Sports, Jobs, and Taxes: The Economic Impact of Sports Teams and Stadiums
America is in the midst of a sports building boom. Professional sports teams are demanding and receiving fancy new playing facilities that are heavily subsidized by government.
October 2015 | by David Delaney
New sports facilities costing at least $500 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 $15 billion will be spent on new facilities for professional sports teams before 2020.
Most of this $15 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 Houston Oilers' 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.
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.
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.