Thursday, April 09, 2009

Tax Foundation on Yankee Stadium: "the House the IRS Built"

The Tax Foundation's new report, From the House That Ruth Built to the House the IRS Built: New York City and New York Yankees Abuse PILOTs to Finance New Stadium, draws on reports from Assemblyman Richard Brodsky and hearings held by Rep. Dennis Kucinich.

The same criticisms could be launched at the Atlantic Yards arena, should it be built, given that the same regulations that allowed the financing scheme for Yankee Stadium were grandfathered in for AY.

Based on calculations from Brodsky, the $942 million in initial bonds would save the team between $231 million and $471 million--though the federal government bears the brunt of the cost. "Without this generous subsidy, it is unlikely that such an expensive stadium could have been built," the report states.

(The Tax Foundation describes itself as a nonpartisan tax research group based in Washington, DC, though some say it has a conservative bent.)

Executive summary

Travis Greaves and Joseph Henchman offer this summary:
The stadium's construction costs have been publicly subsidized in the form of $942 million in tax-exempt bonds issued by New York City. Seeking tax-free status for the bonds to ensure a lower interest rate, New York structured the deal to ensure it didn't run afoul of a federal tax code provision which requires that such bonds not be "private activity bonds." This serves as a huge benefit because the bonds are exempt from city, state, and federal taxes, and have an interest rate about 25 percent below that of taxable bonds.

There are two parts to this financing scheme which seem "foul." First, the new Yankee Stadium will be city-owned and thus exempt from property taxes. Meanwhile its primary tenant, the Yankees, will pay no rent. This clearly brings up the issue of whether such tax-exempt bonds should have been issued at all, and especially when the city is so far in the red.

Secondly, to pay off the bonds over time, New York City will receive payments theoretically equivalent to the property taxes that Yankee Stadium would otherwise pay. The city claims that these payments in lieu of taxes (PILOTs) equal taxes that would otherwise be owed. In reality, these payments are inflated by overvaluing the stadium property by three times that of comparable property. By inflating the payments in lieu of taxes, the City can say to taxpayers that the Yankees are paying a significant part of the stadium's cost, while telling the IRS that the City is paying for almost all of it.

While the IRS signed off on the deal, it has subsequently approved a regulation prohibiting such shell games in the future. The regulation applies only to bonds sold on or after October 24, 2008, leaving previously issued bonds for the Yankees project and even newly issued bonds to pay for cost overruns in the clear. (However, the project's alleged use of inflated assessments remains the subject of public debate and congressional hearings.) Going forward, local governments will still be able to use tax-free status for private projects, but only if public benefit is convincingly demonstrated by meeting a more rigorous standard.


Overvaluing the land

The report explains how PILOTs work:
The city's claim that the Yankees' payments are akin to tax payments rather than debt service payments rests on the fact that the PILOTs are based on property tax assessments. A PILOT arguably satisfies the definition of "generally applicable tax" if the payment is not greater than the amount imposed for a tax of general application and the payment is designated for a public purpose. For example, if $50 million was needed annually to pay off the bonds, but actual property taxes would amount to only $30 million, a PILOT that would qualify for tax-free status could not exceed $30 million.

The city was determined to ensure that the payments would cover all bond costs, and equally determined to receive tax-exempt status on the bonds. Consequently, it was important that the stadium property be assessed at a value greater than the bonds in order for the payments to equal the debt service and be at a value which would produce property taxes equal to or less than what the taxes on the actual property would have otherwise been. Three appraisals were conducted, each purportedly using comparable land and taking into account the size, location, and appreciation in value from the development.


The report notes that Manhattan land was used to value a stadium in the Bronx, but doesn't point out that one comparable site was in Alphabet City, more than seven miles away.

Conclusion

From the conclusion:
But because of the way the project is being financed, it is difficult to know what the actual cost to the taxpayer is, let alone whether it is the best use of scarce taxpayer dollars.

Here, New York City has tapped into taxpayer funds by shifting the financing through different layers of local government while essentially claiming that the stadium will pay for itself.

If there are justifiable uses for PILOTs, the Yankee Stadium project does not appear to be one of them. When taxpayers elsewhere hear that any project is being funded by PILOTs, they should remember the cautionary tale of the Yankee PILOTs and insist on strict transparency and accountability so that their taxpayers do not end up subsidizing private uses with public funds.

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