Today the House Ways and Means Committee released the text of the tax reform bill, the Tax Cuts and Jobs Act. My colleague Brian Riedl has offered an initial appraisal of the bill looking at the major changes. Tucked into the text is a smaller provision that would scrap one of the most stubbornly persistent forms of corporate welfare, tax-exempt bonds for stadiums. This form of financing has federal taxpayers to subsidize the construction of professional sports stadiums across the country for years. Now is an appropriate time to end it.
When local governments issue bonds, the interest on public-purpose bonds is exempt from federal taxation, while bonds financing private activity are subject to taxation. There are specific exemptions for private activity bonds, for example for bonds financing charitable, educational, religious, or other similar organizations. Professional sports stadiums do not generally meet those criteria, but have nevertheless been treated in a similar fashion.
The Tax Reform Act of 1986 attempted to scrap federal tax subsidies for stadiums by classifying bonds as private, and not eligible for the tax exemption for bonds if the share of nongovernmental proceeds and financing exceeded a certain threshold. The thinking at the time was that few, if any, stadium projects would qualify, as the bonds would have to finance 90 percent of the stadium construction costs to qualify. Instead of cutting down on the number of stadiums that would qualify, the new rule just led more state and local governments to finance more of the stadium costs so they would continue to be eligible.
This source of financing forces federal taxpayers to subsidize the construction of new stadiums for professional sports teams, even though the benefits of that construction accrue to private agents such as the owners. Past research has found some evidence that the availability of more subsidies, including through this channel, have led owners to demand new stadiums at a faster rate.
According to a report from the Brookings Institution, 36 professional sports stadiums have been financed using these tax-exempt bonds since 2000. Multiple teams in every major sport made use of the tax-exempt bonds offered, and foregone federal revenue since 2000 totaled $3.7 billion.
The tax reform bill would make interest on bonds issued for professional sports stadiums subject to tax, effective for all bonds issued after the bill was introduced. The reform will not be a major revenue driver, as the Joint Committee on Taxation estimates it would increase revenue by $0.2 billion over a decade. The provision would finally remove a carve-out that allows the use federal subsidies to benefit private entities, without justification from a policy perspective. Furthermore, the mechanism has remained in place for decades, despite previous attempts to address it.
The measure has a history of bi-partisan support as members of both parties have recognized the flaws inherent in the status quo. In the House, Rep. Steve Russell (R-OK) sponsored the No Tax Subsidies for Stadiums Act, while in the Senate Cory Booker (D-NJ) and James Lankford (R-OK) sponsored similar legislation. President Obama included such a measure in two of his budget proposals. Now, in the tax reform legislation crafted by the Trump administration and Congressional Republicans, a legislative fix could finally become law.
Supporters of the exemption, and of stadium subsidies in general, argue that stadiums generate economic benefits for the surrounding areas that justify the incentives offered. However, projections of these benefits are often overstated, and the weight of evidence from multiple studies suggests that sports stadiums are unlikely to generate significant positive effects.
The change is a welcome development and would remove one of the sources of corporate welfare for stadiums, but it cannot do anything about incentives offered at the state and local level. While federal subsidies through the tax-exempt bond financing exceed $3 billion, total stadium subsidies including incentives at other levels of government approach $12 billion. Las Vegas offered a $750 million package to lure the Raiders away from Oakland, financed by an increase in hotel taxes. Even if states were to continue to insist on subsidizing stadium construction, removing the tax-exempt bond channel would at least attenuate their incentive to do so. It would also potentially encourage them to focus more on taxes that at least fall primarily on people who make use of the stadium, such as surcharges on tickets purchased, which would currently put them at risk of running afoul of the 1986 criteria.
Removing this channel of subsidies for stadiums would reduce federal government involvement in that area, and federal taxpayers would no longer be required to help finance them. The provision’s inclusion in the tax reform bill is a positive development, and indicative of the many ways the federal tax code could be improved.
Charles Hughes is a policy analyst at the Manhattan Institute. Follow him on Twitter @CharlesHHughes.
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