Saturday, December 13, 2014

Funding professional stadiums with public money

The Tampa Bay Rays are threatening to leave the city if a new stadium isn't built. This happens all the time throughout professional sports. Teams use the threat of re-location to get taxpayers to fork over some or all of the money required for a new stadium. But should taxpayers fund stadiums?

Some of the arguments made by government officials in support of funding a new stadium include increased attendance and tourism, new jobs, revitalizing downtown areas, and civic pride. There is little evidence that the first 3 reasons ever materialize. It is important to remember that the true cost of anything must include the opportunity cost, which is the value of the next best alternative. So if a government spends $240 million dollars on a stadium, which is what state and local government spent on the Arizona Diamondbacks stadium, the cost is not only the $240 million, but also whatever net benefits the next best use of those funds would have created. So if the next best alternative was better public schools, the true cost was $240 million plus the benefits residents would have gotten from having better public schools (or new museums, a new university, better parks, etc.). When the opportunity cost is included projects that look profitable on paper can turn out to be net losers.

When it comes to attendance, most new stadiums see a temporary bump that quickly dissipates. As an example, according to The Economics of Sports by Michael Leeds and Peter von Allmen when Miller Park in Milwaukee first opened in 2001 attendance for Brewer's games increased from 19,427 to 34,704 per game. By 2003 attendance had declined to 20,992 per game, nearly the same level as in the old ballpark. This trend is seen in other places as well. Shiny new stadiums provide a temporary attendance bump, but if the team fails to achieve success fans will quit going once the novelty of the experience wears off.

The creation of jobs is usually lackluster as well. The aforementioned $240 million dollar investment in Arizona led to 340 full time jobs. The is a cost of $706,000 per job. The Maryland Department of Business and Economic Development calculated that the Baltimore Ravens stadium created jobs at a cost of $127,000 to $331,000 each depending on the estimates. While this is cheaper than Arizona, it is much more expensive than other job creating programs. For example, Maryland's Sunny Day Fund for economic development created 5,200 jobs at a cost of $6,250 per job in the same time period (Leeds & von Allmen). (A more subtle point but one that I think is important is to remember that jobs are a cost, not a benefit, and thus any project that is promoted based on the jobs it will create should be viewed with suspicion.)

As for revitalizing downtown, there are many projects that can do that. If a new stadium is built it often crowds out spending that would occur at other places. Most of the people who attend sporting events are local citizens who would spend their time and money doing other things within the city if the stadium was not there. It is incorrect to attribute all of the spending that occurs at new stadiums as a net benefit, since much of that spending would have taken place at other areas within the city. The increased business that occurs in and around new stadiums is usually accompanied by decreased business in other areas of the city.

There are also many different ways to fund a stadium with public money. In the article above about Tampa Bay, local officials are thinking about using a tourism development tax. The reason for this is that it pushes the cost of the new stadium on to tourists rather than locals and thus it is easier for government officials to justify. The problem with this is that tourism taxes crucially rely on the number of tourists. The Ramsey rule of taxation says that higher taxes should be applied to goods that have relatively more inelastic demand. One of the main things that affect demand elasticity is the availability of substitutes. It seems to me that there are a lot of good substitutes for vacationing in the Tampa Bay area, including other areas of Florida, South Carolina, Georgia, southern California, etc. This means that the elasticity of demand for vacations in the Tampa bay area is probably relatively elastic and that a tax will have a relatively large, negative effect on the amount of tourists. Thus any tax revenue projections that ignore this effect will be overstated. Local officials may project that an increase in the tourism tax will lead to enough money to fund the stadium, but if they ignore or under-estimate the effect that higher prices have on quantity their projections could be wildly off, leaving local taxpayers to make up the difference.

Perhaps the best argument for publicly funding sports stadiums is that it increases civic pride. This means that sports teams act like a public good. So while there may be no monetary benefits, there is a utility benefit that accrues to local residents. People rally around their sports teams during difficult times and take great pride in them when they are doing well. Look at the Saints after hurricane Katrina. That is probably why when most sports fans talk about their team they use the pronoun "we". Fans feel as if they are part of the team, and this is worth something to them. If that is the case I can see why citizens fund some portion of stadiums. But they should probably ignore the other promises.

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