The popular perception about America's older cities
is that their five-decade decline has reached bottom and they are
now on the economic rebound, yet the facts indicate otherwise. Most
older cities are still experiencing a loss of jobs and residents as
businesses and families seek safer communities and functioning
schools elsewhere. Eleven of the 12 top cities that lost population
since 1970 saw those losses continue through the 1990s.
Contributing to the exodus are urban crime rates that are higher
than national averages and substantially higher than those of the
surrounding suburbs, as well as public schools whose student
performance scores consistently measure well below average.
Although the success of the suburbs in
attracting jobs, residents, commerce, and culture suggests that
providing safe streets and good schools is the best way to reverse
the exodus of jobs and residents from America's central cities,
only a handful of cities have made any meaningful attempt to deal
with these long-standing deficiencies. Instead, most of these
struggling cities continue to bet their futures (and limited
revenues) on costly infrastructure projects that focus on tourism
and entertainment. In city after troubled city, convention centers,
stadiums, arenas, opera houses, aquariums, museums, casinos,
racetracks, and other places of entertainment are presented as
powerful engines of economic development that will pay for
themselves in new jobs, paychecks, and taxes. The mounting evidence
suggests, however, that while such projects offer significant
benefits to a very narrow slice of the regional (including
suburban) business community, they offer very little to the urban
community in general.
The
roots of today's urban "edifice complex" go back to the 1950s and
the now-discredited federal urban renewal programs that were
created to restore cities to some measure of economic health by
replacing residential neighborhoods with projects of a commercial
or public nature. Few, if any, of these programs were successful,
but that has not stopped civic leaders from attempting to impose
more modern versions of these costly schemes on their cities.
Whereas the urban renewal efforts of the 1950s and 1960s relied on
the construction of office complexes, limited access highways,
urban shopping galleries, and public housing, and the 1970s and
1980s version relied on rail-based transit systems, the efforts of
the 1990s rely increasingly on tourism and entertainment
facilities.
These projects seldom pay for themselves,
either in rental fees or in additional taxes generated by the
facilities; other broad-based taxes or state lotteries must be
dedicated to covering their operating losses and annual debt
service payments. State and city taxes on restaurant meals, hotel
room rentals, and car rentals are common sources of tax revenues to
fund these projects.
A
significant source of financial support for these efforts is the
U.S. Treasury (and, indirectly, the U.S. taxpayer), which provides
a variety of subsidies to many of these local projects. The chief
form of federal support is the privilege to issue bonds whose
interest earnings are exempt from all federal taxes, as well as
state taxes for investors who live in the state or community
issuing the bonds. The cost in foregone tax revenues to the U.S.
Treasury is estimated at $21 million for every $100 million in
bonds issued. The privilege to issue such bonds has been
controversial in Congress, and Senator Daniel Patrick Moynihan
(D-NY) has introduced legislation (S. 1880) to prohibit communities
from issuing tax-exempt bonds to finance the construction of
professional sports facilities.
Other subsidies can include direct
appropriations from Congress, as is the case with Washington's new
convention center, which will receive federal money to upgrade a
nearby Metro station and to relocate utilities at the construction
site. Federal funding, such as money from the U.S. Department of
Housing and Urban Development's Community Development Block Grants
program and from the U.S. Department of Transportation, also can be
used to help subsidize such facilities or related projects.
But
because the vast majority of these projects are financed with
tax-exempt borrowing, federal tax policy plays an important role in
encouraging this type of urban revitalization scheme--and the
federal taxpayer plays a part in subsidizing it. Indeed, the
estimated $7 billion needed to construct the 40 professional sports
facilities on the drawing boards or already underway in communities
throughout the country could entail a federal tax subsidy of as
much as $2.4 billion over the life of the tax-exempt bonds used to
finance those projects.
Targeted by promoters, many cash-strapped
cities are induced to finance, in whole or in part, monumental
entertainment-oriented infrastructure projects. A substantial body
of evidence exists to show just how successful these urban
revitalization schemes that depend on costly entertainment-oriented
infrastructure projects have been. Much of that evidence suggests
that publicly funded mega-entertainment centers make a rather
unimpressive contribution to a community's economic vitality and
employment opportunities.
A TALE OF TWO STATES AND ONE CITY
An
instructive case study on the costs and benefits of different
regional revitalization schemes can be found in the Washington,
D.C., area, which offers as a type of social science experiment the
experiences of citizens in a single metropolitan market governed by
the administration and laws of three separate bodies--Maryland,
Virginia, and the District of Columbia. These jurisdictions have
reacted to the glamorous promises of entertainment promoters in
markedly different ways in their quest for economic development,
and each has achieved dramatically different results. Their
contrasting experiences raise questions about (1) the value of an
infrastructure-dependent revitalization strategy, compared with one
that relies on nothing more exotic than the provision of high
quality services, and (2) the wisdom of a federal policy that
encourages these projects.
Recently, the District of Columbia's
government and business leaders formally committed to building a
downtown baseball stadium, which may cost as much as $330 million;
the city's Sports Commission announced it has hired an
architectural firm to draw up the plans. The city also contributed
$79 million to the newly completed MCI Center--home to Washington's
professional basketball and hockey teams--and to building a new
convention center, which could cost up to $800 million. The
District's financial commitment to these three projects alone
should exceed $1.2 billion, but could rise to as much as $2 billion
if the city's offer to co-sponsor the 2012 Summer Olympics is
accepted and if work on a proposed opera house ($200 million), a
7th and 9th Street trolley line, and proposed music and photography
museums is initiated at city expense.
Such
a financial commitment to an array of taxpayer-funded
mega-entertainment projects demonstrates that Washington, D.C., has
embraced a revitalization strategy whose implementation in other
cash-strapped cities has left a checkered performance history. It
is not too late to rethink Washington's costly approach by taking a
closer look at just how meager the benefits have been in
communities that have made massive investments in monuments to
public entertainment. A good place to start is Baltimore,
Maryland.
Baltimore: Still Suffering
Maryland's approach to urban
revitalization was pushed to its extreme when the state and local
governments decided to invest hundreds of millions of public
dollars in a Potemkin Village of entertainment facilities located
along the southern edge of the city called the Inner Harbor. The
new Orioles Park at Camden Yards ($200 million) and Ravens stadium
(over $300 million), as well as the government-subsidized Inner
Harbor pavilions and the National Aquarium, offer charming
distractions to tourists and visiting families from the suburbs,
but they have contributed very little to the economic well-being of
Baltimore or the shrinking number of residents. As Washington
Post writer Rudolph Pyatt noted, "economic spinoffs from
Orioles Park have yet to reach blighted communities just a few
blocks away."
Despite the promise of urban
revitalization from these projects, the city of Baltimore is as
troubled as ever. Its population has fallen by a quarter of a
million people since 1960 and is now at its the lowest level since
1915. The city continues to lose an estimated 1,000 citizens per
month as
businesses, workers, and residents leave for the suburbs or other
communities that have invested public funds in quality schools and
law enforcement rather than in costly infrastructure devoted to
seasonally limited entertainment. Among America's major cities,
only St. Louis and Washington, D.C., have lost greater shares of
their populations over this decade.
As
an analysis of the new Baltimore Ravens football stadium conducted
by the State of Maryland shows, the stadium demonstrates
particularly well the lackluster economic impact of major
entertainment facilities on urban revitalization. An early
consultants' report prepared for stadium boosters presented an
optimistic scenario, partly assuming that a significant fraction of
game attendees would rent a Baltimore hotel room on game night. Yet
a subsequent analysis by Maryland's Economic Development Department
concluded that the state's then-projected $177 million stadium
investment would produce only 1,394 full-time jobs. This implies a
staggering cost to taxpayers of $127,000 per job. A more recent
study by the Maryland General Assembly's Office of Policy Analysis
concludes that the new football stadium would create only 889 jobs,
amounting to a cost of $200,000 per job.
Dennis Zimmerman, the Congressional
Research Service's expert on stadium financing, puts this costly
job-generating performance in perspective by noting in a recent
report that another Maryland jobs program, the "Sunny Day Fund,"
cost the government $6,250 for each new job it created.
Baltimore's poor return on the public's
investment in sports stadiums is typical of the lackluster
job-generating experience of such entertainment facilities. Robert
Baade, professor of economics at Lake Forest College, studied 48
cities over a 30-year period. In the 32 cities that experienced a
change in the number of sports teams, 30 saw no change in per
capita income, one improved, and one worsened. Of 30 cities
experiencing a change in the number of stadiums or arenas, 27
showed no influence on income, but three experienced significant
negative effects. A more recent study published by
the Brookings Institution in Washington, D.C., echoed these
findings. It concluded that "A new sports facility has an extremely
small (perhaps even negative) effect on overall economic activity
and employment."
In
explaining his findings, Professor Baade concluded:
Upon some reflection, sport's slow growth
pattern should not be surprising. The slower growth reflects the
kind of economic activity that investments in professional sports
spawn. Sports diverts economic development toward labor-intensive,
relatively unskilled (low-wage), part-time jobs. Other cities in
the region that invest in economic activity that promotes
full-time, non-seasonal, and high wage jobs can be expected to
capture a greater share of the regional economic pie.
Different Strategies
A comparison of the approaches of cities and counties in
Virginia and Maryland may serve to illustrate the difference in
results between alternative approaches to economic development
uncovered by Professor Baade.
Virginia has no major league subsidized
sports facilities, other than those at its state-supported colleges
and universities. Further, the state's focus on technology and
ordinary but financially self-sufficient commerce, rather than on
subsidized adult entertainment, is fostering a statewide boom in
high-paying technology-related jobs, as well as substantial
private investment in resort and entertainment
complexes.
In
contrast, Prince George's County, Maryland, a close-in suburb of
Washington, D.C., served as home to two professional sports teams
and their arena for 25 years until the teams' relocation to the
District of Columbia in 1998. But their presence appears to have
contributed little to the economic well-being of that county. In
1970, Prince George's County's per capita personal income was equal
to 82 percent of that of Fairfax County, Virginia, another
Washington suburb; by 1990, its per capita income was only 70
percent of Fairfax County's.
Good
schools and low crime, not proximity to professional sports venues,
determine where businesses locate and expand and where prosperous
families choose to live. Yet Prince George's County, whose schools
are ranked the second worst in Maryland (Baltimore City's were the
worst), provided $70 million in infrastructure support to the
privately funded Jack Kent Cooke Stadium, new home of the
Washington Redskins professional football team.
Perhaps Art Modell, owner of the Baltimore
Ravens football team, was voicing the philosophy and priorities of
many of Maryland's civic leaders and elected officials when he
observed that "The pride and presence of a professional football
team is far more important than thirty libraries, and I say that
with all due respect to the learning process."
Washington's "Field of Dreams"
Strategy
The
District of Columbia is administered by an elected city government
with both state and local responsibilities and resources and by the
federal government, whose constitutional mandate to oversee the
affairs of the nation's capital city often has led Congress and the
President to view it as ground zero for the latest initiative in
urban revitalization. The substantial body of evidence
demonstrating that professional sports facilities and other
structures dedicated to entertainment lead to little or no
meaningful economic improvement has not influenced the District of
Columbia. With the support and urging of its congressionally
created Financial Control Board, the U.S. Office of Management and
Budget, and many in Congress, the District may soon spend hundreds
of millions of dollars on entertainment facilities that it can ill
afford. The city's commitment to this approach is evident, for
example, in the recent formation of the not-for-profit Washington
Center Alliance, which hopes to jump start the city's economy by
encouraging the construction of music and photography museums and a
baseball park.
In
addition, last year, the federal government funded improvements in
the mass transit Metro system to facilitate access to the MCI
Center and proposed creating and funding a development bank to help
finance the convention center and other infrastructure projects.
This year, it agreed to fund improvements in the Metro station that
will serve the prospective convention center. Heralded as an
investment that would help the District's downtown economy, the MCI
arena seems to be having only a modest impact on the surrounding
neighborhood through a somewhat higher restaurant business.
Whatever its impact, it has not been sufficient to offset a
city-wide loss of 7,700 jobs in the 12 months ending in March 1998,
when the city's unemployment rate reached 9.1 percent--the highest
for the month of March in 15 years.
Low
benefits for high costs are not limited to stadiums and arenas;
they also characterize the economic impact of most convention
centers.
As a key component of its revitalization strategy, the District
government intends to construct a new convention center in the
close-in Mt. Vernon Square residential neighborhood at a cost
(excluding the land) that the U.S. General Accounting Office
estimates will be at least $800 million. Debt service, operating
losses, and foregone property taxes will require as much as $60
million per year in subsidies.
Proponents of the center claim that its
impact on tourism will contribute to inner-city revitalization--an
outcome not necessarily supported by data in a recent consultants'
report. Indeed, the 1997 Coopers & Lybrand study for the
Washington Convention Center Authority reveals some rather
troubling estimates of just how meager a return the city will get
on its investment. Although much has been made of the report's
estimates of the regional sales the center may generate, these
projections are derived from generic spending multipliers that make
rough guesses about the economic impact of a new center. Such
analysis assumes, for example, that $1.00 spent by a conventioneer
on a D.C. hotel room will yield a total of $1.40 in city spending
by the time the dollar is re-spent again and again by hotel
employees, suppliers, investors, and so on.
When
such multipliers are applied to all the kinds of spending that
conventioneers are likely to make, the results are, by themselves,
sufficiently impressive. But the important question that
is seldom asked in these studies--and certainly not in the Coopers
& Lybrand study--is how the returns from this investment would
compare with alternative uses of the $800 million up-front
investment, the $60 million annual tax subsidy, and the
well-located city land on which the center is to be built. What
economic benefits would flow to the city, for instance, if this sum
were used for a tax cut, or for public school improvements, or a
new university, or the world's largest indoor
water slide park with live palm trees and monkeys? Nobody knows,
because such considerations were not part of the consultants'
evaluation.
The
consultants did, however, provide enough other specific information
to suggest that, on the whole, this convention center project would
provide a mediocre return to the city. In the report's appendix,
the consultants estimate that the new convention center will have
its primary economic impact by initially producing 176,000 net new,
or incremental, hotel room night rentals per year in the
Washington, D.C., area, which could rise to 200,000 in the
future.
In a city that is on track to hosting as much as 25 million
tourists in 1998, this represents an increase in visitors of less
than 1.0 percent--a rather marginal return for an $800 million
investment.
The report also estimates that the new convention center will
create between 4,380 and 9,100 net new full-time and part-time jobs
in the metropolitan area, but only 1,670 to 3,860 jobs within the
District of Columbia proper. Although no estimate is provided on
how this total will be divided between full- and part-time jobs,
most of these jobs will be in the hotel and restaurant sectors of
the regional economy--areas of employment that typically pay
below-average wages, according to data compiled by the U.S. Bureau
of Labor Statistics.
To
understand the impact, consider the hourly wages in a number of
trades that would be found commonly in most communities. As Table 1
illustrates, the types of jobs typically created by a convention
center or other entertainment-oriented project tend to be below the
average of all trades--as much as 50 percent below for food
service, and substantially below other types of jobs suitable for
an urban environment. Even with the report's high-end estimate of
3,860 new jobs in the District, under the best of circumstances the
District will be investing $207,253 of scarce community financial
resources for each new low-wage job created by the new convention
center.
According to Heywood Sanders of Trinity
University, a leading expert on convention centers, assuming (1)
that the convention center probably will require an annual tax
subsidy of about $60 million per year to cover the expected
operating losses and service debt, and (2) that every one of the
net new room rentals will occur within the District, then District
taxpayers will pay $340 in subsidies to induce conventioneers to
spend about $140 per night on a D.C. hotel room. However, the
consultants' report projects that about half of the economic impact
of the center will occur in the District's surrounding
jurisdictions, which will not be taxed to support the convention
center. The subsidy per hotel room rented, then, could double to
$680 if half of the attendees take a suburban hotel room in
Maryland or Virginia.
The
city could get the same economic kick at half the cost simply by
offering free hotel rooms to a random collection of 176,000
prospective tourists who agree to spend at least one night in the
city and buy their own meals, taxi rides, and mementos. Added
benefits of this less costly alternative would be the preservation
of the residential integrity of the Shaw neighborhood and the
opportunity to re-deploy the now-vacant Mt. Vernon Square site for
more productive use--such as unsubsidized residential housing for
workers who shop in the city's stores and pay sales, income, and
property taxes throughout the year.
Indeed, if the District improved basic
public services to a level of quality sufficient to re-attract just
the 86,000 citizens who moved to the suburbs since 1990,
approximately $3.1 billion in new spending would be added to the
city's economy. This is far more than the $400 million the
convention center is expected to add each year to the entire
metropolitan area, including the suburbs in Maryland and
Virginia.
Now
the city's "edifice boosters" are chasing after other entertainment
monuments: a new baseball stadium and the right to host, and pay
for, the 2012 Summer Olympics. Although little analytic information
is available on the economic benefits of hosting the Olympics, it
is worth noting that shortly after the 1996 Olympics in Atlanta, an
Atlanta Business Chronicle editorial on "Why the Olympics Hurt
Business" began by asking:
So
were we duped by Olympic Organizers? Or is it still too early to
tell?... [T]he first days of the Olympics have left the Atlanta
business community wondering where to place the blame for what has
been an economic disaster for some.
It
seems that the traffic congestion problems chased away Atlanta's
normal day-to-day customers and replaced them with cash-strapped
tourists on fast-food budgets.
Although there is no assurance that a
major league baseball team could be acquired for the proposed D.C.
baseball park, such technicalities often do not stop fervent civic
boosters from taxing and building. For example, in Oklahoma City
the recently built but never occupied NHL/NBA-scale arena stands as
testament to how hot that fervor can glow. And in several northeastern
states, five cities spent $110 million of public money to construct
baseball parks to field teams in a newly formed minor league that,
as of a month before the scheduled opening of the season, existed
only on paper.
Even
though it has been 27 years since a major league baseball team has
changed cities, D.C.'s baseball boosters argue that the city could
be the back-up site for a group of Northern Virginia investors who
are thought to be near the front of the line of those hoping to
acquire an expansion or relocated team. To date, these investors
have not had much luck getting Virginians to agree to pay for the
ballpark or allow it in their neighborhoods. Virginians simply do
not believe that a $300 million, taxpayer-subsidized stadium will
spur economic development.
Virginia's Back-to-Basics Strategy
In
contrast to citizens in Maryland and the District, Virginians'
skeptical attitude toward the economic benefits of costly
infrastructure projects whose use is limited to seasonal adult
entertainment is unusual. Despite the occasional seduction of state
officials, they successfully resisted efforts by the Walt Disney
Corporation, the Washington Redskins football team, and a group of
investors who want a baseball team to entice them to agree to build
costly accommodations for their entertainment businesses.
To
date, the state remains free of subsidized major league sports
facilities. The rejected suitors accused Virginians of a selfish
"NIMBY" (Not In My Back Yard) attitude toward development, yet
Virginia is awash in the new construction of factories, office
buildings, shopping centers, campus buildings, golf courses,
privately financed conference centers, and other major projects
that promise high-paying, year-round, full-time jobs. The offer to
create part-time, low wage, vendor-type jobs typical of subsidized
entertainment complexes simply is not attractive to citizens of
Virginia.
At
the once-empty railroad yard in suburban Alexandria, Virginia,
where the late Jack Kent Cooke and former Governor L. Douglas
Wilder tried to put a new state-subsidized football stadium for the
Washington Redskins, there now stands a major, privately financed
shopping center. It provides convenient retail services to an
entire community, hundreds of full- and part-time jobs, and a
healthy flow of sales, income, and property tax revenues to fund
the community's basic public services. (Mr. Cooke finally built
Redskin Park in Prince George's County, Maryland, with
taxpayer-subsidized roads and infrastructure.)
The state's focus on providing quality higher education and
maintaining an attractive environment both for residents and for a
diverse mix of commercial enterprises is paying off. In July 1998,
Virginia's unemployment rate stood at 3.0 percent, and the state's
economy had created 196,600 jobs over the previous 12 months. By
contrast, Maryland's July 1998 unemployment rate was 4.7 percent,
and the state had created only 13,400 jobs over the same 12-month
period. Meanwhile, in the District of Columbia, the unemployment
rate was 8.3 percent, and job growth had turned positive (thanks
largely to a nationwide boom in tourism) after shrinking during the
first three months of the year. In the 12 months ending in July
1998, the District of Columbia created 4,900 jobs.
By
encouraging the creation of new sources of tax revenue rather than
users of subsidies, Virginia has ample financial resources and the
borrowing capacity to fund the construction of new engineering,
law, and science schools at its state universities, and to pay
higher-than-average salaries to its professors. These combine to
attract top scholars and students to its state-supported schools.
When adjusted for regional differences in the cost of living, the
annual salaries of full professors at the University of Virginia
($87,164), Virginia Tech ($74,733), and Virginia Commonwealth
($69,625) exceed by a significant margin the $62,450 earned by full
professors at Maryland's flagship public university, the University
of Maryland at College Park.
As a
result, these and other investments in quality education mean that
20,800 Virginia undergraduates attend public universities rated by
Barron's Profiles of American Colleges as "most" or
"highly" competitive, compared with just 1,500 such students in
Maryland. In addition, in August 1998, five of Virginia's public
universities were included in Kiplinger's 1998 list of the nation's
top 25 public universities and colleges. Maryland placed just one.
Virginia's focus on higher education also allows it to surpass
Maryland in the proportion of undergraduate students that can be
accommodated in its state schools: Although Virginia's population
exceeds Maryland's by 32 percent, Virginia enrolls 74 percent more
undergraduates in its four-year state universities and
colleges.
In
the District of Columbia, which intends to divert tens of millions
in annual tax revenues to subsidize a convention center, the
University of the District of Columbia received the lowest
qualitative rating ("non-competitive," according to Barron's
Profiles) and has an undergraduate student body that has
declined from 11,000 students in 1991 to 4,800 today because of
budget cuts and mismanagement.
HOW CONGRESS FEEDS THE BUILDING
FRENZY
Virtually all publicly funded convention
centers, stadiums, arenas, and other infrastructure projects are
financed with debt instruments that are exempt from federal income
taxes, and often from state income taxes if the investor resides in
the state that issued the bonds. Allowing investors in these bonds
to earn interest income that is exempt from federal income taxes
enables the municipalities to borrow at lower interest rates.
By
permitting communities to use tax-exempt financing for "public
purpose" investments in this manner, the federal government, in
effect, provides a subsidy to the municipal bond issuer that is
equal to the federal income taxes that otherwise would have been
paid if the investor, say, owned taxable bonds. As subsidies go,
the federal tax exemption on municipal debt is one of the most
inefficient because the loss in federal income tax revenues is
generally higher than the interest rate savings to the municipality
provided by the tax-exempt status.
For
a 30-year tax-exempt bond carrying an interest rate that is two
percentage points below a comparable taxable bond rate, the present
value of the federal tax subsidy over the life of the bond is equal
to approximately 21 percent of the principal borrowed--or $21
million for every $100 million of tax-exempt bonds issued. For a
typical $250 million ballpark being constructed in many cities,
this federal subsidy is worth about $52.5 million, and for the
Washington Convention Center, the present value of the federal tax
subsidy could equal $110 million over the life of the bonds.
Recognizing that the high costs and
subsidies of stadiums did not compare favorably to the benefits
they provide, compared with such other public investments as
schools, roads, and hospitals, Congress in 1986 enacted legislation
that eliminated the ability of communities and sports team owners
to use tax-exempt financing to build stadiums. Specifically, the
Tax Reform Act of 1986 prohibits the use of "private activity"
tax-exempt bonds to finance sports facilities, because the
expanding use of such bonds for that purpose was crowding out bonds
for other public purposes, providing greater tax loopholes for the
rich, and reducing federal tax revenues.
Unfortunately, this attempted legislative
remedy backfired badly. Tax lawyers discovered that stadiums could
still use tax-exempt financing under another provision of the U.S.
tax code as long as no more than 10 percent of the funds used for
debt service was derived from the rental of the stadium--thereby
requiring that 90 percent of the funds be derived from city and
state taxes, or other non-rental fees.
Ironically, the use of this alternative
provision of the tax code bestowed even greater benefits on sports
team owners than the provision Congress had rescinded. Under the
former "private activity" provision, rent and other revenues
derived from a stadium could be used to pay the interest and
principal on the bonds used to finance a stadium. Communities had
an incentive to offer stadiums to team owners at rent levels that
would at least cover the debt service costs on the tax-exempt
bonds. But under the alternative provision of the tax code that
authorizes state and local governments to issue tax-exempt bonds
for public purposes, these bonds are exempt from taxes
only if no more than 10 percent of the debt service is derived from
stadium revenue sources. As a consequence, communities using such
bonds to finance a stadium or ballpark must find alternative
sources of tax revenues to service the debt, since much of the rent
that would be collected could not be used to pay interest and
principal on the bonds.
Although the purpose of this requirement
was to ensure that only bona fide public facilities would
be eligible for the federal subsidy, in practice it has induced
communities to sign sweetheart deals with sports team owners,
because any direct rents derived from the stadium could not exceed
10 percent of debt service. In effect, under current federal
law, had the state of Maryland cut a tougher deal with Ravens owner
Art Modell for higher rent and revenue shares, it might not have
been able to use tax-exempt financing to build the stadium. As a
consequence of this perverse interpretation of the law, communities
building sports stadiums must use tax revenues from broad-based
taxes--such as a hotel or restaurant tax or an add-on to the sales
tax--to pay off the loan for the stadium. Because such taxes are
paid by everybody, and in most communities are part of general
revenues to be used for such services as schools and law
enforcement, the misuse of the federal tax code ensures that
stadiums will continue, as Modell observed, to take precedence over
libraries in many communities.
Senator Daniel Moynihan's legislation (S.
1880) would end this perverse misuse of the law by classifying
bonds issued to finance professional sports facilities as "private
activity" bonds, thereby making them ineligible for tax-exempt
privileges. Sports team owners would have to finance the
construction of their own facilities, as is still done in some
communities, and this in turn would allow local officials to focus
on effective urban revitalization strategies and free millions of
dollars in prospective public funds that could be redirected to
legitimate public purposes or tax relief.
CONCLUSION
The
question of whether to subsidize a professional sports facility is
a contentious one wherever raised, and in many cases the community,
through referendum or the decision of elected officials, chooses to
go forward with full or partial public support for the facility.
Unlike other forms of entertainment, professional sports franchises
create powerful emotional bonds within the community that elevate
the aura of a team to "public good" and enable easier access to
public funds.
If a
community's democratically determined priorities endorse such
spending, then few can argue with it. But advocates of subsidized
sports, convention centers, and other forms of public entertainment
should be honest about what is at stake and should not entice the
public to believe they are supporting broad-based economic
development that will contribute heavily to a city's economy. At
the same time, elected officials in declining cities, however
desperate they may be for new investment in their communities, must
realize that the revitalization boost from such projects is
negligible and that community resources and civic energy would be
better directed to more productive activities.
As
the record from around the country indicates, the economic boost
from public investment in entertainment complexes is exceptionally
modest at best, and counterproductive at worst. It diverts scarce
resources and public attention from the less glamorous activities
that make more meaningful contributions to the public's
well-being.
Ronald D.
Utt is Grover M. Hermann Fellow in Federal Budgetary
Affairs at The Heritage Foundation.
Endnotes