Wednesday, June 18, 2008

Treasury official: Intangible benefits, political constraints fuel stadium deals

The only parties who seem to be justifying the use of tax-exempt bonds backed by fixed PILOTs (payments in lieu of taxes) to build sports facilities are sports team owners and their municipal backers. Academic analysts of professional sports and a wide array of civic groups criticize the provision as a wasteful subsidy.

Even the Chief Counsel for the Internal Revenue Service, Donald Korb, called the plan the IRS (seemingly reluctantly) approved for the construction of stadiums for the New York Yankees and New York Mets a "loophole" the IRS tried quickly to close.

Rep. Dennis Kucinich, who chairs the Domestic Policy Subcommittee of the House Committee on Oversight and Reform, doesn't think the IRS should let the stadium deals go through in the first place and has called for a moratorium until the IRS and Treasury Department explain their positions.

After all, as testimony last year showed, the Treasury Department had trouble justifying the deals, suggesting that local decisionmaking was affected by perceived intangible benefits as well as political and fiscal constraints.

That suggests that projects like the Atlantic Yards arena are essentially political projects that require significant scrutiny in the news pages, not cheerleading in the sports pages.

Treasury official on the spot

Kucinich, during a 10/10/07 hearing of the Domestic Policy Subcommittee, heard from Eric Solomon, Assistant Secretary for Tax Policy, Department of Treasury.

Solomon offered testimony that gently buttressed the academic argument:
The tax policy justification for a Federal subsidy for tax-exempt bonds is strongest in circumstances where State or local governments use Governmental Bonds to finance public infrastructure projects and other traditional governmental functions to carry out clear public purposes.

The tax policy justification for a Federal subsidy for tax-exempt bonds is weaker when State or local governments use Governmental Bonds to finance activities beyond traditional governmental functions, such as the provision of stadiums, in which the public purpose is more attenuated and private businesses receive the benefits of the subsidy.


The benefit principle

Then Kucinich pressed the issue. (Video available. Go to about 24:15.)

REP. KUCINICH: I'd like to go to this issue of the benefit principle of taxation.... In part, it is based on the idea that those who benefit from services should be the ones who pay for them. Now let's say that City A is told by the owner of a professional sports team that they will have to finance a new stadium or the team will leave. And let's further say that City B offers twice as much to the team to lure it away from City A. Now, of course, all the bond financing offered by City B and City A -- if they choose to give the team what it wants, will be tax-exempt.

Apply the benefit principle of taxation to this transaction. How do federal taxpayers benefit from the team moving to City B, or for that matter staying in City A, with a new stadium? How do they benefit?


Solomon (right) allowed himself a smile before offering a deadpan reply.

MR. SOLOMON: The current structure of the Internal Revenue Code leaves discretion to the state and local governments to make these decisions. And that is part of the framework. And we present, in our written testimony, possible options that one might consider if one were to decide that it is an appropriate --

His questioner was skeptical.

REP. KUCINICH: So you really can't say, is what you're saying.

MR. SOLOMON: I'm not an expert on local economic issues, of the determinations that state and local governments make, as to what appropriate projects are --

REP. KUCINICH: Let me try one more question, then. If the economists are right, that building professional sports stadiums do not raise incomes, create jobs, or increase revenues, while new ballparks do increase the value of the team franchise, would you say that building a professional sports stadium is mostly a private activity, or is it a public activity?

MR. SOLOMON: State and local governments, and those who are in state and local government, need to make these decisions. And they make these decisions, not necessarily on dollars and cents--

REP. KUCINICH: Okay. Okay. I got it. I got it. I know where you're coming from.

Political constraints

Later, Rep. Darrell Issa (R-CA), asked Solomon why, cities continue to compete to attract teams and to offer stadium subsidies. (The scarcity issue was also discussed at the hearing as contributing to the problem.)

REP. ISSA: Why, in your opinion, are cities making that decision if it's a bad business investment? What do you think the real reason that cities are voluntarily doing this, and continuing to do this bidding process?

MR. SOLOMON: Because the cities believe that there are various benefits. Perhaps they cannot be specifically identified, but there are various intangible benefits. And they -- of course, there are political constraints on their decisions as well as financial constraints.

And that's why developers like Forest City Ratner spend big money on lobbyists.

1 comment:

  1. So sports team owners are in the small club lobbying to justify the use of special loophole tax-exempt bonds?- “R-TIFC-PILOT”(pronounced “Artifice-PILOT”- or “Return Total Intercepted For Costs-PILOT”) bonds.

    Yes the team owners are in this club,- that makes sense. But “municipal backers” want to join this small club and join the lobbying game too? Really! Anyone working for or representing a municipality, state or local government is looking to shoot themselves in the foot if they lobby for this loophole: they only seek to strengthen their adversary’s negotiating edge.

    In the case of sports venue financings only “the private businesses receive the benefits of the subsidy” because they wield a monopoly (via the sports franchise system) and that is why, as in the Kucinich example that “City A” and “City B” are forced to compete each other so that in the end the tax exempt financing goes to the sports team franchise owner either way, no matter what. It is why all the actual subsidy benefit is pocketed exclusively by the sports team owner. The public pays for this unproductive transfer of wealth to rich franchise owners. The federal government pays for it in the form of unpaid income taxes. States and municipalities pay for it in the form of unpaid income taxes and also because this particular form of subsidy actually encourages the non-payment of real estate taxes as well.

    We are told “City A” and “City B” still compete with each other (notwithstanding expert advices that there is no economic benefit) not based “on dollars and cents” reasons. (-Pregnant pause-)

    Norman editorializes “that's why developers like Forest City Ratner spend big money on lobbyists”- It is also why they make political contributions- Then there is a more jaundiced observation: After lobbying for their negotiating adversaries, the sports team owners, public officials who have denied the public interest can take jobs directly working for those the private businesses.

    Michael D. D. White
    Noticing New York

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