Abstract
In this opening chapter I describe the contribution of this book to the sports facility economics and public finance disciplines. I introduce jargon and concepts to lay the foundation for topics I discuss in more detail elsewhere. Among the issues I review are: the definition and history of tax expenditures in general and property tax expenditures more specifically; statutory and economic property tax incidence; and defining the appropriate counterfactual for property tax expenditure analyses as it concerns sports facilities. I draw on past and current major league facility subsidy debates for illustration.
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Notes
- 1.
Okner (1974) and Baim (1994) also provide estimates of the property tax expenditure, but they cover select facilities and both assume assessed values on the tax roll are reflective of the counterfactual assessed value under private ownership. Okner is transparent about questioning this assumption, however.
- 2.
Drukker et al. (2020) provide a lower-bound estimate of the federal subsidy to team owners provided through local government issued tax-exempt bonds for 57 active facilities of $4.3 billion.
- 3.
See page 109 in Long (2013). She uses a 6% discount rate. The $66 million discounted value over 30 years is equal to $2.2 million per year in inflation-adjusted terms at 6% or $5.0 million per year in nominal terms.
- 4.
Examples of this reasoning are given in Brown et al. (2016).
- 5.
The stadium was privately financed by former Miami Dolphins owner Joe Robbie on land that was gifted to the county for the exclusive use as a stadium site. Since Hard Rock Stadium’s construction, no other Florida facility has used the same public-private partnership design. All other major league facilities in the state are publicly owned on public land.
- 6.
See Bill A2574 in the 2016–2017 session that was codified as Chapter 65 in the New Jersey Public Laws of 2016. Prior to this change in state law, leasehold interests in stadiums and arenas were not explicitly exempted from property taxes and further only leases of municipal property could be exempted. This bill explicitly added stadiums and arenas as exempt leasehold interests and also expanded property ownership to counties and special authorities. The statement of support from the Assembly Appropriations Committee attached to the bill reads, “This bill clarifies and reaffirms that stadiums and arenas owned by government entities are entirely exempt from property taxation. The bill reaffirms that when government entities enter into private-public arrangements and lease property to for-profit entities to achieve stadium and arena uses, such property, including any leasehold interest in such property, remains entirely tax exempt.”
- 7.
Leasehold interests are classified as intangible personal property in North Carolina. See §105-273(8). Session Law 2018-98 removed a leasehold interest in public real property exception from the intangible personal property tax exemption effective July 1, 2019.
- 8.
For this discussion I am ignoring other non-property tax policy changes that were needed to move the stadium project forward, such as a change in state law allowing the stadium to be built on park land.
- 9.
On PILOT allocations, see Local Law 73 of 2005. The city council approved the PILOT agreement in April 2006.
- 10.
Because the city agreed to forgo the stadium’s PILOTs, the dollars never entered the city’s general fund to be appropriated. Whether or not taxes must touch a local government’s general fund to count as general revenue is a legal question.
- 11.
See IRS Private Letter Ruling no. 200640001 and Private Letter Ruling no. 200641002, both published in October 2006.
- 12.
For the 2006 ruling, see page 11 of the Private Letter Ruling no. 200641002. For the 2008 ruling, see the Final regulations published as “Treatment of Payments in Lieu of Taxes Under Section 141” in the Federal Register, 73 (207), Friday, October 24, 2008, and specifically page 63,373.
- 13.
See page 5 of the Private Letter Ruling no. 200641002.
- 14.
Team president Randy Levine testified before the Subcommittee on Domestic Policy on October 24, 2008. The hearing was titled Gaming the tax code: The New York Yankees and the City of New York respond to questions about the new Yankee Stadium. In written testimony he noted that “had this PILOT financing mechanism not been in place, a new Yankee Stadium would not have been built, and without any new stadium, regrettably, the Yankees would have been forced to leave The Bronx.”
- 15.
In 2006, the New York City Industrial Development Authority, the city’s economic development arm and the agency overseeing the stadium development, wrote to the IRS that it believed the Yankees would leave the city, and the threat of relocation was the basis for the city’s support of the PILOT agreement. This threat was not articulated by the Yankees until 2008. The Yankees had been making threats to move to New Jersey since the 1980s, but those threats were not tied to a PILOT agreement, the focus here.
- 16.
Under New York state law, park land must go through a legislative review process known as alienation at the state level before it can be developed.
- 17.
The full title of the report is “The house that you built: An interim report into the decision by New York City to subsidize the New Yankee Stadium.” A copy is available from the author.
- 18.
Bradbury et al. (2022) provide a thorough review of the sports facility economics literature, including the property price impacts research.
- 19.
Though this case study focuses on the Yankees, the New York City Mets and Brooklyn Nets also used PILOT agreements for their respective facilities.
- 20.
During the 2008 Congressional hearing, the then-Commissioner of the Department of Finance Martha Stark testified that the department “determines the value of a property regardless of whether it will be exempt from taxes. Our estimated value does not change because a property might receive a full or a partial exemption or tax exempt bond financing.” If true, it is a waste of administrative resources, since the properties generate no revenue for the administrative cost incurred. Moreover, the issue is less about there being a value on the roll than whether or not that value is meaningful compared to the counterfactual world, which we cannot observe. In many jurisdictions in the US, exempt property are not assessed at all, a zero value entered on the roll, consistent with not allocating resources to property that generate no revenue. Moreover, DOF produces valuations for the Statue of Liberty, Governor’s Island, and the Metropolitan Museum of Art, but it stretches credulity that these valuations equal the valuations if the landmarks were privately owned or put on the market.
- 21.
There are cases where human engineering has both created and destroyed land, implying that the supply of land is not fixed. The Erie Canal, the Panama Canal, and the redirected Harlem river are examples of land being destroyed. Battery Park City in Lower Manhattan and Dubai’s Palm Islands are examples of land being created. These are extreme, infrequent, and expensive engineering feats, and for the vast majority of the Earth, notwithstanding natural changes in land on a geologic time scale, it is useful to treat land as fixed in supply.
- 22.
See California Revenue and Taxation Code §104 and §106 as well as Colorado Revised Statutes §39-1-102(11) and §39-1-102(14).
- 23.
See Florida Statutes §196.199(2)(b).
- 24.
Exceptions to this are oil and mineral-rich states like Alaska and Wyoming. Maryland and Montana are the only two states that centralize assessment administration for all property. Data on centrally and locally assessed property are available in the Significant Features of the Property Tax database.
- 25.
The ACIR’s archives are hosted by the University of North Texas library with digitized content, including the public opinion survey reports, available at https://library.unt.edu/gpo/acir/BrowseTitles.htm.
- 26.
Interestingly, for a period of 10 straight years, from 1979 through 1988, the federal income tax took the honor whereas before and after these bookends the local property tax was typically ranked the worst. This period coincided with the so-called property tax revolts instigated by California’s Proposition 13. During this period state legislatures across the country restructured their property tax systems or implemented tax relief programs in an effort to curb increasing tax burdens on residential properties. The drop in the property tax’s status as the worst tax could reflect taxpayers’ satisfaction with these efforts, at least for a short while.
- 27.
Fischel (1989) argues this reasoning extends to the public services financed by property taxes. State laws may severe the local benefit tax linkage, making it more difficult for residents to perceive what local public goods their taxes are financing.
- 28.
The extent of the tax’s progressivity, as well as its impact on behavior, remains open to debate, however. Oates and Fischel (2016) provide greater insight on these matters. I avoid wading into this debate since the outcome is not relevant to my purpose.
- 29.
More specifically, Surrey had in mind spending on programs that lawmakers would not be willing to support to the same extent if spending had to come from the budget.
- 30.
The non-profit and non-partisan Institute on Taxation and Economic Policy maintains an inventory of states with tax expenditure budgets, providing links to the most recent ones.
- 31.
The Governmental Accounting Standards Board adopted Statement 77 in 2015 in an effort to improve local tax incentive transparency.
- 32.
One might reason there is an accounting justification for exemptions. If a property tax exemption is given to encourage a social outcome, the same outcome can be realized through direct budgetary appropriations. If the direct appropriation and tax expenditure are the same amount, then differences in the cost to administer the spending—bureaucratic overhead—could give additional reason to prefer a tax expenditure over a budget line item. For instance, if state law exempts any property owned by a public entity from taxation, the cost to administer the exemption is basically zero, most certainly greater than the labor cost to legislative staff to determine the efficient appropriation level. I say “basically” because assessors still incur a trivial but non-zero marginal administrative cost of placing a value on the roll, exempt or otherwise. The marginal administrative cost trends towards zero as the size of the jurisdiction increases.
- 33.
The pier arena was designed by Snøhetta, a global architectural firm with an extensive portfolio of cultural buildings such as museums. The Chase Center was designed by MANICA Architecture of Kansas City, whose portfolio is more focused on sports and entertainment. Additionally, the pier site was 12.5 acres, excluding 2.8 acres in ancillary development across the Embarcadero at what is known as Seawall Lot 330. The Chase Center block is 10.7 acres.
- 34.
Brody (2002) provides a thorough discussion about the so-called subsidy theory of property tax exemptions alluded to here.
- 35.
The National Basketball Association Foundation received its 501(c)(3) exemption status effective June 2021.
- 36.
As I have argued elsewhere in this chapter, there may be an economic case for using the property tax to deliver subsidies, but it does not follow from this that it must be in the form of exemptions. That is, again, a political decision.
- 37.
One way in which the first formulation may have some public finance policy value is in the facility siting decision. If government wants to grow its tax base, then it will locate a facility where it can grow the base the most. Clearly, though, having control over facility location is a form of government intervention, but it is also a decision government has little influence over in the real world. While there are instances where lawmakers express a desire to develop land for sports before a team expresses its interest, such as with UBS Arena, more often lawmakers are facility site takers.
- 38.
The size of the tax’s effects depends on the size of the tax, its salience, and the relative sensitivity of consumers to small changes in prices.
- 39.
The farmer’s logic prompted Fischel to make his t-shirt-ready statement, “The deadweight loss of the property tax is hairy cattle” (p. 171).
- 40.
I intentionally avoid discussing the broader debate in property tax economics whether the tax is a benefit tax or a tax on capital, since it is not obvious to me how this debate informs debates on government investment in sports facilities. For those interested in further reading on this debate, accessible treatments are provided by Zodrow (2001) and Oates and Fischel (2016).
- 41.
I am referring to instances where the development footprint is a relatively large share of the parcel footprint.
- 42.
An example illustrating this is the Capital Centre, the home of the then-Washington Bullets and Washington Capitals. In 1973, Abe Pollin moved into the arena on land owned by the Maryland-National Capital Park and Planning Commission, an exempt government entity. The arena was privately constructed by Pollin and his partner Arnold Heft, and the ground lease was for 20 years with two 10-year possible extensions. After the lease ended, the facility reverted to the Commission. The ground lease contained a clause stating that any real property taxes paid by the arena owner would count as rent, and further if the state’s property assessor determined the facility was exempt from property taxes, the arena owner had to pay $325,000 per year in additional rent. Thus, if the assessor determined the arena and land were taxable and the tax liability were greater than $325,000, it would be in Pollin’s financial interest to appeal. In 1974, the Prince George’s County Supervisor of Assessments decided the arena and land were taxable as a leasehold interest, and issued property tax bills accordingly. Pollin appealed to the Property Tax Assessment Appeal Board for Prince George’s County and won; he won again before Circuit Court for Prince George’s County after the county, state, and Commission appealed the tax board’s decision. However, upon appeal to the Maryland Court of Special Appeals, the state’s intermediate judicial body, the court ruled in the county’s favor, concluding that of the 75 acres upon which the arena and parking were constructed, only 20% remained park space, untouched by private development. This amount of park space was too little for the arena site to be exempted from property taxes under the state’s leasehold interest laws, the court ruled. In a later court case, Pollin disclosed that the team paid $426,000 in rent in lieu of taxes in 1973, and thus Pollin would save $100,000 if the state assessor determined his leasehold interest in the land was tax exempt. Because property taxes and rent were treated as substitutes, though, this also meant the subsidy from the county would be at least $100,000 each year over the life of the lease. The only reason this did not occur is because the Court of Special Appeals overturned the lower court’s ruling, instead deciding in the county’s favor. For additional information, see Supervisor v. Washington National Arena, 42 Md. App. 695, 402 A.2d 148 (Md. Ct. Spec. App. 1979) and Reyes v. Prince George’s County, 281 Md. 279, 380 A.2d 12 (Md. 1977).
- 43.
At the time of writing, a number of cities and counties in California have been accused of violating the state’s Surplus Land Act, which requires that affordable housing developers be given preference to purchase any land owned by a government agency that is put to market. Over the last five years, Anaheim, San Diego, and Alameda County have sold public land to team owners or facility developers without making the land available for affordable housing developers. The California Department of Housing and Community Development sent notices of violation to each local government. The issue has yet to be resolved in Oakland while San Diego formally declared the site of surplus land as state law requires. In Anaheim, former mayor Harry Sidhu resigned amid an FBI corruption probe tied in large part to his interactions with the Anaheim Angels owner regarding the stadium land (Custodio, 2022a, 2022b).
- 44.
- 45.
The complete statement of public use is contained on pages 10 and 11 in the staff report to the city council regarding use of eminent domain for the arena. The report is dated January 26, 2021 and titled Resolution of Necessity—Hearing to Consider Adoption of Resolutions of Necessity to Acquire Property in the City of Inglewood for the Inglewood Basketball Entertainment Center Project.
- 46.
A relevant sports facility case on this point is Alibri v. Detroit Wayne County Stadium Authority, 683 N.W.2d 147 (Mich. 2004).
- 47.
See Proposal 4 of the November 2006 election. The approved language was codified in the Michigan Constitution, Article X §2.
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Propheter, G. (2022). Introduction. In: Major League Sports and the Property Tax. Sports Economics, Management and Policy, vol 22. Springer, Cham. https://doi.org/10.1007/978-3-031-18790-2_1
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