Municipal bonds are a popular way of subsidizing stadium construction, but their tax-exempt status means local taxpayers are not the only ones footing the bill.
“The idea that residents of Sacramento should have to pay to help build a new basketball arena in, say, Seattle, boggles the mind,” the Sacramento Bee opined in an editorial Monday, but “under the current federal tax code … that’s the way it works.”
Tax-exempt municipal bonds were originally designed to help finance public infrastructure projects like roads and sewer systems, the editorial notes, but are increasingly being “used by state and local governments to help front the cost of new arenas and stadiums, even when those buildings are going to be owned or controlled by private interests.” (RELATED: Illinois: Sweet Land of 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.
In Minneapolis, for instance, municipal bonds are being used to finance the construction of a $1 billion stadium for the Minnesota Vikings, according to Twin Cities Business Magazine. State officials defend the scheme by claiming the new stadium has spurred roughly $800 million in additional investment, but the article points out that, “economists and other academics argue that the subsidies—which shift costs from private owners to local residents—aren’t worth their costs.”
The Treasury Department estimates that, over the next 10 years, the stadium tax break will cost the federal government about $542 million in foregone tax revenue.
A provision in President Obama’s proposed 2016 budget, however, would eliminate the so-called “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. (RELATED: Obama Asks Congress to End Stadium Subsidies)
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, ensuring that taxpayers around the country will not have to share the costs of decision made without their input or consent.
The editorial says President Obama’s proposal “deserves support from both sides of the aisle,” but predicts it “will face an uphill battle in Congress,” because “The benefits go to a few well-organized and well-funded interests who wield outsized influence with the decision-makers, while the rest of us get scalped for a dollar or two.” (RELATED: Obama’s Plan for Ending Stadium Subsidies Misses the Point)
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