The D.C. Council agreed to borrow $106 million to help pay for a new stadium for D.C. United in December. While supporters of the project hope it will bring new life to the impoverished Buzzard Point neighborhood, most economists are skeptical about how much a stadium contributes to a city's economy, and councilman David Catania warned that the debt could leave the district less able to pay for needed repairs to schools, hospitals and the Metro.
His warnings were ignored, and he ultimately went along with the proposal, as the council found itself in a situation that's all too typical in cities with professional sports teams. Worried that the team might leave the city, they gave it millions to stay. Around the country, there are at least 64 major-league sports stadiums partially paid for with public debt, according to an analysis by Bloomberg. And since municipal governments can issue bonds that are exempt from federal income tax, taxpayers nationwide ultimately help to pay back the debt, even for teams that are thousands of miles away.
"It's a silly tax break," said Matt Gardner, director of the Institute on Taxation and Economic Policy. "It's ludicrous that the federal government would be subsidizing state and local borrowing to give investors tax breaks to make it easier for them to build sports stadiums."
President Obama has proposed eliminating that exemption for sports facilities in his budget released this week. Here's what the plan would do.
Right now, anyone who loans money to a local government by buying a bond doesn't have to pay taxes on the interest from that bond, as long as the local government is paying back at least 90 percent of the debt or as long as the money is spent on a project that is used for government purposes at least 90 percent of the time. In D.C. United's case, for example, even though the soccer-specific stadium won't be used for government purposes, the district is paying back all of the debt, so its lenders don't have to pay federal taxes on the interest from the bonds. As a result, the lenders will charge the city slightly less in interest on the bonds. That's a great deal for the bondholders and a good deal for the city, but a terrible one for taxpayers nationally.
Obama wants to change the law so that who is paying the debt for sports facilities is irrelevant to whether the interest is exempt. D.C. United's bonds would not be exempt from taxes. City councils would still butter up their teams, but they'd have to pay more in interest to do so, and the federal taxpayer wouldn't be on the hook. That is if Congress agrees to the proposal, which is unlikely given the political complications of tax reform.
Dennis Zimmerman, the director of projects at the American Tax Policy Institute, made a similar suggestion in a report 19 years ago. "I'm pleased," he said. "And I don't think it stands a snowball's chance in hell."
Stadiums, of course, are only a particularly fishy example of a common practice among local governments: using subsidies to lure businesses of all types away from other jurisdictions, from manufacturing plants to warehouses. These projects might likewise be financed by bonds that are exempt from federal taxes.
Economists point out that this competition for business contributes nothing to the national economy as a whole, since it simply relocates business from one area to another, at the expense of local governments that are often short on cash to begin with. What's worse, they can make the entire country less efficient, as businesses locate wherever they can get the best deals on their taxes, not where they're closest to their customers or their suppliers.
These problems are glaringly obvious with stadiums. Each league fixes the number of professional sports teams, so the competition doesn't increase the overall amount of sports being played. Washington's gain in holding onto D.C. United was a loss for Baltimore or wherever the team might have moved. Meanwhile, some teams probably struggle on in markets too small to support a competitive roster because the local government is paying them to stay.
Obama's proposal on stadiums would save the federal government $542 million in the next decade, pocket change in the context of the $4 trillion budget, but Gardner hopes it's just the beginning. "This could be the leading edge of a broader discussion about when, if it all, state and local government should be able to use tax-exempt bonds to build infrastructure more generally," he said.