that occurred in the last few decades means that, “practically every franchise that you can think of has a new facility already,” meaning demand for replacements is likely to be relatively low for the next decade or so, at least in the major sports leagues.
Perhaps more importantly, straitened government budgets during and after the recession led to an increase in the number of privately financed stadiums, giving the lie to the oft-repeated threat that teams would relocate if lawmakers failed to pony up for new stadiums.
“Once privately-financed projects are completed, they generate tax revenues and economic activity,” and voters, if not politicians, are beginning to realize that they have been paying for an outcome they could have had for nothing.
“The franchises in various sports have an interest in being close to metropolitan centers, and if tax incentives don’t exist, they’re still going to build a new stadium,” he continued. “You can’t tell me that a franchise that is worth over $2 billion is not going to put a new facility in a place where they can draw from the most potential customers.”
Obama’s proposal moves from the realm of the merely ineffectual to that of the potentially problematic, though, when one considers the effect it might have on the ability of state and local governments to finance legitimate projects.
“Tax-exempt financing is necessary in this country,” Fernandez said, pointing out that, “before stadium deals, states and cities used tax-exempt bonds to invest in roads and bridges and all that other stuff.”
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