Publicly Funded Sports Stadiums and Wal-Mart

I was recently reading a news article in the DesNews about the Real Salt Lake soccer stadium. It was interesting because it was really just pointing out the obvious fact that with the debt issued by the county via a 20-year bond that interest would make the stadium price tag considerably higher. I think most people knew that already, and were willing to accept the fact that it would be expensive, but saw it as a welcome economic development opportunity for Sandy. While I am, along with much of Utah, intrigued by sports and believe that having more professional sports in Utah would be great, I can’t help but think that most taxpayers don’t really understand all the nuances of this already done deal. My friend Aaron (a frequent contributor to this blog) and I actually wrote a paper together about this subject almost a year-and-a-half ago that describes some of the issues surrounding the soccer stadium and our take on it. The information is a little dated, but still pertinent.

Finally, this blog really is dedicated to the apolitical entertainment musings that we have, but I can’t help but post something about this as a dedicated sports fan with fiscally responsible leanings. I’m pretty sure Aaron and I are in agreement, but he can post a comment if he feels like he wants to add anything.

Should Tax Dollars Be Spent on the

Real Salt Lake Soccer Stadium?

By:

Jedediah Briggs

and Aaron Smith

The State Legislature has recently approved a bill (HB371) that authorizes all counties in the state to levy a 1.25 percent tax on hotel accommodations to pay for tourism projects. This bill could help pay for part of the Real Salt Lake soccer stadium in Sandy. However, several independent polls already have shown that most valley residents oppose a taxpayer-subsidized soccer stadium. Thus, the county, not the people, will soon decide whether to use the new tax revenue toward funding the stadium, which could cost taxpayers upwards of $45 million dollars. Before the county puts forth the money, there are a few questions to consider:

• Will the RSL stadium spur economic development in Sandy?
• What are the benefits for Sandy in having a sports stadium?
• What are the costs of subsidizing a new soccer stadium?

Will the RSL stadium spur

economic development in Sandy?

Intuitively, a number of people would argue that building a new sports stadium would spur economic development in the surrounding area, but some studies have shown that that simply is not the case. In fact, one study which analyzed the effect of professional sports on local economies in 37 metropolitan areas found that professional sports stadiums did have an impact in an area, but it was, at best, minimal. For example, in 1990, Maryland and Baltimore collected $3.4 billion and $528 million, respectively. For the city, the tax gain from the newly constructed stadium in Baltimore represented only .7% of the tax gain. In addition, personal income in Baltimore was almost $14 billion. Projected earnings for the stadium represent .15% of Baltimore’s total income. Maybe the citizens of Sandy should worry about whether there is an actual impact.

The question could also be raised as to whether sports stadiums increase income per capita in the cities where they are located. The aforementioned study took into account the entire sports environment of the city, including the presence of franchises, franchise entry and departure, stadium construction and renovation, the location of new stadiums and arenas, and the “novelty” effect of a new stadium or arena for professional sports. Of the 37 metropolitan areas in the sample, none of them had a measurable impact on the growth rate of real per capita income in those areas. However, in one case the arrival of a new basketball franchise in a metropolitan area increased real per capita income by about $67, but building a new arena for that basketball team reduced real per capita income by almost $73 in each of the 10 years following the construction of the arena—a net loss of about $6 per person. Much of the lack of economic development can be illustrated through a discussion of the substitution effect.

The substitution effect

It is anticipated that the new arena for Real Salt Lake would be funded in part by public dollars. Usually a large portion of tax dollars goes to public services, such as healthcare, education, and local infrastructure, but in this scenario, the tax payer is being asked to fund a for-profit business. The revenues from the soccer stadium will not be going directly back to the taxpayers of Salt Lake County, but to the owner of the team. There is a difference between giving incentives or tax breaks to a store like Wal-Mart or Ikea to build in your town and actually paying for the store to be built. If valuable tax dollars, which could otherwise be spent on public goods, are spent on funding a sports stadium it could diminish the ability of the local economy to produce other non-sports-related goods and services, which in turn would reduce local income.

There is a difference between giving incentives or tax breaks to a store like Wal-Mart or Ikea to build in your town and actually paying for the store to be built.

The substitution effect also has an influence on private spending. Utah households, like all others, have budgetary constrains, with a limited amount of income. With a new professional sports team in the area, or a new entertainment option, families might spend less on other forms of entertainment, such as dinner, bowling, movies, or shopping. If families spend more money on going to games and less on the local economy then it might have a negative impact on an area. A study of the recently built MCI Center in Washington DC concluded that the arena provided no actual increase in entertainment dollars spent, but rather served as an alternate way for money to be spent. Essentially, there are only so many dollars to go around, and there is simply a transfer of where a person’s money eventually ends up. In the case of the soccer stadium, money goes into the hands of a small number of owners and players who might not reinvest back into the community.

What are the benefits for Sandy in having a sports stadium?

There are some benefits related to having a new sports stadium and team to root for. However, most of the benefits are qualitative in nature, not monetary. There is evidence that cities with sports franchises have a renewed sense of civic pride—it gives the community something to rally behind. There is also the feeling of satisfaction associated with having a professional sports team carry your cities’ name across the country. Furthermore, the arena could be used for other purposes as well, such as social events and concerts. A sports franchise is politically popular. Many people throughout Sandy want a professional soccer team in their midst, which drives political motives to landing a franchise. However, these ideas, again, are rooted in political and social benefits, not monetary policy.

Furthermore, in the Salt Lake County proposal, the land surrounding the stadium will be developed, similar to the area around the Delta Center with the creation of the Gateway Mall. However, the previously aforementioned Washington DC study found that the MCI Center was only part of a major revitalization program. Economic growth in a city such as Salt Lake may have more to do with a rapidly growing population than a soccer franchise.

What are the costs of subsidizing a new soccer stadium?

At present, Real Salt Lake has projected an estimated cost of $145 million for the entire stadium project. Of that total price, Real management has asked that $45 million come from public funds. The public funds, Real management argues, will not be put towards actually stadium construction, but on developing land near the site, including a broadcast studio and hotel.

In order to raise the necessary funds for the stadium, the Utah state legislature has passed a bill that would call for a 1.25% tax on hotel guests. A further analysis of the proposal raises several concerns.

First, there are signs that Salt Lake County is developing a tax rate problem towards hotel use. A 2005 bill that passed through Salt Lake County voters allowed the county to tax hotels in order to expand the Salt Palace Convention Center. The legislation proposed by the state legislature would be the second such tax increase in Salt Lake County in less than a year. One side effect of continually increasing the tax rate on such a limited base (hotel users) would be a decrease in possible hotel use because of over pricing. If the tax rate, combined with the natural increase of hotel prices, becomes too high, there could actually be a decline in hotel activity.

Second, there is a sense that the bill is pitting political entities against each other. In the aforementioned 2005 bill, Salt Lake City put forth $8 million on any future expansion involving Real Salt Lake. That money has already been committed. Salt Lake City is subsidizing a major portion of the development, yet the city may not realize any economic gains, if there are any to be had at all.

Third, there is some concern as to public perception regarding the legislation. As the bill was passed on a state legislative level, local voters in Sandy, and throughout the state, were unable to vote regarding the bill. As citizens continue to lose autonomy on tax issues, there could be political fallout in addition to any economic side effects. Additionally, it may become progressively more difficult to increase taxes on more immediate needs, such as education, health care, and infrastructure.

...Real management has asked that $45 million come from public funds.

Fourth, and perhaps of most concern, the proposal will rely on a user tax. There are disadvantages to this tax. Because the tax is aimed at hotel users, the tax has a limited base. Traditionally, hotel taxes are targeted to tourism development, such as the 2005 bill on the Salt Palace. Additionally, with a user tax, there is an element of unpredictability. The ebbs and flows of tourism can affect the amount of revenue, as tourism is heavily reliant on a healthy economy. Also, tourism can be altered by political climate. The events of September 11^th drastically changed tourist based industries. Additionally, natural disasters can also have a great influence on regional tourism. The combination of a limited and unpredictable base could lead to a serious problem in revenue stability.

Risky business

In addition to the concerns with the nature of the tax, there are also some concerns to be raised about Real Salt Lake and Major League Soccer in general.

Since its inception, the league has collectively lost over $200 million. Last year, the Los Angeles Galaxy became the first team to earn a profit in the history of the league, with a total of $200,000. Historically, there is evidence that the league has a revenue problem.

For example, since its inception in 1993, three of the original ten soccer franchises are now defunct. One of those teams, the San Jose Earthquakes, was a two-time league champion and featured several prominent national team members. Despite continually winning and sold-out stadiums in the soccer hot bed of California, the team failed to turn a profit.

Second, Major League Soccer has yet to garner a major television contract. Television contracts are vital to the success of major American sports, such as football, baseball, and basketball. Should Major League Soccer, and Real Salt Lake, hope to ever flourish; they will need to secure a contract. However, securing a TV contract is out of Real Salt Lake and any local government entity’s control. Even with a positive outlook towards the hotel tax revenue, the team may still be unprofitable. The other two now extinct teams, Miami and Tampa Bay, failed to succeed despite being in areas heavily populated by Latinos, the primary demographic of American soccer.

Finally, there is concern about the expenditure of team revenue. In the past, Real Salt Lake has committed to be part of Salt Lake County’s economic growth. However, the actual extent to which Real can participate is very limited. Typically, a major league soccer franchise has as much as sixty percent of revenues tied to player salaries. In addition, the day-to-day operations must also be furnished. There is little evidence to suggest that Real owners will be willing to take whatever revenue remains and put it towards economic development in the county.

Works Cited

Amelia Nielson-Stowell and Nicole Warburton. “Legislation Targets Funding of Stadium.” The Deseret News. 1 Feb. 2006.

Dennis Coates and Brad R. Humphreys, “The Stadium Gambit and Local Economic Development.” Regulation 23 (2000): 23.

Derek P. Jensen. “RSL’s Funding: A Hot Potato for S.L. County, Legislature.” The Salt Lake Tribune. 3 Mar. 2006.

Ed Lazere, “Would a Publicly Financed Stadium Pay Off for DC?” D.C. Fiscal Policy Institute, 2003, pp. 1-9.

Jack Bell. “A League Looks to Grow.” The New York Times. 2 April 2006.

James Quirk and Rodney Fort, Pay Dirt: The Business of Professional Team Sports, Princeton University Press, 1992, pp. 170-171.

Jamie Gadette. “Real Stadium Questions.” Salt Lake City Weekly. 27 Oct. 2005.

Mike Moffit. “Leaky Stadiums.” Stadium Subsidies.” 2006. The New York Times Company. Feb. 1, 2006.