Research by Carolina Law faculty members has thrust them into the national spotlight recently. Read the full article in the Spring-Summer 2014 issue of Carolina Law.
Should a St. Louis Cardinals fan in North Carolina have to help pay for the new Yankee Stadium? Patricia Bryan, Martha Brandis Professor of Law and a lifelong Cardinals fan, wondered that when she noticed the massive federal subsidy from tax-exempt bonds financing the stadium. Professional baseball and football teams have often taken advantage of this controversial subsidy, but the Yankee deal was structured in a way that could result in an increasing drain on the Treasury. Her article, “Building the New Yankee Stadium: Tax-Exempt Bonds and Other Subsidies for the Richest Team in Baseball,” was published in “The Cooperstown Symposium on Baseball and American Culture: 2011-12.”
When Yankee Stadium opened in 2009, public subsidies were estimated at $1.2 billion out of total cost of $2.3 billion. The Yankees justified the subsidies by promising that the stadium would promote economic development. According to research cited by Bryan, though, economists agree that contributions to sports facilities produce meager community-wide benefits, while wealthy team owners reap huge financial gains.
Much of the financial support for Yankee Stadium came from the city and state, but the federal tax exemption lowered costs by nearly $400 million. And, in a sleight-of-hand accounting move, the deal avoided the public scrutiny required for exemption.
The federal exemption is justified as encouraging projects that benefit the general public. For instance, a community might not want to pay for a bridge or airport open to more than just the locals. As an incentive, the federal government gives up tax revenue from interest paid on municipal financing bonds, and city and states save by paying lower tax-exempt interest rates.
When the project is used by a private business such as a sports team, the tax exemption is allowed only if the community agrees to repay the bonds with general tax revenues. The rule was intended to ensure that local citizens supported the project as the best use of collective funds. Some municipalities have raised money with new taxes falling mostly on the poor (such as lotteries) or on tourists (such as taxes on hotels and rental cars). Local taxpayers may not feel the burden of these taxes, but they give up potential sources of revenue that could pay for schools or police protection. In the New York deal, though, local taxpayers didn’t have the chance to consider alternative ways to spend the money.
As other sports teams have done, the Yankees threatened to move to a different city unless they received public subsidies, including the federal exemption. Given severe budget shortfalls, though, local politicians feared that using general tax revenues would trigger opposition. They proposed a new idea: The Yankees would be excused from paying property taxes and would, instead, contribute payments-in-lieu-of-taxes, or PILOTs, to a separate trust account used only to repay the financing bonds. Since the money wasn’t reflected in the city’s budget, the public didn’t see it as available to avoid layoffs of teachers, police and firefighters.
The deal enabled officials to say publicly that the Yankees were paying for the stadium and yet argue to the IRS that general tax revenues would be used so that the bonds qualified as tax exempt.
Municipalities would oppose any tightening of federal oversight, and they wouldn’t want the feds telling them how to invest borrowed funds. But it’s expensive to allow local governments to offer the benefit of the federal exemption to privately owned sports teams.
“The cost of subsidizing stadiums may be relatively low for each taxpayer,” Bryan says, “but we should ask whether federal taxpayers benefit from the enormous federal subsidy. Unless the law is changed, we’ll keep depleting our scarce national resources by helping build expensive stadiums, and we’ll continue to enrich wealthy team owners.”
-May 8, 2014