America – Sports Construction Boom America is in the midst of a sports construction boom. New sports facilities costing at least $200 million each have been completed or are under way in Baltimore, Charlotte, Chicago, Cincinnati, Cleveland, Milwaukee, Nashville, San Francisco, St. Louis, Seattle, Tampa, and Washington, D.
C., and are in the planning stages in Boston, Dallas, Minneapolis, New York, and Pittsburgh. Major stadium renovations have been undertaken in Jacksonville and Oakland.
Industry experts estimate that more than $7 billion will be spent on new facilities for professional sports teams before 2006.Most of this $7 billion will come from public sources. The subsidy starts with the federal government, which allows state and local governments to issue tax-exempt bonds to help finance sports facilities. Tax exemption lowers interest on debt and so reduces the amount that cities and teams must pay for a stadium.
Since 1975, the interest rate reduction has varied between 2.4 and 4.5 percentage points. Assuming a differential of 3 percentage points, the discounted present value loss in federal taxes for a $225 million stadium is about $70 million, or more than $2 million a year over a useful life of 30 years.Ten facilities built in the 1970s and 1980s, including the Superdome in New Orleans, the Silverdome in Pontiac, the now-obsolete Kingdome in Seattle, and Giants Stadium in the New Jersey Meadowlands, each cause an annual federal tax loss exceeding $1 million. State and local governments pay even larger subsidies than Washington.
Sports facilities now typically cost the host city more than $10 million a year. Perhaps the most successful new baseball stadium, Oriole Park at Camden Yards, costs Maryland residents $14 million a year. Renovations aren’t cheap either: the net cost to local government for refurbishing the Oakland Coliseum for the Raiders was about $70 million.Most large cities are willing to spend big to attract or keep a major league franchise. But a city need not be among the nation’s biggest to win a national competition for a team, as shown by the NBA’s Utah Jazz’s Delta Center in Salt Lake City and the NFL’s Houston Oilers’ new football stadium in Nashville. Why Cities Subsidize Sports The economic rationale for cities’ willingness to subsidize sports facilities is revealed in the campaign slogan for a new stadium for the San Francisco 49ers: Build the Stadium–Create the Jobs! Proponents claim that sports facilities improve the local economy in four ways. First, building the facility creates construction jobs.
Second, people who attend games or work for the team generate new spending in the community, expanding local employment. Third, a team attracts tourists and companies to the host city, further increasing local spending and jobs. Finally, all this new spending has a multiplier effect as increased local income causes still more new spending and job creation.Advocates argue that new stadiums spur so much economic growth that they are self-financing: subsidies are offset by revenues from ticket taxes, sales taxes on concessions and other spending outside the stadium, and property tax increases arising from the stadium’s economic impact. Unfortunately, these arguments contain bad economic reasoning that leads to overstatement of the benefits of stadiums. Economic growth takes place when a community’s resources–people, capital investments, and natural resources like land–become more productive. Increased productivity can arise in two ways: from economically beneficial specialization by the community for the purpose of trading with other regions or from local value added that is higher than other uses of local workers, land, and investments.
Building a stadium is good for the local economy only if a stadium is the most productive way to make capital investments and use its workers.In our forthcoming Brookings book, Sports, Jobs, and Taxes, we and 15 collaborators examine the local economic development argument from all angles: case studies of the effect of specific facilities, as well as comparisons among cities and even neighborhoods that have and have not sunk hundreds of millions of dollars into sports development. In every case, the conclusions are the same. A new sports facility has an extremely small (perhaps even negative) effect on overall economic activity and employment. No recent facility appears to have earned anything approaching a reasonable return on investment. No recent facility has been self-financing in terms of its impact on net tax revenues.
Regardless of whether the unit of analysis is a local neighborhood, a city, or an entire metropolitan area, the economic benefits of sports facilities are de minimus. As noted, a stadium can spur economic growth if sports is a significant export industry–that is, if it attracts outsiders to buy the local product and if it results in the sale of certain rights (broadcasting, product licensing) to national firms. But, in reality, sports has little effect on regional net exports.
Sports facilities attract neither tourists nor new industry. Probably the most successful export facility is Oriole Park, where about a third of the crowd at every game comes from outside the Baltimore area.(Baltimore’s baseball exports are enhanced because it is 40 miles from the nation’s capital, which has no major league baseball team.
) Even so, the net gain to Baltimore’s economy in terms of new jobs and incremental tax revenues is only about $3 million a year–not much of a return on a $200 million investment. Sports teams do collect substantial revenues from national licensing and broadcasting, but these must be balanced against funds leaving the area. Most professional athletes do not live where they play, so their income is not spent locally. Moreover, players make inflated salaries for only a few years, so they have high savings, which they invest in national firms. Finally, though a new stadium increases attendance, ticket revenues are shared in both baseball and football, so that part of the revenue gain goes to other cities.On balance, these factors are largely offsetting, leaving little or no net local export gain to a community.
One promotional study estimated that the local annual economic impact of the Denver Broncos was nearly $120 million; another estimated that the combined annual economic benefit of Cincinnati’s Bengals and Reds was $245 million. Such promotional studies overstate the economic impact of a facility because they confuse gross and net economic effects. Most spending inside a stadium is a substitute for other local recreational spending, such as movies and restaurants. Similarly, most tax collections inside a stadium are substitutes: as other entertainment businesses decline, tax collections from them fall. Promotional studies also fail to take into account differences between sports and other industries in income distribution.
Most sports revenue goes to a relatively few players, managers, coaches, and executives who earn extremely high salaries–all well above the earnings of people who work in the industries that are substitutes for sports. Most stadium employees work part time at very low wages and earn a small fraction of team revenues. Thus, substituting spending on sports for other recreational spending concentrates income, reduces the total number of jobs, and replaces full-time jobs with low-wage, part-time jobs. A second rationale for subsidized stadiums is that stadiums generate more local consumer satisfaction than alternative investments. There is some truth to this argument. Professional sports teams are very small businesses, comparable to large department or grocery stores.They capture public attention far out of proportion to their economic significance. Broadcast and print media give so much attention to sports because so many people are fans, even if they do not actually attend games or buy sports-related products.
A professional sports team, therefore, creates a public good or externality–a benefit enjoyed by consumers who follow sports regardless of whether they help pay for it. The magnitude of this benefit is unknown, and is not shared by everyone; nevertheless, it exists. As a result, sports fans are likely to accept higher taxes or reduced public services to attract or keep a team, even if they do not attend games themselves. These fans, supplemented and mobilized by teams, local media, and local interests that benefit directly from a stadium, constitute the base of political support for subsidized sports facilities.The Role of Monopoly Leagues While sports subsidies might ow from externalities, their primary cause is the monopolistic structure of sports.
Leagues maximize their members’ profits by keeping the number of franchises below the number of cities that could support a team. To attract teams, cities must compete through a bidding war, whereby each bids its willingness to pay to have a team, not the amount necessary to make a team viable. Monopoly leagues convert fans’ (hence cities’) willingness to pay for a team into an opportunity for teams to extract revenues. Teams are not required to take advantage of this opportunity, and in two cases–the Charlotte Panthers and, to a lesser extent, the San Francisco Giants–the financial exposure of the city has been the relatively modest costs of site acquisition and infrastructural investments.But in most cases, local and state governments have paid over $100 million in stadium subsidy, and in some cases have financed the entire enterprise. The tendency of sports teams to seek new homes has been intensified by new stadium technology. The rather ordinary cookie-cutter, multipurpose facility of the 1960s and 1970s has given way to the elaborate, single-sport facility that features numerous new revenue opportunities: luxury suites, club boxes, elaborate concessions, catering, signage, advertising, theme activities, and even bars, restaurants, and apartments with a view of the field.
A new facility now can add $30 million annually to a team’s revenues for a few years after the stadium opens. Because new stadiums produce substantially more revenues, more cities are now economically viable franchise sites–which explains why Charlotte, Jacksonville, and Nashville have become NFL cities.As more localities bid for teams, cities are forced to offer ever larger subsidies. What Can Be Done? Abuses from exorbitant stadium packages, sweetheart leases, and footloose franchises have left many citizens and politicians crying foul.
What remedy, if any, is available to curb escalating subsidies and to protect the emotional and financial investments of fans and cities? In principle, cities could bargain as a group with sports leagues, thereby counterbalancing the leagues’ monopoly power. In practice, this strategy is unlikely to work. Efforts by cities to form a sports-host association have failed.
The temptation to cheat by secretly negotiating with a mobile team is too strong to preserve concerted behavior.Another strategy is to insert provisions in a facility lease that deter team relocation. Many cities have tried this approach, but most leases …