Saturday, June 14, 2008

Rep. Kucinich asks IRS, Treasury to hold off on approving financing deal for AY arena, other projects

Who loses when triple tax-exempt bonds are used to finance stadiums for the Yankees and Mets, and the planned Atlantic Yards arena? Overwhelmingly the savings come at the expense of federal taxpayers, not state or city ones, which is why city and state officials are so eager to use such a financing mechanism--the costs are just too diffuse.

Rep. Dennis Kucinich, a Democrat from Ohio, former maverick presidential candidate, and Chairman of the Domestic Policy Subcommittee of the House Committee on Oversight and Government Reform, yesterday released a letter asking the Internal Revenue Service and the U.S. Treasury Department to desist from approving any more sports facility deals based on PILOTs (payments in lieu of taxes), pending further clarification of their policies.

In other words: don't approve any deal involving the Nets arena just yet.

It's not clear to me whether Kucinich, whose letter was dated May 23, was piling on the recently-surfaced concern about such deals, or whether the original delivery of that letter triggered additional alarm among New York officials whose expectations of smooth sailing for AY arena funding and more bonds for Yankee Stadium had already been dashed.

The Times reported yesterday:
The Internal Revenue Service initially approved the use of the bonds for the ballparks, but quickly issued a proposal in 2006 to tighten the rules governing the use of tax-exempt bonds so that it would be more difficult, and perhaps impossible, for this kind of financing to be used again by profitable, private enterprises like professional sports teams.


Shining a light

We know that such a PILOT deal is contemplated for Atlantic Yards, though we don't know whether it is under discussion in those departments. On page 10 of the letter, Kucinich asks a bit disingenuously whether additional sports franchises seek to use PILOTs and "To your knowledge, does the Atlantic Yards proposal include use of PILOTs to fund an arena for the Nets?"

It's not clear whether Kucinich's subcommittee has the power to stop the agencies from acting. But the subcommittee, concerned about lagging investment in the country's infrastructure, has been trying to shine a light on the public policy distortions caused by devoting subsidies and tax-exempt funding to sports facilities, holding two hearings last year.

(Here's an explanation from Neil deMause, author of the book Field of Schemes and the Field of Schemes web site, about how PILOTs work in this context.)

No net benefit from sports facilities

The letter states:
There was abundant evidence adduced at Subcommittee hearings demonstrating that the financing of sports stadiums with tax-exempt bonds does not provide a net economic benefit to communities, whether or not the financing is accomplished through PILOTs.


Kucinich's letter cites testimony by three critics of such stadium financing, including Bettina Damiani of Good Jobs New York and deMause:
"There is absolutely no evidence that $18.5 billion dollars in public benefits have been generated since 1990 to compensate for the $18.5 billion dollars in public costs. Variations on the loophole, including recent creative use of payments-in-lieu-of-taxes should be similarly prohibited. The opportunity cost is significant, viewed in the context of infrastructure or any of a host of other important public services, and competition between local jurisdictions is becoming increasingly counter-productive when measured at the national level."

From Kucinich's letter

The letter opens:

The Domestic Policy Subcommittee of the Oversight and Government Reform Committee is writing regarding the U.S. Department of Treasury's (Treasury Department) and Internal Revenue Service's (IRS and, collectively, Treasury Department) regulation of the use of payments in lieu of taxes (PILOTs) in the financing of the construction of sports stadiums.

I believe that in testimony to this Subcommittee, the Treasury Department inaccurately characterized its decision in two Private Letter Rulings issued in 2006 (PLRs) to treat PILOTs made by the Yankees and Mets as permissible sources of financing for tax-exempt private activity bonds.' I am particularly troubled with Treasury Department testimony that the department existing regulations compelled the Treasury Department's decision to allow the use of PILOTs in this context. After carefully considering your testimony and the relevant regulations, I believe that your putative lack of discretion to prohibit the use of PILOTs is incorrect as a matter of law. In fact, there is strong argument that Treasury Department's existing regulations compelled a decision to prohibit the use of PILOTs for tax-exempt bonds used to finance stadium construction, both in the cases of the Yankees and Mets projects and more generally. At a minimum, the Treasury Department retains discretion to prohibit their use.

The Treasury Department's rulings open the door to other sports franchises to emulate the Yankees' and Mets' use of PILOTs to finance tax-exempt bonds. This is a significant change with, according to many Subcommittee witnesses, substantial negative public-policy ramifications. Between the Tax Reform Act of 1986 and 2006, stadium projects involving tax-exempt bonds were financed by what were indisputably generally applicable taxes, such as broadly applicable sales taxes borne generally by the public. The Treasury Department has insisted to this Subcommittee that it had no choice to allow the PILOTs and that it promptly proposed a new PILOT rule that would close an old "loophole" in the existing regulations. On the contrary, it appears that this loophole was partially of the Treasury Department's own recent creation. While the new PILOT rule would tighten the requirements for the use of PILOTs in certain respects, it would further legitimize their use for financing stadiums by placing them on firmer regulatory authority.

Because of the importance and technical nature of this issue, we request additional clarification of your position before you proceed with further rulemaking in this area.

(Emphasis in original)

The letter goes into considerable technical detail, as well.

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