Stadium subsidy


A stadium subsidy is a type of government subsidy given to professional sports franchises to help finance the construction or renovation of a sports venue. Stadium subsidies can come in the form of tax-free municipal bonds, cash payments, long-term tax exemptions, infrastructure improvements, and operating cost subsidies. Funding for stadium subsidies can come from all levels of government and remains controversial among legislators and citizens. When surveyed, 86% of economists favored eliminating public subsidies for professional sports francises.

Background

In the United States

Eighty years ago, stadium subsidies were essentially unheard of, with funding for professional sports stadiums coming from private sources. In 1951, MLB commissioner Ford Frick decided that league teams were bringing large amounts of revenue to their host cities from which owners weren't able to profit. He announced that cities would need to start supporting their teams by building and maintaining venues through public subsidy. Today, most new or renovated professional sports stadiums are financed at least partly through stadium subsidies. While Frick may have been a catalyst, this change has been primarily caused by the increase in bargaining power of professional sports teams at the expense of their host cities. As the years have passed, municipalities have come to love their local professional sports teams.
Recently there have been many studies that have suggested that there are a number of direct and indirect economic benefits associated with hosting a professional sports team, although each city experiences this to a different degree. Even still, a survey conducted in 2017 found that "83% of economists polled believed that a subsidy's cost to the public outweighed the economic benefits". The economics behind issuing billions of dollars to professional athletic organizations are still unclear, but cities have clearly showed that they are willing to assume the best, as recent years have seen an increase in the number of subsidies issues and the amount of money issued per subsidy.
Twenty-seven of the 30 stadiums built between 1953 and 1970 received more than $450 million in total public funding for construction. During this period, publicly funding a stadium grew in popularity as an effective incentive to attract professional sports teams to up and coming cities. Famous examples include the Brooklyn Dodgers leaving New York in exchange for 300 acres in Chavez Ravine and the New York Giants moving to San Francisco for what would eventually become Candlestick Park. The Los Angeles Coliseum became the first fully publicly funded stadium in 2018.
Over time, a market for subsidies has come into existence. Sports teams have realized their ability to relocate at lower and lower costs to their private contributors. Because local governments feel that keeping their sports teams around is critical to the success of their cities, they comply and grant teams subsidies. This creates a market for subsidies, where professional athletic organizations can shop between cities to see which municipality will provide them with the most resources. Teams in the NFL have a major incentive to keep their stadium up to date, as the NFL allows teams to bid to host the Super Bowl and takes recent and planned renovations into account. Many NFL teams in recent years have asked for subsidies for the construction of entirely new stadiums, like the Atlanta Falcons, who were subsequently awarded the contract for Super Bowl LIII.

In Europe

Public subsidies for major league sports stadiums and arenas are far less common in Europe than in the United States. The relationship between the local clubs and the cities that host them is typically much stronger than in the United States, with the team being more intrinsic to the cities' identity. Cities would be significantly more upset at the departure of their beloved local teams, and viable alternative cities already have their own clubs to whom their residents are loyal. As a result, the leagues in Europe have significantly less bargaining power. They will not threaten to relocate to another city if not provided with a subsidy, or at the very least the threat would not be credible. It is also worth noting that the NFL, the league in the United States whose stadiums have the highest percentage of public financing of the four major leagues, does not have an equivalent in Europe; American football is relatively unpopular.

Types of Subsidies

There are two primary ways that a city facilitates the construction of a stadium. The first, and most commonly used method, is a direct subsidy. This involves a city promising a certain amount of revenue to go towards the construction, maintenance, and renovation of a stadium. Other times, the city will give tax breaks to teams or stadium owners in lieu of a direct cash transfer. Over a period of time, a reduction in the taxes paid against the stadium generally saves the organization building the stadium around the same amount as a subsidy would be worth.
In the US, the annual subsidies provided by the state for the construction of stadiums are in the range of billions of dollars. A 2005 study of all sports stadiums and facilities in use by the four major leagues from 1990 to 2001 calculated a total public subsidy of approximately $17 billion, or approx. $24 billion in 2018 dollars. The average annual subsidy during that period was $1.6 billion for all 99 facilities included in the study, with an average of $16.2 million per facility annually. A 2012 Bloomberg analysis estimates that tax exemptions annually cost the U.S. Treasury $146 million.
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Benefits

In granting stadium subsidies, governments claim that the new or improved stadiums will have positive externalities for the city. Proponents tout improvements to the local economy as the primary benefits. Economists who debate the issue have separated the effects on a local economy into direct and indirect effects. Direct benefits are those that exist as a result of the "rent, concessions, parking, advertising, suite rental, and other preferred seating rental", and direct expenses come from "wages and related expenses, utilities, repairs and maintenance, insurance," and the costs of building the facilities. Generally, these benefits vary widely. The Baltimore Orioles, for example, estimate that each game they host brings $3 million in economic benefits to the city. Over the course of an entire baseball season, the Orioles will have 81 home games, which means that benefit gets multiplied to be around $243 million a season. For NFL teams the case is much different, as there are only 8 home games a season. Over the lifetime of a stadium, which is often between 20–30 years, this benefit accumulates even more. Essentially, this is the basis on which municipalities evaluate the benefit of a team. Supporters further argue that the stadiums attract tourism and businesses that lead to further spending and job creation, representing indirect benefits. All of the increased spending causes a multiplier effect that leads to more spending and job creation and eventually finances the subsidy through increased tax revenues from ticket and concessions sales, improved property values and more spending nearby the stadium. In some cases, there has even been an observed reduction in crime during a game, although the aggregate effect of professional sports on crime is disputable. Additionally, there has recently been research that suggests that home games generate what is called a "sunny day benefit". There is a measurable drop in local spending that occurs within a city on a rainy day, but with a professional sports team playing a game, spending increases significantly. Jordan Rappaport, an economist at the Federal Reserve Bank of Kansas, estimates that this benefit is between $14 to $24 million a year, which can be compounded over the life of a stadium.
Advocates for stadium subsidies also claim less quantifiable positive externalities, such as civic pride and fan identification, so that hosting a major sports team becomes something of a public good. Local sports fans enjoy the benefit even if they do not pay for it.
When a city conducts a calculation to assess what they are willing to pay for a subsidy, they use an economic model that attempts to quantify the various social benefits for each dollar invested. This is done through a social marginal benefit evaluation, which takes the sums of all of the private benefits that result from investing, intended or not. Economists consider all the economic effects of having a professional athletic team in a city, like the "sunny day" benefit, job creation, civic pride, increased tourism, decreases/increases in crime rates, etc. The social marginal cost is equal to the sum of the private marginal benefits. The marginal cost is known only by the government, who deliberates with franchises to decide how much bringing a team to their city will cost. The image to the right is a good visual representation of this analysis. In this diagram, the city would like to acquire four teams, since at that point the social marginal benefit of recruiting a team still exceeds the marginal cost.

Criticisms

Many criticisms exist regarding the use of stadium subsidies. First, critics argue that new stadiums generate little to no new spending. Instead, what fans spend in and around the stadium are substitutes for what they would otherwise spend on different entertainment options. Thus, this argument contends, new stadiums do not cause economic growth or lead to increased aggregate income. In fact, this suggests that money being substituted towards concessions, tickets, and merchandise actively harms the economy surrounding a stadium. For example, the Little Caesars Arena in Detroit, Michigan was subsidized by a bond issue, diverting taxes paid by local businesses into stadium construction. Annually, an estimated $15 million in taxpayer funds earmarked for public schools are used to subsidize the stadium.
Another criticism of stadium subsidies is that much of the money the new stadiums bring in does not stay in the local economy. Instead of going to stadium employees and other sources that would benefit the local community, a lot of the money goes toward paying the organizations. Those payments come from either the state or city government, where spending normally goes towards social welfare programs or salaries for government employees. It has been argued that the opportunity cost of a subsidy for a sports team is far greater than the benefit, since the billions of dollars that are spent on a stadium could be better spent on schools, firehouses, public transportation, or police departments.
Critics also argue that the construction of new stadiums could cause citizens and businesses to leave a city because of eminent domain issues. If a city is forced to take land from its citizens to build a new stadium, those who have lost land could become angry enough to leave the city. If they are business owners, then they will likely take their businesses with them. These trade-offs are a part of the marginal cost calculation the city does. Much like the social marginal benefit calculation the city performed to find what benefits teams brought to the city, the social marginal cost calculation sums up all of the unintended negative effects from a particular spending plan.
A review of the empirical literature assessing the effects of subsidies for professional sports franchises and facilities reveals that most evidence goes against sports subsidies. Specifically, subsidies cannot be justified on the grounds of local economic development, income growth or job creation.