Leaky Stadiums and Other Thoughts

By David Marasco

This past summer Milwaukee hosted baseball's all-star game. The night before, during the home-run derby, the skies opened up and America saw that Wisconsin's proud new house had some leaks in the roof. When taxpayers pay for a new stadium, they have to make sure that their new stadium is not leaky. However, this is not about holes in the roof, it is about holes in the economy.

The typical argument used to sell a stadium construction contract to the tax-paying public is that it improves the local economy. Money will be generated, and the taxes on the new revenue will in theory offset the taxes used to subsidize the new stadium. The problem with this stream of thought is the first step. How is that money generated? Most people have entertainment budgets, and the $100 they spend taking the family to the ballgame is $100 that they don't spend on movies or bowling later on in the month. Nobody seriously thinks that we should raise taxes and spend millions on bowling alley or movie theater subsidies, yet we do the same for professional sports. Yet so long as there is simply a transfer of spending money from one kind of pastime to another, no new tax streams are generated.

The only way to make this idea work is to draw money into the economy that normally would not flow into that locality. Stadiums can act as magnets, drawing in out-of-towners to spend on sports and perhaps local restaurants and hotels. If a family from the suburbs drives in for a ballgame and drops a load of cash downtown instead of at their local movie multiplex, then money (and taxes) that would have been spent in the suburbs is transferred into the city. Note, however, that this is a zero-sum game. Money spent on sports and entertainment in the city is not spent on entertainment substitutes in localities that provide the sports tourists.

A non-sports comparison can be made to the casino industry. In the Midwest and other areas of the country, casinos are seen as a good way to provide jobs, and through taxes, extra revenue streams for local governments. Cities with casinos hope to draw people and their money from the surrounding area. However, the other towns in the area see their money draining to the city with the casino.

An important thing to note here is that the taxes spent to build a stadium should therefore be local taxes, or the situation should be such that the taxing body benefits from the flow of money from one area to another. For example, if a stadium in Minneapolis is drawing large sums of money normally spent in St. Paul, then the residents of St. Paul would be shooting themselves in the foot if they also paid taxes for the new stadium. A statewide tax (or for that matter a subsidy from the state government) for a Minneapolis stadium makes little sense. Few people are likely to travel to Minnesota in order to see the Twins, and many of the state residents would be depositing money into Minneapolis rather than their own towns. Why should the population of Minnesota pay for a device that does not draw too much more money into the statewide economy, but in fact might drain money from their own cities? However, it might make sense for the state of Illinois to subsidize sports stadiums in Chicago. In that case there is the potential for money to be drawn from Indiana and possibly Wisconsin, putting more money into the economy of Illinois.

Stadiums can be used to transfer money between local economies. But there are certainly other ways. For example, instead of seeing a ballgame a family seeking entertainment orders out for pizza and picks up a video. Money is spent on local businesses and taxes are collected to reflect that. However, the pizza joint got their cheese from Wisconsin and the video store got their tapes from Hollywood. Some of the money spent by the family hence leaks out of the local economy to Wisconsin and Hollywood. The money that stays in the community is taxed over and over again as it is exchanged for goods and services, but the money that flees elsewhere is no longer taxed by the local government.

An important thing to see here is that different situations have different amounts of leakage. An area that has to import a lot of its products will have a very leaky economy. A big city, which produces many of the products consumed by the locals, will have a less leaky economy and will do a better job of capturing and taxing money brought into the economy. A government in an agricultural region will lose less money to leakage if it uses tax money to encourage out-of-towners spending on food, rather than machinery built in Detroit.

At the end of the day the taxpayers have to decide how their government will encourage local businesses through tax breaks or direct subsidies. The more leaky the industry is in the local economy, the less it deserves support. Let's take a look at sports franchises. What is the main thing that these businesses spend money on? The players of course. Does this money stay in the local economy? It might, if most of the players live in the region. However, if your star outfielder takes his $15M contract and builds a huge mansion in the Dominican Republic, the money he spends there certainly is not being spent locally. Think about the problems that Montreal faces. How many players, from the United States or Latin America, decide to settle in French-speaking Quebec and spend their money there? It's not just the foreigners either. If the star pitcher lives on a huge ranch in Texas, that's money not spent locally. How about the fancy German cars that these athletes buy? Sure, the local dealer gets a cut, but a good chunk of that change goes to Europe. Members of the jet-set are more likely than the general population to spend money outside of the local economy. Do a quick thought experiment. What percentage of the people in the stadium are out-of-towners introducing their money into the local economy? How many of the players live out-of-town and spend the lion's share of their paychecks somewhere else? Governments need to think a long time about the level of leakage in professional sports economies when deciding to subsidize stadiums rather than other projects. If you look at the blueprints and see that the stadium is too leaky, you decide not to build it.

One last thing, once politicians saw stadiums as a means of importing money from surrounding communities, they pulled another rabbit out of the hat. Suppose out-of-towners not only use the stadium, but also paid for it. How to do this? Fund the stadium through hotel taxes. This was done for Comiskey Park in Chicago.

This is great, right? The locals get a new ballpark and Joe and Wanda from Iowa pay for it. Not so fast. The extra tax money spent by the tourists means that they'll spend less money on other things. An extra fifty bucks spent on hotel taxes could mean fewer souvenir t-shirts sold. Worse still, the extra hotel taxes make the city less competitive when it comes to drawing travelers. Not everyone compares the local hotel taxes when they plan out their vacations, but travel agents and convention planners certainly know these numbers. Jack up the hotel taxes high enough, and people will go to Miami instead.

Suppose the hotel taxes are set in a reasonable manner that balances the loss to the local travel-related merchants with the revenue gain to the government. Then using the hotel tax is a good way of funding the stadium, right? Well, it's a good way of selling it to the public. In the end the government collects a certain amount of taxes, and budgets for certain expenses. Does it really make a difference if you take $10M for stadium debt this year from one revenue stream or another if those funds would be better spent on repairing schools? It's a shell game. You can claim the stadium does not hurt the schools because it is funded by out-of-towners, but the truth is, the schools could have been funded by the hotel tax also. You can move the source of revenue from one tax stream to another, but in the end it's money in and money out, and if it doesn't make sense to build a stadium with one form of taxes, it doesn't make sense to build with hotel taxes either.