“Fiscal cliff” talks target tax-exempt bond subsidies

Well, this is kind of interesting. Apparently, as part of the talks in Washington to reduce the deficit and avoid the “fiscal cliff” (which isn’t really a cliff, but that’s an issue for another time), consideration is being given to reducing or eliminating the tax-exemptness of tax-exempt municipal bonds, which are only one of the key government subsidies driving the last 25 years of stadium building, something that Congress was concerned enough about to actually take the extreme measure of asking me to testify about it.

Tax-exempt bonds are one of the more abstruse elements of the stadium-subsidy game, but in a nutshell, here’s how they work: A city government wants to sell bonds to fund a big construction project. The IRS says, “Hey, you’re a city government, you deserve a break. How about we don’t charge bondholders any taxes on the money they make on the bonds?” The city responds, “Cool! If bondholders don’t have to pay taxes, they’ll accept a lower interest rate! And that saves us money!” And everybody goes home happy, except for the federal government, which is suddenly out a lot of tax money — to the tune of $146 million a year. (State and local governments take a hit as well, but given that state and local income tax rates are usually pretty low by comparison, it’s a vastly smaller one.)

Now, tax-exempt muni bonds are used for all sorts of other things — parks, libraries, stuff like that with an actual public purpose — that would also suddenly become more expensive to build if the tax break suddenly evaporated. But it is interesting that a stadium tax loophole that many people have been complaining about ever since it was accidentally enshrined into law in 1986, but haven’t been able to do much about, is suddenly on the table thanks to a completely unrelated fake crisis. Given the lobbying power of both local legislators and developers, probably nothing will come of it, but it bears watching nonetheless.

6 comments on ““Fiscal cliff” talks target tax-exempt bond subsidies

  1. The factions may compromise and keep the exemption for bonds issued before 2013 and end it for new bonds. Is the Yankee Stadium’s land assessment still $275 / sq ft ?

  2. Changing the tax-exemption on old bonds wouldn’t affect sports team owners, anyway, just the bondholders who bought the stadium bonds. A bigger question is whether they’d grandfather in projects that are already greenlit but no bonds have been sold.

  3. Owners, no.. they just want the public funds up front or via tax exemption. However, start adding a few points to the municipal bond rate and it makes the total cost of those bonds a bit higher (assuming someone in government actually bothers to pay attention to the extra money involved in interest payments on those 30 year bonds).

    Unless the US Government wanted to flood the market with municipal bonds they would probably have to announce it years in advance. I don’t think municipalities would take kindly to the higher interest rates both to attract buyers due to loss of tax exemption as well as to attract buyers because there’s 100 other cities issuing bonds that month.

  4. It would certainly affect team owners on new bonds, because it would mean higher interest rates. I’m saying that on bonds already sold, changing the tax exemption would only affect bondholders, not any of the entities that sold or are paying off the bonds, because the interest rate has already been set.

  5. Yeah, that would be pretty unpopular. “Hey everyone who bought tax exempt bonds (priced with low interest rates due to stability and that tax expectation), we’re now going to change a rule that could push those into the red for you”. The muni bond market would see a fresh round of pre-maturity trading at discounted prices, on top of the recession-amplified concern about the fiscal stability of some municipalities.

  6. Never doubt the power of a fake crisis…
    Our news and defense industries are almost entirely built on them (and lost pet rescues and/or makeovers).