The Hidden Costs of Stadium Subsidies

A note to the reader: This is an early draft of academic journal article.
We appreciate comments/feedback to further refine the finished product.

Source: Neil deMausse (Field of Schemes blog) and Reuben Fischer-Baum (Deadspin)

Introduction

Since the 1980s there has been an increasing trend among cities to provide public funds for the construction of professional sports stadiums. Proponents claim that such initiatives are a sound investment for municipal governments, increasing economic growth and tax revenue. However, a sizable body of academic research indicates that subsidizing a professional sports facility does not provide the benefits claimed by proponents. In fact, as we discuss here, stadium subsidies actually create hidden costs for the local economy. As a result, subsidizing professional sports with public funds is not in the best interest of the community.

A Brief History of Stadium Subsidies

Until the 1950s, publicly-owned stadiums were nearly unheard of. The owners of sports teams and private investors were responsible for building new facilities or renovating older ones with private capital. However, the abrupt relocation of the Baltimore Colts to Indianapolis in 1984 after Baltimore officials turned down the team’s requests for publicly-funded renovations showed team owners that they could leverage fan loyalty and the threat of a franchise move into public funding for new construction.

In their book, Field of Schemes, Neil deMause and Joanna Cagan described the Colts’ move to the new stadium subsidized by Indianapolis as “the tip of the sports-welfare iceberg.” By 1992, 77 percent of all US professional sports stadiums had been paid for, at least in part, by taxpayer funds. Within the same decade, almost half of all professional sports franchises were once again requesting public funds for new facilities or were already in the construction/renovation process. Since then, the use of public funds to subsidize facilities for professional sports has consistently trended upwards. The imbalance of bargaining power enjoyed by team owners also means that the duration of leasing contracts for use of public stadiums has grown shorter. As a result, some cities have been left with decades of construction bond payments even after the sports team they benefited has moved to a different city.

Common Forms of Public Support for Sports Stadiums

Pure Subsidies

The most obvious way that public funding can be used to support professional sports is through cash payments. Such payments are often dedicated to stadium construction, but grants of land to build the sports facility are essentially equivalent. Although it is not a cash subsidy, the use of government’s power of eminent domain to procure the land to build a stadium on represents another government privilege granted to the owners of the sports team, who otherwise would have to offer higher payments to persuade the existing property owners to sell.

Tax Credits and Abatements

Closely related to cash and land grants for stadium construction are property tax abatements or similar tax credits offered to the team owners, generally with the understanding that these credits serve the same purpose of direct cash subsidies.

Loan Guarantees

Loan guarantees represent an important third kind of subsidy offered to professional sports teams. When municipal governments use public funds and property as collateral for private debts, it enables sports team owners to receive lower loan interest rates because taxpayers are effectively assuming the risk that the team owner will not repay the loan. Like the use of eminent domain, this constitutes a subsidy in effect, even if no cash payments or tax deferrals are actually provided to the professional sports team. Furthermore, the increased exposure to investment risk can result in a reduction of the municipality’s credit rating, meaning that the debt service payments on existing and future municipal bonds will increase.

Typical Arguments in Favor of Stadium Subsidies

A standard series of arguments are commonly used by those who wish to justify the use of public funds to subsidize construction of sports facilities. The core of the argument is that building the stadium will expand the local economy through increases in consumer spending and employment. For example, it is asserted that building the stadium will add construction jobs to the local economy while the sports fans’ spending at and around the stadium will boost employment in the entertainment industry. The argument proceeds that these increases in economic activity involve multiplier effects — that the wages of construction and entertainment industry workers will be re-spent in the local community, leading to wider economic growth. Furthermore, the new stadium is expected to increase tourism to the city, leading to even more local spending.

City leaders also see stadium projects located in downtown areas as a means to revitalize the city core, replacing older, unsightly, and perhaps less lucrative (in the terms of tax revenue) land uses to make room for the stadium and allow for new commercial and residential properties near the facility. Using public funds to support professional sports stadiums corresponds to city officials trying to guide the growth of the region in a particular direction, rather than simply provide public goods like the court system and public safety and allow the city to develop organically according to the natural flow of interactions between residents. Another perspective of this approach is that the city is essentially competing with nearby municipalities for the tax revenue contributed by those residents and businesses whose decision on where to live or locate is changed by the presence of the sports stadium.

The Hidden Costs of Stadium Subsidies

It is rare for the costs of public funding of professional sports to be explicitly and systematically considered. Normally such analyses begin and end at the consideration of the cash impact of the subsidy on the municipal budget (which makes de facto subsidies like eminent domain and loan guarantees seem more viable by comparison). However, there are several other problems associated with stadium subsidies that are important for policymakers and the public to bear in mind. These costs are not considered in the “benefits-only analysis” that is typically (albeit, perhaps unconsciously) used. As with any other economic or political decision, the better approach is to engage in a conscious and rigorous cost-benefit analysis that considers both the fiscal cost and the opportunity costs of stadium subsidies. In addition, the ways in which subsidizing professional sports distorts economic and political decisions need to be explicitly explored.

Public Funding Tradeoffs

When a municipality dedicates public funds to support professional sports — or any other private investment — it loses the ability to spend those same funds to provide the public goods which are the core role of local government. For example, the $750 million subsidy that Nevada will provide to the Raiders football franchise for construction of their new stadium could instead have provided a year’s worth of education to nearly 100,000 public school students or built hundreds of miles of highways. In fact, because Nevada only has 5,692 miles of state-controlled highway, the Raiders’ subsidy could have funded all state highway rehabilitation costs in the state for 6.5 years. Alternately, such funds could go to civic parks or be dedicated to public safety, like police and emergency medical services.

The decrease in public goods or services offered by the municipality not only hurts local residents — it also hurts the general competitiveness of the region compared to other cities which have more prudently spent public funds. This adds insult to injury for other local businesses, whose taxes often pay some of value of subsidy and who now also experience a reduction in potential customers because the city is a less attractive option for new residents to move to or to do business in.

Net Effects on the Local Economy

The net effect of professional sports subsidies — counting both the businesses and jobs that are “created” by the new stadium as well as the businesses and jobs that are destroyed — is often missed. Economic judgment suggests that individuals budget a part of their income to entertainment expenses and that the emergence of a new entertainment option — like a new sports team or an existing sports team with a new stadium — isn’t going to radically increase the amount of money each person sets aside for entertainment. Instead of spending more, people are more likely to shift their choice about how and where they spend their entertainment budget. This means that the existing businesses which had previously served entertainment-seeking residents are likely to see a reduction in customers and income, leading some businesses to close and others to layoff workers. As a result, rather than public subsidies for professional sports teams actually creating new jobs in the entertainment industry, they are more likely to simply shift where the existing pot of entertainment-dedicated money is spent.

In effect, such subsidies represent the municipality taxing some entertainment-related businesses in order to give subsidies to their competitors, and to add insult to injury, these subsidies help their competitors steal their customers away.

Deadweight Loss

In addition to the negligible net effect on the local economy created by stadium subsidies, such subsidies actually create “deadweight losses.” Deadweight loss refers to the loss of value to society created by economic distortions, such as price controls, that result in a less-efficient outcome than otherwise possible.

Taxes by their very nature create some deadweight loss because by increasing the price of goods and services, they shift consumers and producers activities away from the point where the marginal cost equals the marginal benefit — the optimal point of economic activity. Similarly, subsidies create deadweight loss by shifting the decisions of producers and consumers in the opposite direction. Essentially, taxes result in less production/consumption than would otherwise occur and subsidies result in more production/consumption than would otherwise occur, meaning that the scarce resources in society are being used inefficiently. This inefficient use of resources slows long-run economic growth and therefore harms future community well-being.

Net Effects on Municipal Tax Revenue

One justification for public funding of professional sports is that it represents a sort of investment which will pay for itself via higher tax revenues over time. However, when people attend sporting events, it’s likely they simply shift their investments of time and money away from other local options like concerts, restaurants, and recreational activities. As a result, there would be little or no net increase in consumer spending and associated consumption taxes. If the professional sports entertainment option does not cause substantial new spending by local residents, then it probably will not actually increase municipal tax receipts in any meaningful way.

Furthermore, new entertainment spending can only come from three sources:

1. Local residents must increase their income to fund the increase in their entertainment budget.
2. Local residents must spend money from their long-term savings account or else shift spending away from other areas in their budget.
3. Existing nearby entertainment spending that was previously outside of the local area must shift to be inside municipal boundaries.

The first option is possible, but seems somewhat unlikely, since in general the increase in the time spent working (to increase income) would consume time that could be spent on entertainment. The second option would seem to a bad tradeoff for the city across multiple dimensions. First, residents with reduced long-term savings are more likely to make use of social safety net programs when unexpected problems occur. This would increase spending by municipal, state, and federal government welfare programs, as well as leading to greater social instability in general. Second, if residents are instead choosing to consume more entertainment in preference to spending on other goods and services, this reduction would harm those other industries. For example, decreased spending on housing to free up funds to pay for more entertainment would harm local residential construction firms. An even worse alternative would be the potential for residents to spend less on education or training, because such increases in “human capital” have a positive effect on long-run economic growth.

The third option is the only situation in which providing government favoritism for local businesses, to enable them to attract customers away from entertainment venues outside the municipality, would make sense from a public finance perspective. However, several conditions have to be met in order for this to be fiscally appropriate. First, there must already be substantial spending at nearby entertainment venues outside of the municipality’s’ jurisdiction. Second, the subsidies must actually result in some sort of better entertainment experience that attracts people who had previously been spending money at entertainment venues outside the city. Third, the cost of the subsidy must be less than the increase in local taxes created by the newly-attracted customers. Lastly, the subsidy must have the effect of changing the location decision of the sports team owner. That is, that without the subsidy she would have definitely chosen to locate the sports team in another municipality.

This last condition is the one which is most often overlooked in stadium subsidy decisions by policymakers. In most cases the decision of where to locate a business — even a sports team — is predicated on factors over which local policymakers have no control, such as the population of the metropolitan area, the likelihood that local residents will be attracted to spend their entertainment budget at the stadium, and that local residents have a sufficiently large entertainment budget to spend in the first place. As a result, the local government can often gain the benefit of increased tax revenue from the sports team choosing to locate inside the municipality without actually subsidizing it. In such situations providing a subsidy actually represents a pure loss of tax revenues, rather than an investment toward a large future gain.

Lastly, the concepts of economic activity and tax revenue are often conflated in stadium subsidy debates. For example, Arlington, Texas provided $325 million in subsidies for the Dallas Cowboys’ new stadium, but only expects to recover $2.9 million in annual tax revenue. This corresponds to a simple payoff period of 112 years! However, the project was still argued to be a good investment of public funds because private consultants estimated the stadium would foster $238 million in “annual economic activity.” Essentially, it can be easy for city officials and taxpayers to be misled by exuberant predictions of increased economic activity, rather than focus on the anticipated tax revenues resulting from that activity. This confusion carries major risks to the municipality’s future finances and therefore taxpayers’ liability.

One example of financial risk is seen in Hartford, Connecticut. The city has spent the past two years building a new baseball stadium for The Yard Goats, a minor league (Double-A) baseball franchise. The stadium, Dunkin’ Donuts Park, was completed a year late and ran at least $10 million over budget. When a host of architectural flaws and contractor errors became apparent, a city council member suggested selling the facility to avoid inevitable operating losses and ongoing structural issues, but fellow council members vetoed the idea and pressed on with construction. The city now expects to lose $5 million in the first two years of operating the park.

Distorting Local Economic Development

Subsidies for professional sports stadiums can also create distortions in local economic development by motivating investments in particular forms of entertainment that customers didn’t actually want. This occurs because a subsidy inhibits the natural cost-benefit analysis in economic decisions through obscuring the relative value of the resources used for entertainment (e.g.: the land used for the stadium) that is communicated by price signals.

If the team owner and private investors believed that sports fans were willing to pay higher ticket prices to support a better stadium, then there would be an appropriate economic incentive to build a new stadium or renovate the existing facility. However, if local sports fans are not actually willing to pay higher prices for the improved level of entertainment, then any money spent on a new stadium is a waste of resources.

This means that the land and the construction resources dedicated to a new stadium may instead have created more social benefit by being put to a different use. The parcel of land used for the stadium may have been better used for a different type of commercial development or for residential purposes. If the land originally belonged to the municipality, it might have been better used to create public green space — which produces its own benefits and is much less expensive than a stadium — or as a location to build new schools or locate emergency services. Importantly, if the new stadium would not have been economically viable without the subsidies (because customers wouldn’t pay the increased ticket prices to fund the project), then even allowing the land to remain undeveloped actually represents a better use of society’s scarce resources, because at least no resources are wasted.

Distorting Political Decision Making

When private investors bear the risk of a potentially bad investment, they have the incentive to seek out the best information available to allow them to make the most informed decision possible. However, city officials making the choice of whether to use public funds to subsidize professional sports teams do not face the same risk. They do not bear the full cost of the decision if it turns out to be a bad investment — the cost is instead spread out to the many current (and future) taxpayers of the municipality. As a result, city officials have less incentive than private investors to make sound investment decisions.

Furthermore, city officials often gain public goodwill simply because they are seen as being proactive in pursuing local economic development, even if it does not turn out well. The average member of the public (and the average voter) often never receives the information that the use of public funds to subsidize professional sports has turned out to be a bad investment, meaning that policymakers are insulated from the political consequences of their decisions. Viewed through the lens of economic analysis, this means that policymakers tend to put more weight on the possible benefits of a stadium subsidy and discount the potential costs, leading to irrationally optimistic approach toward subsidizing professional sports.

Wasting Resources

Government subsidies granted to professional sports teams, like subsidies granted to other industries, result in the wasteful use of the scarce resources available to society. Harvard economist Harvey Leibenstein coined the term “X-Inefficiency” to describe the waste that results from inefficient production by a company that is protected from competition. His argument is premised on the idea that there is always some slack or inefficiency in production simply because humans are not perfectly efficient. However, the discipline created by competition — the potential of losing customers — motivates companies to be as efficient as practically possible. When the discipline of competition is reduced because of government subsidies to the privileged company, the motivation to be as efficient as possible is also reduced. As a result, resources are wasted in production that would not have otherwise been lost.

In the same way, subsidies reduce a company’s need to focus on serving the customer, since the subsidy partially insulates the company from the consequences of poor service. Reduced customer focus means that customers are served more poorly than they would have been otherwise without the subsidy. This reduces the total economic value created by the transaction, meaning that the subsidy creates another form of waste in the economy.

The fact that government subsidies for professional sports teams exist also motivates team owners to invest funds to chase the subsides. The money and resources spent on lobbying activities to gain government-granted privilege is called “rent-seeking” by economists. It consumes scarce productive assets, redirecting them away from the creation of real value through voluntary exchange. In effect, it destroys value — almost like burning a giant pile of cash.

In the case of subsidies, rent-seeking represents a costly gamble aimed at gaining investors through force. If the political activity is successful, then the subsidy is an involuntary transfer from taxpayers to the professional sports team owner, meaning that the taxpayers generally don’t benefit from the deal (otherwise they would have entered into the trade voluntarily) and resources are wasted in the undisciplined future production. If the rent-seeking is unsuccessful, then any assets spent on it are still wasted, but at least economic distortion and inefficient future production has been avoided.

Lastly, the courting of government officials’ favor to win subsidies often results in strings being attached to the subsidies, such as requiring a minimum amount of new jobs to be created or stipulating that local resources or companies be used in the stadium construction. While such stipulations might seem reasonable requirements to be attached to the granting of subsidies, in actuality they cause an even larger waste of resources because they compel the stadium construction — which is an inefficient use of resources — to be carried out in an inefficient manner.

Encouraging Unproductive Entrepreneurship

“Unproductive entrepreneurship” is a term developed by the late New York University economist William Baumol to describe how the ability to use government power to achieve private economic goals (e.g.: through rent-seeking) motivates some of the most innovative individuals to use their talents in unproductive — and even destructive — activities. As a result, economic growth is slowed and in the extreme can even be reversed as political entrepreneurs scrabble amongst each other to use government authority to gain a bigger piece of the economic pie, rather than focusing on being productive and growing the overall size of the pie. These sorts of struggles to co-opt government authority for private ends led the 19th Century economist and political philosopher Frederic Bastiat to satirically write: “The state is the great fictitious entity by which everyone seeks to live at the expense of everyone else.”

Empirical Evidence

Researchers and economists of a variety of perspectives agree that subsidizing a stadium is a poor public investment. A 1997 Brookings Institution book, Sports, Jobs, and Taxes: The Economic Impact of Sports Teams and Stadiums, edited by Andrew Zimbalist and Roger G. Noll, found that:

“A new sports facility has an extremely small (perhaps even negative) effect on overall economic activity and employment. No recent facility appears to have earned anything approaching a reasonable return on investment. No recent facility has been self-financing in terms of its impact on net tax revenues.”

The authors elaborate that “sports facilities attract neither tourists nor new industry,” since broadcasting revenue is shared between franchises, players invest their high salaries elsewhere, and stadium jobs are low-wage and part-time.

A 2015 Mercatus Center study by sports economist Dennis Coates, using data from 1969 to 2011, found little evidence of increased economic activity following the arrival of a sports franchise. By comparing similarly-sized cities, he discovered that those with professional teams fared no better than those without. In fact, Coates’ 2007 review of academic research on stadium subsidies found: “the broad conclusion of this literature is that stadiums and franchises are ineffective means to creating local economic development, whether that is measured as income or job growth.”

Work by Robert Baade and Victor Matheson studies the evolution of sports facilities over the past two centuries and the potential for professional sports to drive local economic growth. They note that consistently flawed economic impact reporting has created false expectations and that low returns are actually the norm for publicly-funded stadium construction. Like the majority of economists, Baade and Matheson found “little or no economic benefits from spectator sports.”

Perhaps the most comprehensive collection of stadium histories, Field of Schemes chronicles many stadium funding battles across the country. deMause and Cagan thoroughly research the origins of the publicly-funded stadium phenomenon and the drivers of its widespread popularity. They discovered distinct patterns that franchise owners use to secure taxpayer dollars:

1. Claim the old facility is obsolete, sometimes going so far as to neglect maintenance to support this claim
2. Threaten to move
3. Claim that without a state-of-the-art stadium, the team will not be competitive in its league
4. Publish generous, and often unrealistic, economic analysis reports
5. Create a false crisis using an arbitrary deadline on the deal
6. Adjust the goal mid-project, often resulting in budget overruns

Winners and Losers

Based on the preceding analysis, it’s possible to explicitly identify who wins and loses from using public funds to subsidize professional sports teams.

The “winners” are:

1. The team owners
2. The associated companies which gain spillover or collateral benefits from the subsidies (e.g.: real estate developers and construction firms)
3. The political officials which can argue they’ve “done something” to encourage economic development

And the “losers” are:

1. The taxpayers who fund the subsidies
2. The landowners and renters whose property and homes are taken using eminent domain
3. Other local entertainment-related companies who lose customers to their subsidized competitors
4. Other would-be borrowers who lose out on access to investment capital because it is consumed by publicly-guaranteed loans
5. The sports fans who pay higher ticket prices for a more luxurious stadium than would have otherwise been built
6. The sports fans who cannot pay the higher ticket price due to increased entertainment value and therefore miss out on being able to attend sporting events
7. Every person in the local community who would have benefitted from a better spending of public money to provide essential public goods and services, rather than subsidizing private profits
8. Every person whose political leaders are distracted from advancing the public welfare by special interests groups lobbying for government-granted privilege
9. Every person in the economy that is harmed — even slightly — by the inefficient use of resources, which leads to lower long-run economic growth and increases in human well-being; This means that not only are current persons harmed by the subsidy, but future generations also lose out on having a more robust economy that is better able to satisfy their needs

How Municipalities Can Overcome the Stadium Subsidy Arms Race

Most of the previous analysis has implicitly assumed away the possibility of competition between nearby municipalities to attract (or retain) a professional sports franchise. It’s understandable that policymakers might be worried that a sports team relocating to a nearby municipality might attract entertainment spending — and the corresponding tax revenue — away from their own city. This concern can turn into an inter-city competition to attract the sports franchise and a rent-seeking team owner is likely to play nearby municipalities against each other, encouraging them to engage in an “arms race” in order to extract the largest subsidy possible for her team.

However, as we have illustrated, this kind of thinking is short-sighted and fundamentally incorrect — the hidden costs of stadium subsidies mean that it’s never in the public interest to subsidize professional sports. Furthermore, it’s important for policymakers to realize that such subsidy arms races with other nearby municipalities create no net increases in tax revenues or jobs across the combined area and even more critically, that such a contest is highly likely to result in pure loss of tax revenue to municipality that “wins”. As a result, local municipalities would be best served by agreeing to a binding inter-city compact that prohibits the use of public funding to subsidize professional sports teams.

However, inter-city compacts such as these are difficult to implement because few municipalities want to be the first mover in this policy change (doing so would put policy makers at a political disadvantage relative to other nearby cities to attract sports teams). One means of getting around this problem is to build a trigger clause into the legislation so that it does not take effect until every city within a given geographic area has passed identical legislation. Trigger clauses lower the hurdle preventing municipal leaders from enacting such reforms, since the city’s perceived competitiveness relative to other nearby cities is never harmed.

This approach would ensure that if a stadium is indeed built or renovated, that it is done because the investors expect it to be profitable and that the project will not create any economic inefficiencies that waste resources. Better yet, it removes much of the motivation for team owners to engage in economically wasteful and politically corrupting rent-seeking.

Conclusion

In spite of the accelerating trend in stadium subsidies, and the support offered for them by private consultants, city officials, and sports fans, the body of academic literature consistently finds they have little to no economic impact. Nor do stadium subsidies pay for themselves via increased tax revenues. We have illustrated here a number of hidden economic and social costs created by providing public funding for professional sports which are often ignored in policy debates on this topic. We cannot find a situation wherein it makes sense for a community to subsidize professional sports because of the many better options that those same public funds could be used for. One of the core conclusions of economic thinking is that proper consideration of tradeoffs is vitally important; we hope that this paper helps to educate city leaders, private consultants, and other academic researchers on the broader scope of tradeoffs associated with providing public funds for stadium subsidies.

About the Authors

Michael D. Farren is a Research Fellow in the Study of American Capitalism at the Mercatus Center at George Mason University. He plays sports with great enthusiasm and a painful lack of motor skills.

Anne Philpot is a Research Assistant in the Study of American Capitalism at the Mercatus Center at George Mason University. Her motor skills are just fine.