The Ten-Percent Solution

Yesterday I glossed over the illegality of the New York Jets‘ plan to use tax-exempt bonds for their $800 million share of stadium costs, passing along along $77.4 million of its costs to taxpayers. Given the widespread media confusion over this, though, here’s a fuller explanation, in part drawn from chapter three of Field of Schemes:

By the early 1980s, use of tax-exempt “private activity bonds” to finance for-profit development projects was out of control, soaking up as much as 80% of all government bonds issued, and leaving little money left over for genuine public projects. With this in mind, the 1986 Tax Reform Act ruled that private activity bonds would always be subject to taxes – and specifically ruled that sports stadiums were to be considered private-activity.

Congress, however, had left a loophole: the 1986 law ruled that any bond where more than 10% of the use would be by a private entity, and where more than 10% of the bonds would be paid off by revenue from a private project, would be subject to taxes. The solution that many cities promptly used was to cut team rent payments to the bone, ensuring that more than 90% of costs would be borne by the public, thereby meeting the new law’s requirements. “In other words,” the tax-reform law’s principal author, Sen. Pat Moynihan, told Congress after the loophole became clear, “non-stadium governmental revenues (i.e., tax revenues, lottery proceeds, and the like) must be used to repay the bulk of the debt, freeing team owners to pocket stadium revenues.”

For the Jets, though, that option isn’t available: the team has promised to pay the entire $800 million nut, likely though payments in lieu of taxes (PILOTs) to a state authority. And as Congressional Budget Office tax-exempt bond expert Dennis Zimmerman explained two years ago, while generally applicable taxes aren’t counted toward the 10% private-revenue limit, “A payment in lieu of taxes is not a generally applicable tax. … On its face, you’re prohibited either directly or indirectly from using stadium-related revenues. So, for example, you could not have the public sector paying this out of general revenue, then having stadium revenues replace that general revenue. In the same way, I think it also would apply to this scheme.”

Zimmerman was talking about a previous PILOT scheme, floated by then-Mayor Rudy Giuliani to build a new stadium for the Yankees, but the same problem would arise here. Newsday is reporting that “tax-exempt bonds can be used only for public purposes, but firms claimed the stadium, which would also be used for conventions, would offer public value.” The 1986 law, though, makes no concessions for buildings that offer “public value” – if it’s used at least 10% of the time by a private entity, and that private entity repays at least 10% of the bond costs, tax-exempt bonds are verboten.

Zimmerman is always quick to note that he never underestimates the ingenuity of bond lawyers. But they don’t always get away with it: In 2001, the Memphis Redbirds minor-league baseball team had to pay a $1.6 million penalty to the feds for trying to use a non-profit shell corporation to evade restrictions on tax-exempt borrowing. If the Jets are serious about this, their counsel are likely to be having some interesting conversations with the IRS.

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