Federal Tax Break Is the Ticket to Stadiums By Peter Whoriskey Washington Post Staff Writer Monday, July 28, 2003; Page A01
The recent wave of sports stadium and arena construction is costing the U.S. Treasury more than $100 million annually because the projects have been financed with tax-exempt bonds, a federally supported method of borrowing money more often used to build roads, schools and other public projects. The federal tax break for professional sports venues is rarely recognized in the fractious stadium debates across the country. At least 38 major league sports venues have been built or rebuilt using nearly $7 billion in tax-exempt financing since 1990, according to a Washington Post review of more than 40 professional baseball, football, hockey and basketball projects. The cost to the Treasury was calculated using the same methods employed by Treasury and congressional tax estimators. As the District and Virginia advance stadium construction plans this summer to attract a major league baseball team, each group proposes to issue millions in tax-exempt bonds. The considerable debate over the projects has included few questions about the use of such bonds. But assuming current tax rates and today's low interest rates, either stadium plan is likely to cost the Treasury $3 million or more annually. All of this money, critics of this type of financing say, could be better spent. "Baseball has been given a license to play Monopoly, and they're playing it with our money," said Fairfax County Supervisor T. Dana Kauffman (D-Lee). "Baseball or any other sport is something nice to have, not a must-have. As it is, we don't have enough money for our must-haves." The $100 million lost to stadium construction plays a small role in the $2.1 trillion federal budget. But critics of the exemption say the lost revenue is enough to cover some significant public programs. To take one example, $100 million is the amount the Centers for Disease Control and Prevention plans to distribute to help states boost their smallpox vaccination programs. Sen. Byron L. Dorgan (D-N.D.) has characterized the use of tax-exempt bonds for sports venues as an entitlement program for the very rich, and he has pushed, unsuccessfully, to prohibit the practice. "In our view, this is a very expensive public housing program for millionaires -- a subsidy for the millionaires who own these teams and the millionaire athletes who play on them," said Barry Piatt, Dorgan's communications director. "When we have a towering and growing deficit and claim that we can't afford to strengthen health care for seniors or adequately fund education for kids, does this make any sense?" Stadium construction proponents in this region and elsewhere, however, defend the use of tax-exempt financing. "Stadiums are in some sense a private use and in some senses a public use," said Stephen M. Green, a D.C. economic development official. "We view it as an investment in the infrastructure of the city." Gabe Paul Jr., executive director of the Virginia Baseball Stadium Authority, said the method is going to help Virginia taxpayers. "From the point of view of Virginians, we want to take advantage of this legal mechanism," he said. The ballpark "is going to cost Virginians less because of the tax law." The advantage of tax-exempt bonds is that they allow cities, counties, stadium authorities and other public entities to borrow money at lower interest rates, saving millions of dollars annually on debt repayment. Bond investors accept the lower rates because their earnings are not taxed. When King County, Wash., issued $310 million in bonds for a baseball stadium in 1997, for example, the tax-exempt status on the bonds got them an interest rate of 5.9 percent. Equally rated taxable bonds issued at the same time by King County carried an 8 percent interest rate. The difference in rates amounted to $6 million in yearly savings for the county. "The tax exemption is absolutely critical," said Mitchell Ziets, a sports financing consultant who has worked on projects across the country and is now working with the Virginia baseball authority. "A lot of these deals are really tight. There's no excess money." This benefit to the stadium builders comes at the expense of the Treasury, however, because the bond investors are not paying federal taxes on the interest income. For the baseball park in Seattle, the Treasury lost the opportunity to generate more than $7 million a year, based on The Post's calculations. "Local government officials don't say, 'I'm really, really worried about the national deficit, so I'm not going to do it,' " said Andrew Zimbalist, a Smith College economics professor and a critic of baseball finances. "They say, 'This is going to help me get elected.' But why should the federal government be involved in this?" U.S. lawmakers have sought to limit the use of tax-exempt bonds for projects that benefit private parties, such as professional sports teams. Most notably, the massive 1986 tax reform law revoked a specific exemption for sports venue construction, and many expected that tax-exempt bonds would no longer be used for that purpose. But the reform law allowed the use of tax-exempt bonds for any project -- sports or otherwise -- if 90 percent of the repayment comes from taxes. Attempts to change the tax law, fueled in part by a 1996 Congressional Research Service report, have failed, and the opening has allowed the use of more than $6.8 billion in tax-exempt bonds for professional sports venue construction since 1990, according to The Post's review. Houston alone has issued $158 million in tax-exempt bonds for its baseball park, $334 million for its football stadium and $227 million for its basketball arena. "The big advantage for us is the lower rate of interest," said Oliver Luck, chief executive of the Harris County-Houston Sports Authority. "I don't think, quite honestly, that very many people are focused on the hit that the U.S. Treasury would take. Most folks look at these things in terms of the local taxes involved. "Everybody has this mentality that because we send so much money to Washington, if you can get direct or indirect support of federal dollars, take advantage of it. But the federal government has contributed in a substantial way in getting football, baseball and basketball facilities built around the country." Nationally, more than $6.3 billion of that bond debt is still outstanding, which translates into a loss to the Treasury of more than $100 million annually, according to The Post's calculations. Representatives of professional sports leagues point out that the use of tax-exempt bonds is perfectly legal and a local prerogative. "Communities and their leaders make the decisions on how to use tax-exempt bonds, not a sports league," said National Football League spokesman Greg Aiello. "Many communities have clearly and consistently identified sports facilities as worthy of public support because they generate a wide range of public benefits, economic and otherwise." He said that NFL owners have invested $2.6 billion in private funds in stadium projects. Some economists take aim at this federal subsidy, saying it generally serves no national purpose. For although it might make sense for a local government to subsidize a stadium -- either as a cultural attraction or in the belief that it will spur redevelopment -- they see no federal benefit in helping sports teams pit one city against another. "The beauty of the tactic is that tax-exempt bonds have very little meaning to most people," said Robert A. Baade, an economics professor at Lake Forest College in Illinois and an expert in the financing of public sports venues. "Very few perceive that the amount of money involved is very significant. The costs are really hidden."
