Obama proposes killing 29-year-old stadium bond loophole that’s cost U.S. taxpayers $4 billion

This is potentially huge, except it’s an Obama budget proposal and so will never get through this Congress, but still: Obama’s 2015 budget includes a provision that would change the rules for how tax-exempt bonds are issued that would, once and for all, eliminate the loophole that has allowed sports stadiums to get a giant federal tax break for nearly 30 years.

How it works: The 1986 Tax Reform Act introduced a provision limiting the use of tax-exempt bonds — which are cheaper for cities to pay off because bond buyers don’t have to pay taxes on their earnings, and so are willing to accept lower interest rates — to bonds being sold for public uses: think parks and libraries, anything that doesn’t actually bring in enough revenue to pay for construction costs. Eligibility was determined by a two-fold “private activity” test: If a project was going to be used more than 10% of the time for private uses, and more than 10% of the cost was going to be paid off by means other than “generally applicable taxes” (i.e., any kind of special payments, whether called taxes or not), then tax-exempt bonds were disallowed.

Since stadiums and arenas are almost by definition used for private events more than 10% of the time, sports team owners immediately made sure that they wouldn’t get caught in this trap by focusing on the other test, and ensuring that at least 90% of bond costs would be paid off by generally applicable taxes. This required jumping through some fancy hoops at times — sometimes dividing up bond issuances into one publicly paid tax-exempt set and one privately paid taxable set, sometimes pretending that private rent payments are really tax payments and convincing the IRS to go along with it — but has consistently worked out over the years, so far costing taxpayers $4 billion in foregone tax revenue.

The Obama proposal would slam the loophole shut by getting rid of the generally applicable tax test altogether, and simply ruling that any building used more than 10% by a private entity is a private use, and no tax-exempt bonds for you. This, as bond expert Dennis Zimmerman (who testified before Congress in 2007 about the tax-exempt bond problem, alongside me, Heywood Sanders, and others) told ThinkProgress’s Travis Waldron, is an ideal way to eliminate this loophole:

“Perfect. You couldn’t do it any better if you believe like I do that we should not finance these things with tax-exempt debt,” said Dennis Zimmerman, a retired economist who worked for the Congressional Research Service and Congressional Budget Office and now serves as the director of projects for the American Tax Policy Institute. In a 1996 paper for CRS and in other publications, Zimmerman examined the tax exemption on government bonds used for sports facilities and recommended eliminating it….

“Cities can still pay for stadiums,” Zimmerman said. “But there would be no federal subsidy paying part of the interest cost. That’s what’s at stake here: it’s will the federal government pay a share of the interest costs?”

The new rules would go into effect for any bonds issued after the end of this year, which the White House estimates would save the government about $54 million a year, though how they know how many stadium bonds are going to be issued in future years is anybody’s guess. In any event, there’s a good chance that Congressional Republicans will kill this provision in budget talks — though some Republicans have reportedly been willing to rein in tax-exempt bonds in the past, so you never know.

If Congress ever does agree to close the tax-exempt bond loophole, of course, it wouldn’t stop cities from funding stadiums — but it would make it more expensive, hopefully causing local elected officials to require private owners to carry more of the debt burden. (It would also eliminate the incentive for governments to finance bigger shares of stadium debt, in order to get under that 10% private-funding cap.) Of course, it’s always possible that cities would just respond by covering the extra interest payments out of their own pockets, but one battle at a time.

Anyway, go read Waldron’s article, which is excellent. And then make a note to closely follow any upcoming budget reconciliation talks. Like you weren’t already, right.

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10 comments on “Obama proposes killing 29-year-old stadium bond loophole that’s cost U.S. taxpayers $4 billion

  1. You gotta love ol’ 44 tryna hammer the states that voted against him. I just hope he gets a chance to demagogue the issue as Republicans protecting corporate welfare. That will surely unite the country.

  2. I am no Obama fan ( basically 180 Degrees Polar Opposite), but this could actually have legs. Why? It will mostly affect States that vote Democratic like California, and the “Fairness” issue can be very effective. Especially against the NFL and the problems from health, to guns, to drugs, to tax exemptions it has been facing. Another factor is in order to get a budget deal BOTH Republicans and Democrats must give up something, and this Tax Exemption is a pretty small price for Republicans. Last but certainly not least which Stadiums/Arenas would be impacted ( besides California)? Wisconsin, Tampa Bay, NY Soccer Stadium, New England Soccer Stadium, St Louis, Boston Olympics, and if they do not get shovels in the ground the DC United and Colorado State University Stadiums. Not exactly many Republican areas.

  3. It would be great if this loophole was closed, but if this passes it will just shift the cost burden away from the feds.

    Either the well-paid and creative people that are paid by the stadium backers will find another way around the law, or the cities, counties, and states will offer to bridge the gap. There’s no way the club owners will pay for this out of their own pockets.

  4. As noted, these exemptions basically pass costs from municipalities to the federal government, so banning them might seem popular in concept, but like most other subsidies, no one wants to touch their own. Republicans will likely look at this proposal as a tax increase on investors and shifting of economic influence from states to the federal government, so I don’t expect it to have legs. What might get GOP support is a more simplified tax code that doesn’t include federal tax exemption of muni bond interest.

  5. I don’t want to turn this into a political bashing board, but I love the irony in that the GOP doesn’t want the feds in states or corporations business from a regulatory or oversight standpoint, but when they see a handout for either of those two, either directly or through subsidies or tax breaks, they welcome it with open arms.

  6. This will never pass, republicans will never go along with it. To them it’s not “corporate welfare”, but helping businesses by providing a tax break.

  7. In the unlikely event this passes, this would really impact the “projects in progress”, such as in Sacramento. We haven’t sold our bonds yet because of the lawsuit that is scheduled to go to trial in June. If they sold these bonds in September, and this passed in October, it would screw the payment schedule up. We’re already looking at $24M/year in bond payments, and under $10M in guaranteed revenues (the rest is “we think this is going to happen”-style revenues).

    Now, imagine that bond payment going to, say, $28M… Does the City then balk?

    Would the City have to re-issue its bonds?

  8. Mike M it really would probably not affect “Shovel Ready Projects” which is partially why the Yankees, Mets and Nets were able to get tax breaks even after the IRS closed a major loophole. I suspect the Kings will be okay. Raiders, Chargers and A’s? Oh well.

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