By Justin Chan | United States
The purpose of this research is to illustrate the economic impact of developing stadiums with public monies on communities, and the comparison of the trade-offs with short-term and long-term analysis. This report is divided into sections that explain the problem, provide convincing arguments from both sides, and recommendations about what the government and localities can do to ensure long-term economic prosperity and stability. What was found was that economic growth and development argued by proponents for building stadiums is far outweighed by the negative consequences that they create for the taxpayers in the community. It is clear that from the points illustrated in this research that the costs with all aspects of a stadium do not provide the economic incentives hoped for and is a detriment to local and state economies.
The History of Stadium Development in America
Public interest in spectator sports did not become popular until the turn of the 20th century when many prominent politicians such as Theodore Roosevelt made public announcements regarding sporting incidents. Over time, with the growth of media technology such as the radio and television, America became more captivated with spectator sports, such that the United States Senate created the Federal Sports Act in 1972 (Sauew).
The creation of the first stadiums or playing fields developed during the mid-19th century, such as the Union Club Grounds in Brooklyn, New York. From the mid-19th century to the mid 20th century, these stadiums were financed by private money, and after World War II, stadiums began to be funded by public money and loans. Today, less than 10% of all sports facilities since the 1950s have been built without using public money and have cost approximately $2 billion by the end of the 20th century (Dietsch; Zaretsky).
Funding of stadiums transitioned from that of private investments to public subsidies as a result of a progression of laws in the 20th century that led to the Tax Reform Act of 1986. The first income tax in the United States in 1913 allowed state and local governments to issue bonds, and furthermore, the Revenue and Expenditure Control Act of 1968 exempting sports stadiums from the 25 percent threshold for tax-exempting financing. Both of these laws resulted in the Tax Reform Act of 1986 which declared that a bond was only considered private if “more than 10 percent of the bond proceeds were to be used by a nongovernmental entity, and more than 10 percent of the debt service was secured by property used directly or indirectly in a private business” (Gold et al.). This allowed sports owners to finance their stadiums by relying on more than 10% of their municipal bond subsidy to come from state and local governments. This piece of legislation has created a debate about the economic incentives and development costs of stadiums regarding the public good.
The Current Day Dilemma
With the rise of a more globalized world due to technological advancements such as mass media like the internet and an expansion of global trade, there also has been an increase in the cost of stadiums and their impact on the taxpayer due to government subsidies. The costs to build a stadium have ballooned from under $100 million in the 1970s to well over $350 million nowadays (Weiner). The increase in cost exceeds that of the rate of inflation, in fact, “Increases in the construction cost index have been approximately 50 percent and 1000 percent greater than increases for the consumer and wholesale prices” (Baade et al.). Not only have construction costs increased, government subsidies have increased as a response, from nearly $150 million in 1990 to approximately $265 million in just a decade (Coates). The current debate is whether or not the economic development as a result of constructing stadiums and providing a space for sports and recreational activities outweighs that of the government subsidies, and subsequent funds provided for the stadium.
Proponents and Arguments for the Continued Development of Stadiums
Those that support the development of stadiums in localities often note that the creation of these stadiums brings economic prosperity to the locality through the creation of new jobs and revitalizing the economy again. Furthermore, they also note that citizens will create a new culture and inhabit intrinsic values and feelings towards their locality and sports teams as well.
Proponents say that the development of sport facilities will create construction jobs, generate new types of spending within the community, attract people from outside the locality, and provide a multiplier effect, such that every dollar put in to build and maintain the stadium will yield more than dollar in economic growth (Zimbalist & Noll). In addition to this, with the increased amount of revenues coming from property tax and other taxes that resulted from the construction of the stadium like sales tax it will expand the local economy by providing for this additional tax revenue (Baade). A clear example of the economic growth would be The Staples Center in downtown Los Angeles, as the creation of the stadium led to, “a hotel, a movie theater, an ice skating rink, a plaza, and kept expanding” (Semuels). As shown, there has been economic growth due to the building of stadiums in major cities and localities.
Another aspect that proponents argue are the intangible benefits of having a sports stadium in their community. It creates a sense of civic pride and a willingness to pay for stadium subsidies, due to the fascination and culture that is created when a sports team enters a community (Owen). This civic pride often blinds these fans from seeing the true economic cost of building stadiums due to the mobilization of teams, the media, and surrounding local interests. The intangible benefits are such a significant impact that if a team leaves the city for economic and political reasons, “something vital would be lost: ‘the stability and tradition fans cherish. A truly competitive sports world would be as chaotic as the computer and entertainment markets’” (Stadium Scam). Fans and citizens have a genuine and deep emotional interest in their sports teams and facilities.
All of these claims without a clear economic foundation have been funded by the owners of these sports franchises, and are biased. In addition to this, these owners use tactics against the public and politicians that are monopolistic such as having the number of teams less than the number of major cities and threatening to move unless there are public funds to provide for a private institution (Baade et al.). The public’s view has been skewed as a result of improper research and analysis, and individuals have to learn the real opportunity cost of developing a stadium.
The Economic Claim Against the Creation and Maintenance of Stadiums
In contrast to the substantial claims made by proponents for the creation of stadiums, the facts are that there is little to no evidence of economic growth, and the rate of return on investment is not positive. Among an overwhelming majority of independent economic analysis and research, along with the consensus of 83% of economists, they found that, “‘Providing state and local subsidies to build stadiums for professional sports teams is likely to cost the relevant taxpayers more than any local economic benefits that are generated’” (Wolla). The development of a stadium is not economically sound for the locality and the taxpayers within it.
With this, private owners often get their subsidies and incentives to have the sports teams in that specific locality due to the government publicly financing stadiums and stadium renovation, offering favorable leases, direct cash payments, and giving tax-exempt bonds (Weiner). All of these government subsidies do not yield in a positive economic growth for the locality, and especially with tax-exempt bonds, which are the most prevalent. The rate of interest is approximately 2-4.5 percent, which is too low to be effective in the long run, while it should be between 8-9.5 percent to see a positive rate of return on investment (Gold et al.).
To those who argue that the development of a stadium will promote new jobs, and
provide stability to the local economy, this logic is often riddled with a lack of economic understanding. In fact, a majority of the jobs created are low-paying and seasonal jobs that do not promote the development of stable jobs in a society. In fact, when two new stadiums were proposed for the NFL Bengals and MLB Reds, the estimate was to create 7,645 jobs at the cost of $68,000, but in reality, “The cost per job was actually going to run more than $147,000. In contrast, state economic development programs spend about $6,250 per job to create new jobs” (Zaretsky). It would be wiser that government officials spend on programs such as education and transportation development in order to create jobs that are secure and benefit the economy without wasting more resources than necessary.
Moreover, most of the spending that happens in the stadium is a transfer of spending from elsewhere in the community, and very rarely from outside the locality. As a result of this, a lot of the transfer of wealth is being facilitated inside the locality, and not creating investment in the local economy. Two economists, Baade and Dye, found that “the impact of a stadium on the local economy depends, therefore, on the details of where each dollar is spent and would be spent—on imports, on exports, or on local production” (Baade et al.). Of course, there are those few exceptions, such as sports teams in Los Angeles, as the stadium has assisted in the development of the downtown area, but these are only a few and far examples of stadiums and their positive impacts on the local economy.
The cost of these subsidies is transferred to the taxpayers of the localities, and in some instances to citizens around the nation, and are built on a monopolistic industry regarding sports teams and entertainment. Sports teams often threaten the public and government officials about moving the team elsewhere in order for upgrades to the stadiums and subsidies to maintain them. A method they use to do this is creating the demand for teams being lower than that of major cities in the United States (Weiner). To fund these tax-exempt municipal bonds and subsidies, the cost is transferred to the citizen through an increase in taxes such as higher property taxes, hotel taxes, and sales taxes (Povich). All of these taxes decrease the incentive for outside money to come into the locality and create economic growth.
Through loopholes in the tax system and federal legislation, to tactics that are immoral and unethical in the business world, sports teams and their owners have prayed on inaccurate facts supported by their own bias research. This has led to an increase in taxes on citizens living in the locality, without the benefits that were sought after due to the development of the stadium. It should be the understanding that the economic outcomes that have been almost universally agreed upon far outweigh the instinct values of stadiums and the false economic incentives that were hoped for.
Recommendations to Stop Wasteful Spending of Public Monies
To ensure public monies are well spent regarding the development of stadiums, and actually promote a positive rate of return on investment the recommendations are provided:
1. Amend the Tax Reform Act of 1986: To have bonds federally exempt from tax, have no more than 10 percent of the debt service be used by the sports team (Gold et al.)
2. Increase Interest Rates on Municipal Bonds: Have government officials be advised by an independent economist to find a positive rate of return on investment through the interest rates on municipal bonds or have the minimum interest rate on these bonds be 8% (Gold et al.).
3. Ensure Agreement by the Public through Referendums and Votes: To ensure
intrinsic values of stadiums are accounted for, a simple majority of the citizens should hold a referendum to approve the stadium’s construction, maintenance, and other costs.
Through independent and non-biased research, it can be concluded that the economic impact of building a new stadium in a community is far outweighed by the negative repercussions that are transferred onto the citizens of the localities through increased taxes, the lack of real economic growth through jobs and stability, and the misdirection of funds into stadiums rather than public work programs. From the research presented, economic benefits of a new stadium do not merit the costs to build them, and it should be the role of politicians and citizens to see the true economic cost of building stadiums. It should be noted that there are intrinsic values to the citizens as a result of building a stadium, but those values are outweighed by the economic disadvantages. In short, stadiums are a negative economic cost to the community as in the long run the rate of inflation will only cause stadiums to cost more and more with little to no benefits to economic development and growth.
Image from KVIA.
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