Tax-exempt Wrigley bonds could be tough nut to crack

In all the hubbub over Wrigley Field, one thing I haven’t address is whether Chicago Cubs owner Tom Ricketts’ plan would use federally tax-exempt bonds, like the last Cubs stadium renovation subsidy plan.

Chicago Tribune business writer Ameet Sachdev asserts that it would use tax-exempt bonds, citing former Congressional Budget Office bond expert Dennis Zimmerman and, um, me to point out how this represents a federal subsidy. (My moment of fame, for those who can’t be bothered to click through, comes via a quote: “Kansas City Royals fans would no doubt not be pleased to learn that their tax dollars are going to help make the New York Yankees even richer.”) But Sachdev doesn’t actually establish whether the Ricketts plan would actually be eligible for tax-exempt bonds.

So let’s try to figure this out ourselves. The tax-exempt bond law is fiendishly complex, but the main rule we’re interested here is that the bonds can only be paid off by “generally applicable taxes,” not special fees. This was meant to prevent developers from just borrowing cities’ ability to raise cheap money by offering to pay off the bonds with rent — something that would be great for the developers and no skin off the cities’ noses, but would — and did, prior to the 1986 Tax Reform Act — lead to a gazillion private projects getting undeserved federal tax breaks. Instead, the bonds have to be paid off using taxes that everyone pays (or, if you’re the Yankees or Mets, rent money that you put in a box with “TAX MUNNY” scribbled on it) in order to be legal.

So, does the amusement tax Ricketts would be using to pay off his bonds qualify as “generally applicable”? Let’s check the definition in the IRS regs:

A generally applicable tax is an enforced contribution exacted pursuant to legislative authority in the exercise of the taxing power that is imposed and collected for the purpose of raising revenue to be used for governmental purposes. A generally applicable tax must have a uniform tax rate that is applied to all persons of the same classification in the appropriate jurisdiction and a generally applicable manner of determination and collection.

So far, so good: The amusement tax is “for governmental purposes” and is “applied to all persons” who are selling tickets in Cook County. So it’s considered public money, not private money, and thus eligible to be used to pay off tax-exempt bonds.

That’s assuming, though, that the only revenue stream being used to pay off the bonds is the amusement tax. That’s what Ricketts has implied he wants, certainly, but it comes with its own problems: Nobody knows how much that added tax money will amount to (since no one knows how much Cubs ticket sales would go up in a renovated Wrigley), and no bond buyer in their right mind is going to buy bonds without a consistent revenue stream. You could get around this by having the Cubs promise to pay a certain amount per year no matter what the amusement tax amounts to — but that kind of dedicated payment is explicitly verboten under IRS rules.

The only way around this, then, is for the city and state to promise to pay off the bonds, with one tax revenue stream or another, and just hope that the new Cubs revenue is enough to do the trick. If not, then tax-exempt bonds would seemingly go out the window. Unless Ricketts knows some other Stupid Bond Lawyer Tricks that I’m not aware of.

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