The Economics of Sports FIFTH EDITION Chapter THE PUBLIC FINANCE OF SPORTS: WHO PAYS AND WHY? MICHAEL A LEEDS | PETER VON ALLMEN Introduction: The Face of Evil • In the late 1950s, two New York reporters— independently choose Stalin, Hitler and Walter O’Maley as the most despicable human beings who ever lived • Why O’Malley? • He was the Brooklyn Dodgers owner • He moved the team – in the middle of the night – to Los Angeles • Recall that a team can become a public good • He realized that he had market power • Many never forgave him Copyright ©2014 Pearson Education, Inc All rights reserved 7-2 Learning Objectives • Appreciate the connection between the mobility of sports franchises and the increase in public funding of stadiums and arenas • Understand the ways that sports teams, leagues, and institutions exercise monopoly power in their dealings with municipalities • Grasp the impact that exchange rates and stadium location have on the ability of cities to retain franchises and subsidize facilities • Appreciate the advantages and disadvantages of different methods of financing public support of sports facilities Copyright ©2014 Pearson Education, Inc All rights reserved 7-3 7.1 How Cities Came to Fund Stadiums • Today it seems normal for teams to threaten to find a new home unless their current host city builds a new facility or restructures the rental agreement on the current one • This section provides a historical context for the growing mobility of sports franchises and their consequent increase in market power Copyright ©2014 Pearson Education, Inc All rights reserved 7-4 Teams on the Move • The Dodgers left Brooklyn after the 1957 season • They were not the first team to move – The Braves, Browns, & A’s moved earlier – But they were all neglected stepsisters in cities • The Braves’ move ended MLB’s “Golden Age” – – – – – Golden Age lasted fifty years: 1903-53 It was a period of absolute stability No teams entered or left MLB No teams moved Major parks were built (Shibe, Forbes Field, Comiskey) • Boom ends in 1923 with Yankee Stadium Copyright ©2014 Pearson Education, Inc All rights reserved 7-5 The Dodgers Were Different • The Dodgers did not have to move – They were the most profitable MLB team in the 1950s (1947-57) – They accounted for 47% of the National League’s profits – They were a “cultural totem” for Brooklynites and all Americans Copyright ©2014 Pearson Education, Inc All rights reserved 7-6 Opportunity Costs • The Dodgers moved because they could earn even more in LA • Staying in Brooklyn imposed a high opportunity cost • Accounting profit = revenue-explicit costs • Economic profit = revenue – all costs (explicit as well as implicit) – revenue that could have been earned with the given resources elsewhere • Dodgers revenue was much higher in LA (2 million fans) than Brooklyn (1 million fans) Copyright ©2014 Pearson Education, Inc All rights reserved 7-7 The Three Eras of Stadium Construction • Judith Grant Long identifies three phases of stadium funding • The “entrepreneurial period” lasted from 1890 to 1930 • The “civic infrastructure” period lasted from 1953 to 1980 • The “public-private partnership” began after 1980 and is still ongoing Copyright ©2014 Pearson Education, Inc All rights reserved 7-8 Era #1: 1890 – 1930 • All facilities are called “Park” or “Field” – The names reflect pastoral origin of baseball – The term stadium was not used until Jacob Ruppert applied the name to his new “Yankee Stadium” in 1923 • All facilities bear the name of a team owner who built the stadium to house his team – Exception – sort of – Wrigley Field • It was originally “Weeghman” Field built by Federal League • The team and stadium were later bought by Wrigley – Public financing of facilities is an exception Copyright ©2014 Pearson Education, Inc All rights reserved 7-9 Era #1: 1890 – 1930 (cont.) • “Golden Age” kept teams in the facilities they built in the early 20th century • Football teams rented space in baseball parks – got their names from them (Bears/Cubs; Lions/Tigers; Giants/Giants) •Most no longer exist (Wrigley; Fenway are exceptions) Copyright ©2014 Pearson Education, Inc All rights reserved 7-10 Explicit Costs • Table 7.1 shows the total cost and public share of facilities built for major league sports teams since 2000 • Adding up the figures in Table 7.1 shows that $11.34 billion has been spent since 2000 to construct new facilities for the major North American sports leagues • About $6.1 billion has come from state and local governments – The spending on sports facilities comes even when the city has other pressing needs Copyright ©2014 Pearson Education, Inc All rights reserved 7-36 Table 7.1 Copyright ©2014 Pearson Education, Inc All rights reserved 7-37 Table 7.1 Cont Copyright ©2014 Pearson Education, Inc All rights reserved 7-38 Additional Costs • The data in Table 7.1, however, tell only part of the story • These data alone can lead analysts to misstate the full burden of a facility on a city • Construction costs are not the only expenditure that a city makes on a sports facility • The city also pays for infrastructure, such as roads and utilities, and for support services, such as police and sanitation Copyright ©2014 Pearson Education, Inc All rights reserved 7-39 Public Participation • As Table 7.1 shows, the public share of the expenditure on individual facilities has ranged from to 100 percent • This variation is reflected in the facilities’ ownership structure • Five facilities have been built since 2010 – Amway Center and Marlins Park—are owned and operated outright by the cities – Target Field and Consol Energy Arena—are run by public authorities created for them – MetLife Stadium, is jointly operated by Giants Stadium LLC and Jets Development LLC Copyright ©2014 Pearson Education, Inc All rights reserved 7-40 7.5 Paying for Stadiums • There are two reasons for publicly funding sports facilities • Public goods – If people can enjoy the team without paying, they will not so – Governments have a hard time determining how to allocate the burden because the benefits are so intangible • Externalities – Teams and facilities provide benefits to people who not go to a game – Markets under-provide goods that have positive externalities • This section examines ways cities and states fund facilities – What sales tax should a city apply? – Is debt a good idea? Copyright ©2014 Pearson Education, Inc All rights reserved 7-41 Three Criteria for Taxation • Ramsey rule for efficient sales taxes – An efficient tax minimizes deadweight loss – Thus, the tax is inversely related to the elasticity of demand – Compare the deadweight loss in Figures 7.5 and 7.6 • Vertical equity compares the impact of the tax on citizens with different income levels – Those with the greatest ability to pay should pay the most • Horizontal equity suggests that equals should be treated equally – Those who benefit the most from a facility should bear the highest tax burden Copyright ©2014 Pearson Education, Inc All rights reserved 7-42 Figures 7.5 and 7.6 Copyright ©2014 Pearson Education, Inc All rights reserved 7-43 Who Pays a Sales Tax? • Tax burdens are sometimes borne by people who were not the target of the tax • Hotel taxes are popular ways to fund facilities – They “export” the tax to out-of-towners – Taxing those who come to town to watch a game is horizontally equitable • Why hotel owners object to such taxes? – The tax raises the price of a hotel stay – It rises by less than the tax – Some of the tax is “paid” by local hotels – See Figure 7.5 Copyright ©2014 Pearson Education, Inc All rights reserved 7-44 Sin Taxes • Sin taxes are levied on “sinful” products, such as cigarettes and alcohol – Cleveland funded its facilities with a sin tax • Sin taxes are billed as having two virtues – They raise funds – They discourage undesirable behavior • Unfortunately, achieving one of these goals precludes achieving the other – Figure 7.5 shows that when demand is elastic, a tax discourages activity but fails to raise many funds – Figure 7.6 shows that when demand in inelastic, a tax raises funds but fails to discourage the activity Copyright ©2014 Pearson Education, Inc All rights reserved 7-45 Tax Incremental Financing (TIF) • TIF does not impose new taxes • TIF earmarks added tax revenue for a project – San Diego and San Francisco expected hotel stays to rise because of new baseball stadiums – More hotel stays would cause hotel tax revenue to rise – The added tax revenue would pay for the ballpark • TIF assumes a sustained rise in hotel revenue – Without a sustained rise, there will not be enough revenue – That seems to be a problem now in San Diego Copyright ©2014 Pearson Education, Inc All rights reserved 7-46 Taxes That Spread the Burden • Milwaukee funded Miller Park with a five-county sales tax – The wider tax increases horizontal equity • Wealthier suburbanites help pay the burden • Wealthier suburbanites are the largest beneficiaries • Seattle funded Safeco Field in part with a sales tax on restaurants & bars in King County – The tax on businesses that benefit from the stadium increases horizontal equity • The tax was too broad at it burdened fancy French restaurants across town as well as sports bars across the street Copyright ©2014 Pearson Education, Inc All rights reserved 7-47 The Benefits of Debt • Borrowing does not let cities escape taxation – They must eventually pay back debt by raising taxes – The “equivalence theorem” posits that the two are equivalent – taxpayers anticipate the future burden • Tax laws give debt an advantage – Municipal bonds are tax deductible – see Figure 7.7 – Lower tax burden means cities can pay less interest • Tax law reduces tax burden on city residents – This increases the tax burden on taxpayers elsewhere Copyright ©2014 Pearson Education, Inc All rights reserved 7-48 Figure 7.7 Copyright ©2014 Pearson Education, Inc All rights reserved 7-49 Who Benefits from Borrowing? • Tax breaks may save the Yankees $786 million • The Miami Marlins might be in legal trouble – The SEC is investigating whether the team misled local officials by claiming that the team could not afford a new stadium without public support • Borrowing from future residents might be efficient – If they also benefit – they should also pay – Unfortunately, they often pay without benefiting • They often pay for an empty stadium • New Jersey still owed $100 million in bond debt on Meadowlands Stadium when it was demolished in 2010 Copyright ©2014 Pearson Education, Inc All rights reserved 7-50 ... exchange rates and stadium location have on the ability of cities to retain franchises and subsidize facilities • Appreciate the advantages and disadvantages of different methods of financing public... to the creation of the Cleveland Browns of the new All-American Football Conference • MLB almost admitted the Pacific Coast League (PCL) as a third major league – The PCL was a high minor league... funding of stadiums and arenas • Understand the ways that sports teams, leagues, and institutions exercise monopoly power in their dealings with municipalities • Grasp the impact that exchange rates