96-460 E
CRS Report for Congress
Received through the CRS Web
Tax-Exempt Bonds and the Economics of
Professional Sports Stadiums
May 29, 1996
Dennis Zimmerman
Specialist in Public Finance
Economics Division
Congressional Research Service ˜ The Library of Congress

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Tax-Exempt Bonds and the Economics of Professional
Sports Stadiums
Summary
Users of publicly owned stadiums receive subsidies from both state-local and
federal taxpayers. The federal subsidy arises when the stadium is financed with state-
local bonds issued at below-market interest rates paid for by exemption of the bonds'
interest income from federal income taxes. A $225 million stadium built today and
financed 100% with tax-exempt bonds might receive a lifetime federal tax subsidy as
high as $75 million, 34% of construction costs. The total public subsidy for one year,
1989, of 21 stadiums with average construction cost of $50 million is estimated to
have been $146.4 million, with $24.3 million, 17%, being federal subsidy. The federal
subsidy will be at least quadrupled for the $200 million-plus stadiums now being built.
Proponents argue that these stadiums' economic benefits justify the subsidies.
Economic analysis suggests this is not the case. One study found that a new stadium
had no discernible impact on economic development in 27 of 30 metropolitan areas,
and had a negative impact in the other three areas. The reasons for this can be
illustrated with the Baltimore football stadium proposal. Economic benefits were
overstated by 236%, primarily because the reduced spending on other activities that
enables people to attend stadium events was not netted against stadium spending.
And no account was taken of losses incurred by foregoing more productive
investments. The state's $177 million stadium investment is estimated to create 1,394
jobs at a cost of $127,000 per job. The cost per job generated by the state's Sunny
Day Fund economic development program is estimated to be $6,250. The economic
case against federal subsidy of stadiums is stronger. Almost all stadium spending is
spending that would have been made on other activities within the United States,
which means benefits to the Nation as a whole are near zero. Non-economic benefits
are sometimes used by state-local officials to support the political decision to provide
subsidies. Such benefits might be of value to state-local taxpayers, but are less likely
to be of value to federal taxpayers.
The change in treatment of tax-exempt bonds for stadiums made by the Tax
Reform Act of 1986 has generated problems. It continues stadium financing as an
open-ended matching grant for which the magnitude of the federal subsidy in any
given year is determined without the input of federal officials and federal taxpayers;
it virtually requires state-local governments to offer more favorable lease terms to its
professional tenants; and it requires state-local governments to finance their subsidy
with general revenue sources rather than benefit-type payments such as stadium-
related user charges and rents.
Two options are considered to reduce the federal revenue loss from this subsidy.
Elimination of stadium tax-exempt bond finance might be the solution Congress
thought it was adopting in 1986. This would, however, restrict the independence of
state-local officials in a way rarely invoked to control unproductive investments in
private activities. A second option would allow stadium bonds to be issued only as
tax-exempt private-activity bonds subject to the private-activity bond volume cap.
Requiring stadiums to be financed with private-activity bonds would further reduce
the incentive for such investments because these bonds are subject to rules that

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increase project costs, rules that do not apply to stadiums financed with governmental
bonds. One of these rules is the prohibition on use of private-activity bonds to finance
luxury seating.

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Contents
I. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
II. PRO SPORT'S MARKET POWER AND THE PRIVATE USE OF TAX-
EXEMPT BONDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
A. PRO SPORT'S MARKET STRUCTURE . . . . . . . . . . . . . . . . . . . . . . . 3
B. PRIVATE USE OF TAX-EXEMPT BONDS:
HISTORY AND ECONOMIC RATIONALE . . . . . . . . . . . . . . . . . . 3
C. CURRENT PRACTICE IN STADIUM FINANCING . . . . . . . . . . . . . 5
III. FEDERAL AND STATE-LOCAL STADIUM SUBSIDIES . . . . . . . . . . . . 6
A. THE SIZE OF THE STADIUM SUBSIDY . . . . . . . . . . . . . . . . . . . . . 7
B. WHO PAYS: FEDERAL OR STATE-LOCAL TAXPAYERS? . . . . . . 7
IV. ECONOMIC BENEFITS COMPARED TO COSTS: ARE STADIUMS
WORTHWHILE TAXPAYER INVESTMENTS? . . . . . . . . . . . . . . . . . . 13
A. STATE-LOCAL TAXPAYERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
1. Conceptual Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2. Empirical Evidence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
B. FEDERAL TAXPAYERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
V. OPTIONS REDUCING THE USE OF TAX-EXEMPT BONDS FOR
STADIUMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
A. ELIMINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
B. LIMITATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
VI. CONCLUSIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

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Tax-Exempt Bonds and the Economics of
Professional Sports Stadiums
I. INTRODUCTION
A professional sports team's use of a publicly owned stadium, arena, or training
facility is subsidized by taxpayers when the team's lease or rental payment for use of
the stadium or arena is insufficient to pay the operating and construction costs
required if the stadium or arena were privately financed. (Hereafter, stadiums, arenas,
and training facilities will be referred to as, simply, stadiums.) In the vast majority of
these situations, both state-local taxpayers and federal taxpayers pay for the subsidy.
The state-local subsidy arises because the tenants' lease or rental payments are
insufficient to pay the operating and construction costs incurred by the state-local
government.
A federal tax subsidy arises because some portion of the debt financing for the
stadium is in the form of state-local bonds whose interest income is exempt from
federal income taxes. This exemption causes the interest rate on these tax-exempt
bonds to be lower than the interest rate on taxable bonds of equivalent risk. Thus,
stadiums financed with tax-exempt bonds have lower interest costs than if they were
financed with taxable private debt. These lower interest payments are paid for by
federal taxpayers in the form of foregone federal tax receipts from the interest income
that would have been taxed had taxable debt been used to finance the stadium.1
These bonds qualify as tax-exempt "governmental" rather than taxable "private-
activity" bonds under the Internal Revenue Code (the Code) because a limited stream
of rents is available to pay debt service on the bonds. If more substantial rents or
other charges were paid by privately owned sports teams, the bonds would be
"private-activity" bonds and not eligible for tax exemption because stadiums are not
on the list of activities for which tax-exempt "private-activity" bonds can be issued.
One survey suggests that stadiums costing a total of more than $2 billion either
have opened in recent years or are scheduled to be built by the turn of the century.2
Many in Congress thought, mistakenly, that tax-exempt bond financing of these
projects had been terminated in 1986. Renewed use of tax-exempt financing seems
to have focused some congressional concern on the cost to federal taxpayers and its
1 Were the policy at issue here an evaluation of the federal subsidy to state-local
government business enterprise, one would want to estimate the federal tax revenue foregone
by not taxing the pre-tax return on a privately-financed-and-owned stadium.
2 Morgan, John, "More Pro Teams Getting New, Richer Lease on Life," The Baltimore
Sun, March 9, 1996. 1C.

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CRS-2
role in benefiting owners and professional athletes at a time when programs for the
less prosperous are being eliminated or reduced.3
Section II discusses the history, economic rationale, and current rules for the
private use of tax-exempt bonds. Current law requires stadium bonds to be issued as
governmental bonds, which are structured as an open-ended matching grant. Any
stadium proposal prepared by sports franchise owners, state-local officials, and state-
local taxpayers that satisfies the governmental bond rules is entitled to this federal
subsidy. The section explains how the market structure of professional sports leagues
interacts with this "entitlement program" to create a demand for federal subsidy
whose budgetary costs are not subjected to routine evaluation by federal officials and
federal taxpayers.
Section III examines the scale of this federal subsidy of stadiums. The present
discounted value of the federal subsidy over the life of a stadium is estimated.4
Estimates are also made of the total public subsidy in 1989 for each of 21 existing
stadiums, and this total public subsidy is separated into amounts provided by state-
local taxpayers and federal taxpayers. The factors that determine these state-local and
federal shares are discussed.
Section IV reviews the literature that examines the economic benefits of
stadiums to state-local taxpayers. This review indicates that most economic benefits
studies overstate the economic benefits of stadiums and that most stadiums do not
provide economic benefits that compensate for the costs incurred by state-local
taxpayers. The economic benefits study prepared for the proposed Baltimore football
stadium is used to illustrate these issues. It is then shown that, even if economic
benefits did justify the state-local subsidy for most stadiums, the benefits would not
justify a federal subsidy.
Section V examines two options that would change the tax-exempt bond law to
control the federal revenue loss from this subsidy and make it less of an entitlement
program for owners and players. One option is to eliminate the use of tax-exempt
bonds for stadiums. The second option is to deny the use of governmental bonds for
stadiums, but permit stadiums to compete with other private activities for the state's
limited volume of tax-exempt private-activity bonds. A third option is to leave the
law unchanged, perhaps on the basis that non-economic benefits are sufficient to
justify the political decision to provide subsidies. Section VI presents conclusions.
3 Dorgan, Byron L., Testimony before the U.S. Senate Judiciary Subcommittee on
Antitrust, Business Rights, and Competition, November 29, 1995.
4 Relatively little has been written on the tax-exempt bond subsidy of publicly-financed
sports stadiums. See Okner, Benjamin A., "Subsidies of Stadiums and Arenas," in Roger G.
Noll, ed. Government and the Sports Business, Washington, D.C.: The Brookings Institution,
1974; and James Quirk and Rodney D. Fort, Pay Dirt: The Business of Professional Team
Sports. Princeton: Princeton University Press. 1992. Both studies forego explicit discussion
of tax-exempt bonds, leaving this federal subsidy subsumed within estimates of the total
public subsidy.

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CRS-3
II. PRO SPORT'S MARKET POWER AND THE PRIVATE USE OF TAX-
EXEMPT BONDS
If state-local government officials are determined to provide big-league
professional sports for their constituents, the pro leagues' monopoly position
essentially requires publicly provided stadium subsidies. The entitlement nature of the
tax-exempt bond law forces federal taxpayers to contribute to these subsidies.
A. PRO SPORT'S MARKET STRUCTURE
The number of metropolitan areas that desire to have professional sports franchises
long has exceeded the number of available franchises. This situation prevails because
the existing producers (holders of franchises in the four major professional sports
leagues) control entry into the industry and prevent the entry of new competitors from
equalizing demand and supply. In effect, the provision of "major-league" professional
sports is characterized by monopoly.
This restriction of the supply of professional sports franchises intensifies
competition among metropolitan areas for the scarce franchises. One way in which
this competition manifests itself is by shifting a major portion of stadium facility costs
from the private professional sports team to the public sector. If Cleveland, Houston,
or New Jersey will not build or offer more favorable financial terms on a new or
existing football, baseball, or hockey stadium, perhaps Baltimore, Northern Virginia,
or Nashville will.5
B. PRIVATE USE OF TAX-EXEMPT BONDS:
HISTORY AND ECONOMIC RATIONALE
Adam Smith might ask why the federal government of a nation usually devoted
to markets free of government interference would subsidize the capital facilities of
selected private businesses (such as professional sports teams) by allowing them to
use tax-exempt bonds. It is a complicated story, but one whose telling is essential to
the understanding both of current tax law that enables and legislative options that
would change such subsidies for professional sports teams.6
5 This structure of the professional sports market has long been recognized and often
explained in testimony to Congress. For the most recent instances, see Zimbalist, Andrew.
Testimony before Committee on the Judiciary, House. Hearings on Professional Sports
Franchise Relocation: Antitrust Implications. February 6, 1996; and Baade, Robert A.
Testimony before the U.S. Senate Judiciary Subcommittee on Antitrust, Business Rights, and
Competition, November 29, 1995.
6 For a more complete discussion see Zimmerman, Dennis, The Private Use of Tax-
Exempt Bonds: Controlling Public Subsidy of Private Activity, Washington, D.C.: The Urban
Institute Press, 1991; and U.S. Library of Congress, Congressional Research Service, Tax-
Exempt Bond Legislation, 1968-1990: An Economic Perspective, CRS Report 91-154 E, by
Dennis Zimmerman, February 7, 1991, 42p.

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CRS-4
The first modern income tax law in the United States, in 1913, excluded from
taxable income the interest income earned by holders of the debt obligations (bonds)
of states and their political subdivisions. This treatment was believed to be consistent
with the Tenth Amendment to the Constitution and the doctrine of intergovernmental
tax immunity: one level of government could not impose taxes on income received
by individuals or businesses pursuant to contracts with another level of government
(the bond is a contract between a state-local government and the bond holder)
because such a tax would be equivalent to a tax on the government.7
This provision of the tax Code did not limit the purposes for which state-local
governments issue bonds, though some states may have been constrained by their own
laws. Eventually state-local officials began to issue bonds and use the proceeds to
make loans to private businesses and private individuals for such things as
manufacturing and commercial facilities, owner-occupied housing, and student loans.
State-local taxpayers generally did not object to the issuance of bonds for these
private purposes because the bond issues were structured to pay the debt service with
revenue from the private capital facility being built or loan made, thereby avoiding any
need to tax residents.
This situation prevailed until 1968 when Congress attempted to make bond
issuance conform more closely to the economic, as opposed to the legal, rationale for
the interest exemption. The economic rationale for this federal taxpayer-financed
subsidy is that state-local public capital facilities tend to be underprovided because
their benefits spill over political boundaries. The sheer number of state and local
jurisdictions implies that any one jurisdiction's political boundaries likely fail to
encompass all individuals and businesses who benefit from its public services. Thus,
some of the collective consumption benefits spill over the border of a taxing
jurisdiction, as in the case of some educational services or environmental projects.
Collective consumption benefits from providing such goods exceed the benefits to
taxpayers in the providing jurisdiction. Because taxpayers tend to be unwilling to pay
for services received by nonresidents, it may be desirable for a higher level of
government (which does receive payments from the nonresident spillover
beneficiaries) to subsidize residents' consumption in order to induce state-local
governments to provide the proper, that is, a larger, amount of facilities.
This economic perspective suggests the subsidy be restricted to capital facilities
that generate benefits to the general public. The Revenue and Expenditure Control
Act of 1968 (P.L. 90-364) began partial application of this restriction. It declared
state-local bonds to be taxable if more than 25% of the bond proceeds was to be used
by a nongovernmental entity and if more than 25% of the debt service (interest and
principal repayment) was secured by property used directly or indirectly in a private
business.
Congress did, however, make an exception for a limited list of "exempt facilities"
and types of loans that exceeded these two 25% tests, specifically including sports
7 The U.S. Supreme Court in 1988 rejected this constitutional protection for the tax
exemption, maintaining that the exemption is based in U.S. statutes. See South Carolina v.
Baker, 485 U.S. 505, (1988).

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CRS-5
facilities. This exception enabled continued tax-exempt bond financing of sports
stadiums when a professional sports team used more than 25% of the stadium's useful
service and when more than 25% of the debt service was paid for with revenue
generated by the stadium through rents, ticket taxes, shares of concession and parking
facilities, etc. These user-type financing fees met little resistance among state-local
taxpayers, probably because nonusers of the stadium perceived it to be a free
good—general taxes were not being levied to pay for the stadium.
This situation prevailed essentially unchanged until the Tax Reform Act of 1986
(P.L. 99-514), which adopted several provisions affecting private-use bonds. First,
a bond issue was deemed to be a "private-activity" bond and taxable if more than 10%
of the bond proceeds was to be used by a nongovernmental entity and more than 10%
of the debt service was secured by property used directly or indirectly in a private
business. A bond issue which did not exceed one of these tests was deemed to be a
"governmental" bond and tax-exempt. Second, sports facilities were removed from
the list of "exempt facilities" that retain eligibility for financing with tax-exempt
private-activity bonds even though the bonds exceed the two 10% tests. Third, the
total volume of most tax-exempt private-activity bonds for exempt facilities that could
be issued by all the political jurisdictions in a state was limited to the greater of $50
per resident or $150 million. (Sections 141, 142, and 146 of the Code.)
C. CURRENT PRACTICE IN STADIUM FINANCING
Promoters of stadiums did not immediately react to this change in the law
because $2.7 billion of bond financing for virtually every stadium in the planning or
gleam-in-the-eye stages was allowed to remain eligible for tax-exempt financing by
both general and stadium-specific transition rules included in the 1986 Act. Under
these transition rules the bonds had to be issued before the end of 1990. But non-
grandfathered post-1986 stadiums have been forced to alter their financial
arrangements, and it is these stadiums that have been receiving considerable attention
for their apparently generous public subsidies.8
Eligibility for tax-exempt bonds now requires that stadium bonds be issued as
governmental bonds; they can exceed one but not both of the 10% bond tests. Since
professional sports teams almost always will consume more than 10% of a stadium's
useful services, stadium bond issues generally exceed the use test. In order to avoid
exceeding the security interest test, a stadium bond issue must be structured so that
no more than 10% of the debt service for the bonds is secured, even indirectly, by
property used in a trade or business. In practical terms this means state-local
taxpayers must be willing to pay at least 90% of the debt service from some revenue
source other than stadium-generated revenue.9
8 See Morgan (1996), note 2, for a discussion of the lease terms for 6 recently built or
soon to-be-built stadiums.
9 Unresolved at this point is the tax-treatment of bonds issued to finance facilities
"related to" a stadium. For example, the new Washington Redskins stadium in Maryland is
privately financed with public financing for road improvements and parking. The Treasury
(continued...)

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CRS-6
The effect of these changes in bond law can be seen in the terms negotiated for
new stadiums. The proposed $250 million stadium for the Milwaukee Brewers
baseball team envisions a $160-million tax-exempt bond issue, a $40-million capital
contribution from the team, and a $50-million loan from the state to be financed with
taxable debt. The tax-exempt bond issue is to be paid with a 5-county regional sales
tax of 0.1%. Public revenue generated from the stadium will not exceed 10% of the
debt service on $160 million.
The proposed $200-million Baltimore football stadium is to be financed with $99
million in cash and $86 million in tax-exempt bonds. Both the cash and the debt
service on the bonds would be paid from state lottery funds. Public receipt of
stadium-generated revenue is not to exceed 10% of the debt service on $86 million.
In both these deals, the tax-exempt bonds are being serviced with revenue generated
from public sources other than the stadium.
The 1986 Act has had two noteworthy effects. The law says that stadium
revenue cannot be used directly or indirectly to finance debt service. This precludes
paying for debt service with general revenue (e.g., taxes or lottery receipts) and
replacing that general revenue with infusions of revenue earned from the stadium.
Thus, stadiums now being financed with tax-exempt bonds cannot generate stadium-
based payments that exceed 10% of the debt service on the bond issue. In effect, the
changes instituted by the 1986 Act virtually require that if a stadium is to be publicly
financed, it must provide a more favorable lease to its professional tenants. Cities,
10
however, might attempt to substitute an up-front capital contribution from the team
owner (as in the Milwaukee deal) for the stadium-generated revenue which the 10%
rule forces them to forego.
The 1986 Act also redistributes the burden for debt service among state-local
taxpayers as general revenue sources are substituted for stadium-related revenues.
Stadium proposals now routinely must contend with organized taxpayer opposition
to public financing, in large part because state-local taxpayers who are not fans, and
hence not direct beneficiaries of the stadiums, are now being asked to pay for it along
with those who are fans. Some stadium proposals have been defeated.
III. FEDERAL AND STATE-LOCAL STADIUM SUBSIDIES
The market structure of the professional sports leagues results in most franchise
owners' stadium lease or rental payments being lower than would be necessary were
the stadiums financed privately. Private ownership would require a rental payment
at least equal to the sum of fixed costs (depreciation of buildings and equipment, a
(...continued)
9
Department has issued proposed regulations on such facilities for public comment. See
Federal Register, vol. 59, no. 250, December 30, 1994, 67658-67690. The federal subsidies
calculated in this report do not account for related-facility financings that were not counted
as part of the stadium bond issue.
10 This does not preclude negotiating a lease agreement requiring the team to assume the
operating cost of the stadium. These payments would not be counted in the 10% rule.

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CRS-7
market rate of return on invested capital, and property taxes) plus operating expenses.
In this section, the size of the public subsidy is estimated for 21 stadiums and then
disaggregated into the shares provided by state-local and federal taxpayers.
A. THE SIZE OF THE STADIUM SUBSIDY
The market-based approach used by Quirk and Fort to estimate the annual
subsidies received in 1989 by users of 21 publicly financed stadiums with 40-year
useful lives is presented in the first five columns of table 1. Of these stadiums
11
,
Lambeau Field opened first in 1957 (column 1), and the Orlando and Miami Arenas
opened last, in 1988. The original cost of each stadium is presented in column 2.
Column 3 contains estimates of the fixed cost that would have been incurred in 1989
had the stadiums been privately financed (depreciation and property taxes both based
on replacement cost, plus a pre-tax real return on equity). Column 4 contains
estimates of the public authority's operating income or loss (revenue minus variable
cost) in 1989. This operating inc
12
ome (loss) is deducted from (added to) fixed costs
to obtain the total public subsidy in column 5.
These one-year subsidies total $146.4 million in 1989 for the 21 stadiums, and
are quite substantial for some stadiums. Users of the Superdome received a subsidy
in 1989 estimated to be $35.8 million; the Orlando Arena, $12.5 million; Riverfront
13
Stadium, $10 million; and Arrowhead Stadium, the Hoosier Dome, and the
Kingdome, each about $9 million. At the other end of the scale, users of Lambeau
Field and the L.A. Sports Arena received subsidies of $143 thousand and $331
thousand respectively.
B. WHO PAYS: FEDERAL OR STATE-LOCAL TAXPAYERS?
Who is paying these subsidies, state-local or federal taxpayers? In order to
calculate the federal share of this annual total subsidy, it is first necessary to
11 Quirk and Fort (1992), note 4. Tables 4.14-4.16.
12 Rental contracts usually include payments based upon shares of revenue from
admissions (sometimes termed an admissions tax), concessions, parking, and luxury boxes.
These revenues are offset by operating expenses for such things as labor, management, and
supplies.
13 Were the Superdome privately financed, its cost presumably would have been better
controlled. Private owners would have realized that utilization of the facility could not
generate a revenue stream adequate to provide a market rate of return on a facility costing
$168 million.

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CRS-8

Table 1. Federal and State-Local Subsidies to Users of Selected Publicly-Owned Stadiums, 1989
($1,000s)
(1)
(2)
(3)
(4)
(5)
(6)
(7) (8)
Net
Total
Interest
Year
Origina
Fixed
Operatin
Public
Rate
Maximum
Opene
l
Cost1
g
Subsid
Spread2
Federal Subsidy3
d
Cost
Income
y
$
$
$
$
% points
$
% Total
Green Bay
Lambeau
1957
969
293
150
143
0.76
5
3.5
Field
L.A. Sports
Arena
1959
5,000
1,265
934
331
1.03
41
12.5
Atlanta-Fulto
nCounty
Coliseum
1964
18,000
5,079
(1,478)
6,557
1.29
237
3.6
Anaheim
Stadium
1966
24,000
6,445
5,605
840
1.37
346
41.2
San Diego
Jack Murphy
Stadium
1967
26,000
6,907
(64)
6,971
1.33
365
5.2
Salt Lake
City Salt
1969
17,000
4,200
(639)
4,839
2.05
363
7.5
Palace
Cincinnati
Riverfront
Stadium
1970
45,000
10,21
118
10,098
2.09
968
9.6
6
Kansas City
Arrowhead
Stadium
1972
53,000
11,57
2,599
8,978
2.80
1,469
16.4
7
Atlanta Omni
1972
17,000
3,353
1,130
2,223
2.80
471
21.2
Buffalo
Rich Stadium
1973
22,000
4,070
0
4,070
2.45
517
12.7
Denver
McNichols
Arena
1975
13,000
2,152
(799)
2,951
2.92
341
11.6
Louisiana
Superdome
1975
168,00
27,83
(7,922)
35,754
2.92
4,406
12.3
0
2

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CRS-9
Pontiac
Silverdome
1975
56,000
9,287
205
9,082
2.92
1,469
16.2
Seattle
Kingdome
1976
67,000
10,45
1,535
8,920
2.39
1,398
15.7
5
New Jersey
Giants
Stadium
1976
68,000
10,89
5,150
5,746
2.39
1,419
24.7
6
New Jersey
Byrne
Meadow-
1981
85,000
10,24
2,541
7,702
4.46
2,875
37.3
lands Arena
3
Minnesota
Metrodome
1982
62,000
6,674
5,554
1,120
4.14
1,932
172.5
continued on next page
Hoosier
Dome/Mkt
Sq. Arena
1984
77,000
8,294
(1,100)
9,394
2.59
1,484
15.8
Charlotte
Coliseum
1985
55,000
6,126
3,632
2,494
3.18
1,294
51.9
Orlando
1988
110,00
12,62
128
12,500
2.54
2,014
16.1
Arena
0
8
Miami Arena
1988
50,000
5,708
(11)
5,719
2.54
915
16.0
1. Assumes a 7% pre-tax real rate of return on invested capital (Quirk and Fort assumed a 10%
rate), a 40-year stadium life with straight-line depreciation based on replacement cost, and
property taxes equal to 2% of replacement cost.
2. Moody's corporate and state-local long-term Aa bond yields. Bonds used to finance a stadium
in year X are assumed to be issued in December of year X-2 (e.g., the yields for the Miami arena
are those that prevailed in December 1986).
3. Present value of 30-year interest savings allocated across 40-year life of stadium such that the
subsidy remains a constant fraction of the remaining real value of the stadium.
Sources: Quirk and Fort, Pay Dirt, note 4; Moody's Municipal & Government Manual, 1990;
Federal Reserve Board of Governors, Annual Statistical Digest and Banking and Monetary
Statistics, various issues; and CRS calculations.
calculate the interest savings for state-local taxpayers (the value of the federal
subsidy) over the lifetime of each stadium. We illustrate this lifetime subsidy with a
hypothetical $225 million stadium financed 100% with 30-year tax-exempt bonds
rather than with the average $50 million stadium in table 1. The $225 million cost is

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CRS-10
comparable to stadiums being built today—$233 million for Chicago's Comiskey Park
in 1991, $225 million for Denver's Coors Field in 1995, $244 million for Cleveland's
Jacobs Field in 1994, and $250 million for the proposed stadiums in Milwaukee and
Northern Virginia—and provides a better idea of the magnitude of the typical
maximum federal subsidy for stadiums beng built today.
The interest rate spread (differential) between long-term taxable corporate bonds
and long-term tax-exempt state-local bonds, each rated Aa by Moody's Investors
Service, has ranged between 2% and 4.5% over the last quarter century. The interest
expense savings, assuming 1/30th of the bond principal is retired at the end of each
year, are presented in table 2 for interest rate differentials of 2% and 4%, both
undiscounted and discounted at a 7% rate.
The present discounted value of the interest savings if the interest rate spread is
2% is $37.7 million. This interest saving is equal to almost 17% of the $225 million
construction cost. Should the interest rate differential be twice as high, the present
value of the savings doubles to $75.4 million, about 34% of construction cost. The
cost to state-local taxpayers and tenants of professional sports stadiums clearly is
reduced by the substantial decrease in interest expense made possible by tax-exempt
bonds.
The federal taxpayers' revenue loss usually exceeds the value of the interest
savings to state-local taxpayers. The last row of table 2 estimates the present value
of the federal revenue loss on these $225 million of bonds to be $47.1 million or $94.2
million depending on the interest rate differential.
14
Table 2. Interest Savings and Federal Revenue Loss on
Hypothetical $225 Million Stadium Financed With 30-Year
Tax-Exempt Bonds ($ millions)
Interest Rate
Differential
2%
4%
Value of Interest Savings
Undiscounted
$69.8
$139.5
14 If the marginal tax rate of the bond purchaser who clears the market is lower than the
average marginal tax rate of all purchasers of the bonds (meaning some of the bonds are
purchased by those with marginal tax rates above the market-clearing rate), the revenue loss
exceeds the value of the interest savings. Zimmerman estimated that the interest savings on
tax-exempt bonds were about 60% of revenue loss prior to the 1986 tax act, and rose to about
80% after 1986 due to the decrease in progressivity of the marginal rate structure. See
Zimmerman, The Private Use of Tax-Exempt Bonds, note 6, 101-102.
Some might argue that this revenue loss should be reduced by the revenue loss that would
result from interest deductions on the debt-financed portion of the alternative privately-
financed stadium. This is not done here. The creditors of a 100% debt-financed private
stadium would pay taxes on their interest income. If some portion were equity financed, even
higher taxes would be paid, and this revenue-loss estimate would be understated.

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CRS-11
Discounted at 7%
$37.7
$75.4
Savings (Present Value) as
Percent of Construction
Cost
16.8%
33.6%
Present Value of Federal
Revenue Loss
$47.1
$94.2
Calculations by CRS
With this background, we return to the 21 stadiums in table 1 for which the 1989
total subsidy was calculated. The first step in estimating the annual (1989) value of
the tax-exempt bond subsidy is to make a calculation similar to that made in table 2
for each of these 21 stadiums, assuming that 100% of each stadium's original cost was
financed with tax-exempt 30-year non-callable serial bonds. The present value of the
30-year interest savings is based upon the interest rate differential in column 6 of table
1, and is allocated across the 40-year life of the stadium such that the annual subsidy
is a constant fraction of the undepreciated real value of the stadium. The dolla
15
r
value of the maximum federal subsidy and the federal share of the total subsidy for
each stadium is presented in columns 7 and 8. The one-year federal subsidies total
16
$24.3 million and represent 16.6% of the total public subsidy.
Several factors determine these federal subsidies and subsidy shares. Other
things equal, more recently built stadiums tend to have higher federal subsidies and
subsidy shares because they are more costly (requiring larger bond issues) and
because more of the original investment is undepreciated (implying a larger dollar
payment for rate of return). Lambeau Field and the L.A. Sports Arena were built in
the 1950s and, in 1989, have but 8 and 10 years of useful life remaining, respectively.
Their federal subsidies were $5,000 and $41,000; 3.5% and 12.5% of the total
subsidy.
The difference in interest rates between taxable and tax-exempt bonds is also
important; other things equal, the larger the rate difference, the larger the federal
subsidy and subsidy share. As illustrated in column 6 of table 1, bonds for the Byrne
Meadowlands Arena were issued in 1979 when this spread was very high (4.46%);
its federal subsidy and share are substantially higher than those for the Hoosier
15 Although the bonds issued to finance these stadiums all are retired after 30 years, one
cannot assume state-local taxpayers receive zero subsidy for the last 10 years of the 40-year
stadium life. Had taxpayers been forced to pay the higher interest cost for 30 years, those
higher expenses would show up over the next 10 years as some combination of higher taxes,
lower services, and higher debt burden.
16 If some portion of a stadium was financed with current revenue, calculating the federal
subsidy based on 100% tax-exempt financing still is reasonable. The stadium probably was
each government's marginal investment; any current funding simply shifted the extra tax-
exempt bonds to other planned investments. The estimate does overstate the actual subsidy
if some portion of the original cost was financed with taxable debt or if call provisions were
exercised.

---

CRS-12
Dome's comparably sized bond issue in 1982 that experienced a smaller interest rate
difference (2.59%).
But the most important factor explaining the federal subsidy share is the rental
contract with stadium tenants and whether it requires a large subsidy from state-local
taxpayers. Anaheim Stadium was built in 1966. In absolute terms, it has little federal
subsidy ($346,000) because the value of the original bond issue was small in 1989
dollars and only 17 years of useful life remained. But its federal subsidy share is
41.2% of the total subsidy, much higher than for stadiums of comparable vintage. For
example, Jack Murphy Stadium was built one year later for almost the same cost, yet
its federal subsidy share is only 5.2% of a much larger total subsidy. Column 4 shows
that Anaheim Stadium's rental contract produced a $5.6-million operating profit for
the public stadium authority to offset its facility subsidy; Jack Murphy Stadium's rental
contract produced a $64,000 operating loss for San Diego. In effect, Anaheim
Stadium uses its operating profit to pay a substantial share of its fixed cost, thereby
reducing the annual subsidy required of state-local taxpayers.
The federal share of the Metrodome's total subsidy is 172.5%, implying that the
federal subsidy of the Metrodome is 73% greater than the total subsidy received by
users of the Metrodome. The size of the bond issue, share of useful life remaining,
and interest rate differential contribute to this high federal share. But the Hoosier
Dome (built two years later) has a greater original cost and more remaining useful life
than the Metrodome, yet has a federal share of only 15.8%. And the Byrne
Meadowlands Arena (one year older) has an even higher interest rate differential than
the Metrodome, yet has a federal share of only 37.3%. The Metrodome's rental
agreement that generates an operating profit of $5.5 million for the public authority
is primarily responsible for reducing the state-local share of the subsidy and boosting
the federal share above 100%. In contrast, the Hoosier Dome has an operating loss
of $1.1 million.
This discussion illustrates that tax-exempt bonds play an important role in
subsidizing professional sports stadiums. As has been shown by the Metrodome, it
is even possible for stadiums built under the tax-exempt bond rules prevailing before
1986 for state-local taxpayers to make money while federal taxpayers were
subsidizing a stadium. Under the post-1986 tax-exempt bond law, such financia
17
l
arrangements are no longer possible and the future state-local share of stadium
subsidies will have to be larger.
The value and time path of the federal subsidy is determined by state and local
officials at the time stadium financing is arranged. This is possible because the tax-
exempt bond rules discussed in section II currently are structured in a way that makes
17 It is possible the year of 1989 was an above-average year for the Metrodome. Baim
calculates that 13 of 14 stadiums had a net subsidy over their lives (a negative accumulated
net present value of cash flow); the Metrodome's net subsidy after 10 years of life was
$43,500. The value of the tax-exempt bond financing in any one year far exceeds this
$43,500 lifetime subsidy, so it is likely that only federal taxpayers subsidized the Metrodome
for its first 10 years. Baim, Dean V. The Sports Stadium as a Municipal Investment
(Westport, Connecticut: Greenwood Press), 1994.

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CRS-13
this tax preference the equivalent of an open-ended matching grant. The current bond
law essentially makes stadium subsidies a federal entitlement program. Because the
cost of a stadium being built today far exceeds the cost of almost all the stadiums in
table 1, the dollar value of the federal subsidy and revenue loss can be expected to
grow. Should Congress wish to curtail this subsidy, it would be necessary to change
the tax rules. Whether it would be desirable in an economic sense to do so depends
at least in part upon comparing federal taxpayer benefits to the federal revenue loss.
IV. ECONOMIC BENEFITS COMPARED TO COSTS: ARE STADIUMS
WORTHWHILE TAXPAYER INVESTMENTS?
Section III shows that stadiums generally are money losers for state-local
taxpayers when the public sector's benefits are limited to revenues flowing directly
from the stadium. This is hardly surprising—the idea of a subsidy is to provide a net
cash contribution from the public sector. But proponents of publicly financed
stadiums generally publicize economic benefits studies that suggest stadiums will be
profitable investments for the cities' (counties', regions', etc.) taxpayers when account
is taken of the stadium's impact on economic development.
An evaluation of the reasonableness of these studies' estimates of economic
benefits to state-local taxpayers is an important element in evaluating whether federal
taxpayers receive benefits commensurate with their tax-exempt bond subsidy of the
stadiums. Thus, this section begins with a discussion of the studies that estimate
economic benefits for state-local taxpayers, and then turns to evaluating the
soundness of the subsidy for federal taxpayers. Although the political unit backing
any given stadium can range in size from a city to a state, this discussion proceeds
from the perspective of a city.
A. STATE-LOCAL TAXPAYERS
The accuracy of the studies estimating the economic benefits from stadiums has
been questioned.18 Most of these studies appear to be conceptually flawed, and
empirical evidence has emerged that suggests the economic benefits generated by
these stadiums are not adequate, of themselves, to make them sound public
investments.
18 For a discussion of benefit/cost methodology, see Gramlich, Edward M., Benefit-Cost
Analysis of Government Programs, Englewood Cliffs, N.J.: Prentice-Hall, Inc., 1981,
particularly chapter 5. For general criticism of the use of regional economic models by state-
local governments to promote economic development schemes, see Mills, Edwin S., "The
Misuse of Regional Economic Models," Cato Journal, vol. 13, Spring/Summer 1993, 29-39.
For recent criticism specific to the methodology used in stadium studies, see Quirk and Fort,
Paydirt, note 4, 172-176; Zimbalist, Testimony, 1996, note 5; Baade, Robert A., Stadiums,
Professional Sports, and Economic Development: Assessing the Reality, Heartland Policy
Study, No. 62, April 4, 1994, 5-8; and Baade, Robert A., Testimony, 1995, note 5.

---

CRS-14
1. Conceptual Issues
The economic benefits of a new stadium are usually expressed as an increase in
income and jobs. The increase in income and jobs is in turn dependent upon the
extent to which spending is increased. Thus, in these studies the starting point for
assessing economic benefits is to estimate the spending increase associated with the
stadium.
The process begins by estimating direct spending on goods and services by the
team, the fans, and the players. This direct spending appears as income received by
businesses; the businesses and their employees spend a fraction of this income on
other goods and services; this second-round spending in turn appears as income
received by businesses; these businesses and their employees in turn spend a fraction
of this third-round income on other goods and services; and on and on with smaller
amounts spent in each successive round. All of this second, third, and subsequent-
round spending is referred to as indirect spending. The procedure usually followed
is to estimate direct spending and multiply it by a "multiplier" to estimate indirect
spending.
19 The sum of direct and indirect spending forms the basis for estimating the
stadium's impact on the city's economy, usually expressed in terms of tax receipts and
jobs created.
The procedures used to make these spending estimates generally suffer from two
major conceptual flaws: unrealistic assumptions; and a failure to consider opportunity
cost, that is, to compare the benefits from the stadium investment to the benefits that
would accrue to the city from alternative investment opportunities (schools, roads,
manufacturing subsidies, returning the tax dollars to citizens, etc.).
Unrealistic assumptions. Note the number of times the word "increase" was used
in the first paragraph of this section describing economic benefits. Only additional
spending that takes place in the city produces economic benefits for those living in the
city. Since detailed information on geographic spending patterns for professional
sports activities generally is not available, the economic benefits studies must make
assumptions. These assumptions about direct spending often are too optimistic in
three ways.
! One wants an estimate of income and jobs added to the city from direct
spending. For two reasons, much of direct spending does not represent an
increase in either. First, to the extent those attending the games are from the
city, most of the dollars spent are dollars that otherwise likely would have been
spent on restaurants, amusement parks, movies, theater, or other entertainment
located in the city. Income and jobs created by stadium spending are offset by
income and jobs lost in these other activities. Such spending should not be
included as increases in direct spending. Second, much of the income
generated by this adjusted direct spending immediately leaves the city as profits
19 These "multipliers," which enable one to estimate the amount of second, third, and
subsequent-round spending generated by one dollar of direct spending, are available from the
Commerce Department for industry subgroups (including the entertainment industry) for
different-sized geographic areas.

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CRS-15
and wages remitted to the home offices of businesses providing imported
goods and services, savings by franchise owners and players, and spending by
owners and players outside the city. No city income and jobs are created by
such "imported" goods and services and "exported" income.
! The "multipliers" used to estimate indirect spending from direct spending often
are too large, in effect overestimating the share of second, third, and
subsequent-round spending that occurs in the city.
! Studies for stadiums with state or regional public financing should extend the
economic area of analysis beyond the city to include all the political
jurisdictions contributing financial support to the subsidy.
Opportunity cost. Establishing that a stadium will generate positive economic
benefits is necessary but not sufficient information to justify a subsidy on economic
grounds. One needs to know whether an equivalent subsidy of some alternative
activity (or returning the tax dollars to citizens for personal consumption and saving)
can generate a greater amount of benefits. If an alternative generates $2 million of
benefits net of subsidy and the stadium generates $1.5 million net of subsidy, the
stadium can be viewed as imposing a $0.5 million loss on taxpayers, not a $1.5 million
benefit. Economic benefits studies for stadiums rarely make an effort to compare the
benefits to be gained to those from alternative investment projects.
2. Empirical Evidence
The importance of these assumptions about direct and indirect spending is
illustrated in the economic impact estimates for the soon-to-be-built football stadium
at Camden Yards in Baltimore presented in table 3. The first row contains the
estimates prepared by the Maryland Department of Business and Economic
Development (part of the state's executive branch).
Table 3. The Role of Assumptions and Opportunity Cost
In Assessing the Economic Impact of Stadiums:
The Case of the Baltimore Football Stadium
Economic
Cost of
Cost per
Benefits
Jobs
Investment
Job
Source of Estimate
($ millions)
Created
($million)
($1000s)
Dept. of Business
and Economic
Development
$110.6
1,394
$177
$127
Department of
Fiscal Services
$33.0
534
$177
$331
Sunny Day Fund
Development
not available
Activities
5,200
$32.5
$6.25

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CRS-16
Sources: Maryland Department of Business & Economic Development, The
Impact of a Baltimore Pro Football Team on the Economy of Maryland,
November 1995; Maryland Department of Fiscal Services, Estimated Impact
of a Football Stadium at Camden Yards, January 1996; and Office of the
Governor, Summary of Legislation Proposed by Parris N. Glendening,
Governor, Kathleen Kennedy Townsend, Lt. Governor, 1996 Session of the
Maryland General Assembly, no date.
Two assumptions were made in calculating the first row that some would
consider overly optimistic. First, all direct spending is considered to be additional
spending; that is, none of the football spending is judged to replace other
entertainment spending. Second, the size of the multipliers used to calculate indirect
spending exceed those used in a 1987 economic impact study of the baseball stadium
now known as Oriole Park at Camden Yards: for output multipliers, a range of 1.04
to 1.4 in 1987 compared to a range of 1.9 to 3.8; and for employment multipliers, a
range of 1.2 to 1.4 in 1987 compared to a range of 1.5 to 2.0. These assumptions
produced economic benefits of $111 million and 1,394 additional jobs.
The second row contains estimates made by the Maryland Department of Fiscal
Services (part of the state's legislative branch). These estimates assume 80% of direct
spending replaces or substitutes for other spending in the state, and uses the lower
multipliers to calculate indirect spending. These assumptions produce economic
benefits of $33 million and 534 additional jobs. The sensitivity of the estimates to
20
the assumptions is striking.
Dueling assumptions are nothing new in economics. Although extreme
assumptions (such as no substitution in direct spending) can be easily dismissed, the
exact values to use often are unknown. Thus, dispensing with assumptions is not
feasible. What is needed is a test of whether proponents' optimistic assumptions
represent reality.
Suppose proponents' claims of substantial economic benefits from stadiums are
true. If one adjusts for all other factors that might create differences in economic
development among cities, one should expect to observe higher economic
development in cities that constructed stadiums. Baade (1994) estimates the effect
construction of a stadium has had on an area's real per capita income growth from
1958 through 1987; in this effort he studied a sample of 48 metropolitan areas, 36
with and 12 without professional sports teams.
Of the 30 MSAs where there was a change in the number of stadiums
or arenas ten years old or less, 27 MSAs showed no significant
20 Neither study adjusts these estimates downward to reflect the adverse effect on the
Maryland economy of the $80 million in personal seat licenses. Much of this $80 million can
be expected to reduce Marylanders' spending on other goods and services in Maryland. Only
$20 million of this revenue is to be used to fund construction of the stadium and perhaps
replace spending previously financed with the personal seat license money. The remaining
$60 million goes to the football team, and one might expect that a very substantial share of
that $60 million will not be spent in Maryland.

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CRS-17
relationship between the presence of a stadium and real, trend-
adjusted, per capita income growth. In all three of the remaining cases
(St. Louis, San Francisco/Oakland, and Washington, D.C.), the presence
of a sports stadium was significantly negative. [emphases in original]
21
Baade (1996) extended his analysis to job creation. He concluded "Apparently,
adding a ... stadium to a city's economy does not increase aggregate spending in the
city ... in an amount sufficient to ... induce job growth that is measurably different
from zero."22
None of the information in this section has taken the final step, which is to
compare the economic benefits of a stadium with the economic benefits from the best
alternative public investment or tax reduction. The last row of table 3 makes a rough
attempt to do that for the football stadium at Camden Yards. The returns to the state
are estimated by the Economic Development Department as 1,394 full-time "jobs
created," a cost per job created by the stadium of $127,000. In contrast, the 5,200
full-time jobs created or retained by the state's Sunny Day Fund for economic
development since its inception have cost Maryland's taxpayers $32.5 million, a cost
of $6,250 per job. As a wealth generator or a job creator, the stadium appears to be
a poor investment compared to Maryland's Sunny Day Fund. The stadium wil
23
l
impose losses on Maryland taxpayers relative to alternative investments.
B. FEDERAL TAXPAYERS
The preceding section indicates that the state-local economic benefits from a
stadium are generally overestimated and may be smaller than can be obtained with
alternative public investment opportunities. The most straightforward way to assess
the benefits received by federal taxpayers is to utilize the same conceptual framework
used to assess the economic benefits for state-local taxpayers.
The crucial issue in determining the magnitude of economic benefits from direct
spending for the state-local government was the share of the spending that came from
outside the political jurisdiction providing the subsidy. Table 3 shows that the
economic benefits for Maryland declined from $111 million to $33 million when direct
spending was adjusted downward primarily to reflect the alternative assumption that
80% of direct spending would be by Maryland residents who would spend on other
activities, thus providing no net economic benefit.
21 Robert A. Baade, Stadiums, Professional Sports, and Economic Development:
Assessing the Reality, note 18, p. 15.
22 Baade, Robert A., "Professional Sports as Catalysts for Metropolitan Economic
Development," Journal of Urban Affairs, vol. 18, March 1996 (forthcoming).
23 As discussed, the stadium jobs are probably overstated. It is also likely that the 5,200
jobs created or retained by the Sunny Day Fund are overstated. What is important here is that
both job estimates have been produced by stadium proponents, that is, the executive branch
of Maryland's state government. Using the Department of Fiscal Services estimates would
increase the stadium's cost per job to $331,000.

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CRS-18
Now consider whether any increased spending on a stadium that is counted as
a benefit to state-local taxpayers represents a benefit to federal taxpayers. Unless the
fans attending the games come from foreign countries, all spending is made by
residents of the political jurisdiction providing the tax-exempt bond subsidy, the
United States of America. Except for those few U.S. residents who will reduce their
savings to attend games, all of this spending is offset by reductions in spending on
alternative entertainment or other activities. To the federal taxpayer, very little
increased spending and economic benefit arises from this subsidy.
The subsidy is only worthwhile to federal taxpayers if they value spending and
associated jobs in one location more than they value them in another location. If that
is the case, it is only this differential valuation that should be included in taxpayer
benefits.
24 But it is unlikely that federal taxpayers value the spending and associated
jobs attached to a stadium differently according to their location—the subsidy is not
approved for some locations and disapproved for others. It is, in effect, an
entitlement program without regard to the location of the spending and associated
jobs.
Some proponents of stadiums counter evidence that economic benefits are not
sufficient to justify state-local subsidies with a case that qualitative benefits justify
such a subsidy. By this they mean such benefits as
25
the stadium acting as a sort of
"take-off" factor motivating corporations and individuals who are making locational
choices to view the city more favorably, the psychic income residents receive from
living in a "big league" city, and some unspecified intangible entertainment value.
Such arguments are not directly testable propositions. If, however, the analysis in this
report is correct that stadiums represent a drag on a local economy (compared to
alternative investments) and business accurately perceives this effect, a stadium is
unlikely to act as a "take-off" factor for development.
One need not pass judgment on the validity of such qualitative benefits as factors
in justifying a state-local subsidy in order to render judgment on their validity in
justifying a federal subsidy. Reiterating the analysis above, the subsidy is only
worthwhile to federal taxpayers if they value qualitative benefits in one location more
than they value them in another location. If that is the case, it is only this differential
valuation that should be included in taxpayer benefits. But it is unlikely that federal
taxpayers value the qualitative benefits attached to a stadium differently according to
their location—the subsidy is not approved for some locations and disapproved for
others. It is, in effect, an entitlement program with absolutely no attention paid to the
location of the qualitative benefits.
24 For a more complete discussion of these issues, see U.S. Library of Congress,
Congressional Research Service, Is Job Creation a Meaningful Policy Justification?, Report
92-697 E by Jane G. Gravelle, Donald W. Kiefer, and Dennis Zimmerman, September 8,
1992, 18p; and Courant, Paul N., "How Would You Know a Good Economic Policy If You
Tripped Over One? Hint: Don't Just Count Jobs," National Tax Journal, December 1994, 863-
881.
25 For example, see Chema, Thomas V., "When Professional Sports Justify the Subsidy:
A Reply to Robert A. Baade," Journal of Urban Affairs, vol. 18, March 1996 (forthcoming).

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CRS-19
V. OPTIONS REDUCING THE USE OF TAX-EXEMPT BONDS FOR
STADIUMS
The economic case for federal subsidy of professional sports stadiums is weak,
which suggests its status as an entitlement for cities, owners of professional sports
franchises, and professional athletes might bear reconsideration. Two options are
discussed for reducing federal revenue loss from the use of tax-exempt bonds to
finance these stadiums: elimination or limitation.
A. ELIMINATION
State-local governments cannot issue tax-exempt private-activity bonds to
finance stadiums for professional sports teams, but can issue governmental bonds for
this purpose. The authority to issue federal tax-exempt governmental bonds for
stadiums could be withdrawn. Such a move would be consistent with the information
provided in this report that these stadium projects provide no economic benefits for
the federal taxpayer.
Some believe elimination would also be consistent with the intent of Congress
in 1986. The general explanation of the 1986 Act states: "The Act repeals the prior-
law exceptions permitting tax-exemption for interest on bonds to finance sports
facilities; .... " This seemingly unambiguous statement
26
of intent is supported by H.R.
3838, the House bill that led ultimately to the Tax Reform Act of 1986. This bill
proposed repeal of the security interest test.27 Had repeal been adopted, stadium
bonds would have been eliminated because they would always exceed the one
remaining test, the 10% use test.
The House/Senate conferees decided, however, to retain the security interest
test, apparently to avoid prohibiting tax-exempt bond use for public facilities managed
by private entities which do not generate any substantial revenue, such as New York
City's zoos and libraries. Some might argue that retention of the security interest test
need not indicate waning congressional intent to eliminate bonds for stadiums.
Rather, it might be viewed as a reasonable response to the problem of maintaining
bond issuance authority for such privately managed public entities, particularly if
legislators generally believed that stadium proponents would be unable to induce
state-local taxpayers to switch to governmental bond financing.
The 1986 Act could have included an outright prohibition of governmental bonds
for stadiums. At that time, however, Congress had never imposed an outright
prohibition on tax-exempt bond use for any activity financed with governmental
bonds. Two such prohibitions were enacted, however, in the Omnibus Budget
Reconciliation Act of 1987 (P.L. 100-203). This act generally eliminated the ability
of municipalities to use tax-exempt governmental bonds to finance the takeover of
26 Joint Committee on Taxation, General Explanation of the Tax Reform Act of 1986
(H.R. 3838, 99th Congress: Public Law 99-514), May 4, 1987, 1175.
27 U.S. Congress. House. Tax Reform Act of 1985. Report of the Committee on Ways
and Means on H.R. 3838, 99th Congress, 1st sess, Report 99-426, 520.

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CRS-20
investor-owned electric and gas utilities in order to convert them into municipal
utilities (section 141(d) of the Code). The act also denied the use of governmental
bonds to finance residential rental property which is not located within the jurisdiction
of the issuer [section 148(b)(2)(E)]. Thus, precedent does exist for such a prohibition
directed to a specific activity.
With these two exceptions, the tax-exempt bond law currently allows state-local
governments to issue tax-exempt bonds whose proceeds will be used by governmental
or private entities for virtually any activity, provided taxpayers agree to pay 90% or
more of the debt service on the bonds from other revenue sources. For example,
nothing in the federal tax law would prevent a local government from issuing bonds
to finance a privately owned car dealership, provided at least 90% of the debt service
on the bonds was paid from general revenue (meaning the dealership's revenue
contributions to the local government did not exceed 10% of the debt service).
Constraints on such projects would have to come from the state's constitution,
statutes, or through citizen resistance encountered in the political process required to
implement such a policy.
In fact, U.S. tax-exempt bond law currently allows for federal subsidy of certain
private businesses that requires less fiscal responsibility of state-local taxpayers than
they have for stadium bonds. For example, tax-exempt small-issue industrial
development bonds can be issued for up to $10 million of private investment in
manufacturing facilities and the debt service on those bonds can be paid by revenue
generated from the manufacturing facility, not from state-local taxes. In other words,
these are exempt private-activity bonds issued for facilities that exceed both the use
and security interest tests but retain the tax-exempt bond issuance privilege, albeit
subject to state volume caps. This contrasting federal tax treatment raises the
question of what rationale would justify total denial of bond subsidy for stadium
projects that are alleged to stimulate economic development but allow subsidy for
privately owned manufacturing facilities that are also alleged to stimulate economic
development, particularly when the evidence suggests that manufacturing facilities are
no more successful at generating benefits for federal taxpayers than are stadium
projects.28
B. LIMITATION
An alternative option would reverse the policy decision made in 1986 that
eliminated use of tax-exempt private-activity bonds to finance stadiums and ushered
in the use of tax-exempt governmental bonds. The reverse policy would deny
governmental bond financing and permit tax-exempt private-activity bond financing
that is subject to the state volume cap.
Implementation would entail repeal of the security interest test for stadium
bonds, in effect adopting a more targeted variant of the repeal originally proposed by
H.R. 3838 as passed by the House in 1985. Use of governmental bonds to finance
28 U.S. Library of Congress. Congressional Research Service, Small-Issue Industrial
Development Bonds, CRS Report 94-771 E, by Dennis Zimmerman, October 4, 1994, 10 p.

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stadiums used by professional teams would be precluded because such bonds would
always fail the 10% use test. Stadium bonds for which private use exceeds 10% of
bond proceeds would be classified as private-activity bonds, and stadiums would be
added to the list of private activities for which tax-exempt private-activity bonds can
be issued. These bonds would be subject to the state volume cap.
This scheme would have several effects relative to the current situation.
! Use of the volume cap for a stadium would force most states to forego its
taxpayers' benefits from other bonds: small-issue IDBs, mortgage revenue
bonds for first-time home buyers, student loans, etc. State-local governments
would be forced to weigh their taxpayers' benefits from a bond-financed
stadium investment against their taxpayers' benefits from other bond-financed
private activities, all of which provide few net benefits to the federal taxpayer.
! If states in which stadiums are built already use most of their private-activity
bond allotment, stadium bonds would replace tax-exempt private-activity
bonds issued for other purposes. Tax-exempt bond financing of stadiums
would entail no additional cost to federal taxpayers.
! State-local governments could use rents or benefit-type user taxes to finance
stadiums, unlike the current system which forces financing from revenue
sources unrelated to stadiums. This would eliminate the adverse distributional
consequences among state-local taxpayers that occur when all taxpayers are
forced to contribute to a facility whose benefits are consumed primarily by an
identifiable subset of taxpayers, fans of the team.
! The size of the state-local subsidy to professional sports teams might be
reduced. Current treatment requiring governmental bond financing prohibits
tax-exempt financing if stadium revenue flowing into state-local coffers
exceeds 10% of tax-exempt bond debt service. This leaves most of the
revenue associated with the stadium (parking, concessions, tickets, etc.) in the
hands of the team. Allowing stadium financing only as private-activity bonds
within the volume cap would allow more than 10% of debt service to be paid
by stadium-related revenue. This advantage only results if state-local
governments have not reacted already to the interaction of the governmental
bond/10% rules by requiring the team to contribute a larger share of the
project's capital costs than it would under the private-activity bond option.
Requiring private-activity bond financing would also subject stadium bonds to
a series of restrictions that do not apply when issued as governmental bonds. These
restrictions taken together would reduce the public subsidy, raise the cost of stadium
projects, and perhaps reduce the volume of stadium bonds.
! Requiring stadiums to be financed with private-activity bonds would reduce the
incentive for investing in such facilities because no portion of the proceeds of
a tax-exempt private-activity bond issue may be used to finance a "skybox or
other private luxury box." (Section 147(e) of the Code.) Tenants are
pressuring cities to replace or upgrade stadiums that are quite new, such as the

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Charlotte and Miami facilities built in 1988, due to inadequate luxury seating.
The exclusion of luxury seating revenue from sports leagues' pool of shared
revenue increases the return on luxury seating investments relative to
alternative investments (such as developing better players or more appealing
give-aways and promotional efforts).
! Issuance costs financed with the proceeds of a tax-exempt private-activity
bond issue are limited to 2% of bond proceeds. Costs in excess of 2% must
be financed with more expensive revenue sources. (Section 147(g) of the
Code.)
! Tax-exempt private-activity bonds issued for construction of facilities must
rebate arbitrage profits earned on unspent bond proceeds even if the
requirement for spending an increasing share of bond proceeds over a 2-year
period is met. (Section 148(f)(C) of the Code.)
! Advance refunding to take advantage of favorable interest rate changes that
precede call dates on the original stadium bond issue is prohibited for private-
activity bonds. (Section 149(d) of the Code.)
! Private-activity bonds issued to finance purchase of an existing stadium must
make rehabilitation expenditures that equal or exceed the dollar value of the
bond issue. (Section 147(d) of the Code.)
VI. CONCLUSIONS
Publicly owned stadiums used by professional sports teams are heavily subsidized
by both state-local and federal taxpayers. Proponents of stadiums argue these
subsidies are justified by the economic benefits produced by the stadiums. Economic
analysis suggests, however, that neither of these groups of taxpayers appears to
receive economic development benefits sufficient to justify their subsidy. Non-
economic benefits are sometimes used by state-local officials to support the political
decision to provide subsidies. Such benefits might be of value to state-local
taxpayers, but are less likely to be of value to federal taxpayers.
The change in treatment of tax-exempt bonds for stadiums made by the Tax
Reform Act of 1986 had some detrimental economic effects. It continued stadium
financing as an open-ended matching grant for which the magnitude of the federal
subsidy in any given year is determined without the input of federal officials and
federal taxpayers. It virtually required state-local governments to offer more
favorable lease terms to its professional tenants. And it forced state-local
governments to finance their subsidy with general revenue sources rather than benefit-
type taxes such as stadium-related user charges and rents.
If it is desired to reduce the federal revenue loss from this subsidy, two options
might be considered. Elimination of stadium tax-exempt bond finance might be the
solution Congress thought it was adopting in 1986. This would, however, restrict the
independence of state-local officials in a way that rarely has been invoked to control
unproductive investments in other private activities. A second option would allow

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stadium bonds to be issued only as tax-exempt private-activity bonds subject to the
private-activity bond volume cap. This option also would subject stadium projects
to a variety of rules that apply only to private-activity bonds, rules whose effect is to
increase stadium costs.

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