And if the IRS does OK it, how will Bloomberg sell this? After all, he just got done saying NYC wouldn't lay off one cop one teacher or one firefighter to save the OTB.

I mentioned this in my Voice item, but I guess not here: About 90% of the subsidy would come out of the federal treasury, not the city's or state's. That's how Bloomberg is selling it: Hey, they're not asking for our money.

Laying off other cities' firefighters to build the Yanks a stadium is okay, I guess.

Neil,

Reading this post leads a person who understands project finance and the tax code to two possible conclusions. Either you don't understand how the alternative to financing with municpal bonds would work or you understand exactly how project finance works but are mischaracterizing this in order to serve an agenda. Considering how much time you spend writing about these issues, I hope the latter is the case. With your comment about laying off other cities' firefighters based on a belief that the foregone interest payments would be transformed into tax revenue were the financing done otherwise (I can state with 100% certainty that is not the case) or that there is a finite amount of tax exempt debt that can be offered and the Yankee stadium related bonds are taking up that space in the universe(a frankly bizarre view of economics)? I would love to see the Independent Budget Office unpack their $60 million number. I imagine the hypothetical contingencies that get them to those numbers would make Andy Fastow blush.

Actually, there is a cap on how much tax-exempt debt the city can offer - that's one reason Congress tried to crack down on use of it for private projects in the '80s, when it was sucking up all available bonding capacity.

If the Yankees went on the private bond market to raise this money, they'd pay an extra $60 million (roughly) in interest, and the bondholders would pay $60 million (roughly) in taxes on their earnings. You seem to be arguing that the city can generate $60 million in savings for the Yankees out of thin air, without costing anyone anything - talk about bizarre economics.

The IBO breakdown should be available today - I'll post it as soon as I get it. For the reasoning behind it, see their testimony about the previous set of bonds here (scroll down to "Access to Tax-Exempt Bond Financing"):

http://www.ibo.nyc.ny.us/iboreports/yankstadiumtestimony.pdf

Neil,

Assuming arguendo that the Yankees would alternatively issue taxable bonds in order to finance the stadium and also assuming that the incremental interest payments would amount to $60 million, the assumption that the $60 million in increased interest payments would lead to a requisite increase in tax revenue somewhere is just plain screwy. As a first matter, there is not a 100% tax rate on interest income, so the bondholder does not turn around and hand the government all of their increased interest, so I am assuming you merely misspoke. If in fact what you meant is that the increase in the amount of interest would lead to a $60 million increase in the bondholders' tax bill, I don't see how anyone would ever come to that conclusion based on a single input: the aggregate amount of interest the taxpayer is receiving. A taxpayer's liability is based on multiple inputs. A bondholder with offsetting losses would pay no taxes on the interest income of the bonds and presumably the purchase of the bonds would be such a taxpayer. So the investor in municipals who wants the tax free treatment is replaced by the investor who takes interest income against offsetting losses. You've shifted the purchasers but your elusive $60 million never goes into government coffers. And you've screwed the Yankees who have to pay more interest (though the increased interest payments likely can be treated as a deduction on their tax bill). Are you starting to see how this actually works?

Even assuming arguendo that we live in a world where there are no investors looking to purchase corporate debt who also have an offsetting loss that zeroes out their tax liability (imagine that!), I don't think most people would view the foregone taxes as a taking from a taxpayer. Here is a thought experiement: I buy a $1,000 widget in State A with a 5% sales tax. I live in State B that has a 10% sales tax. In your mind, by purchasing the widget in State A did I take $50 from State B? Did the taxpayers in State B give me $50 to buy the widget? Am I causing firemen in State B to be laid off? What if I decide that I don't feel like buying the widget after all? Did I just steal money from State A and State B? I don't think you can just conjure up a scenario which produces the highest tax revenue and then say that the government "gave away" whatever difference there is between that hypothetical maximum and the actual tax liability. That's a bizarre way to look at the world.

I've heard your argument before about how the taxable bondholders would just find another way to avoid paying taxes; neither the IBO nor the Congressional Budget Office, though, believes it. Call me crazy, but I'm going to go with the folks I know have economics degrees on this one.

As for your thought experiment, it's a lousy analogy: Anyone living in a low-sales-tax state can take advantage of the difference in sales tax, but everyone living in New York City can't ring up the mayor and ask for tax-exempt bonds. (I could use financing for a new iPod...) The baseline has to be "what laws apply to everyone else," or else you get a bizarro world in which i can refuse to pay sales tax on all my purchases because, hey, if I didn't buy anything, the city wouldn't collect any tax anyway.

Neil,

The analogy is spot on because the person saving money by not paying the tax in your hypothetical $60 million loss is not the New York person getting the financing assistance(i.e., the Yankees), it is the bondholder. Your hypothetical revenue shortfall would be felt in whatever state the taxpayer was supposed to pay taxes and in the US treasury, and the city or state telling the Yankees they can't use municipal bonds would do nothing to reverse that fact. What the IBO and CBO can say is that a tax inefficient investor living in New York paying at the highest marginal rate would have to pay X amount in taxes on the bond interest. But that's not how the real world works.

Additionally, this whole argument is based on the assumption that the way the Yankees would get alternative financing would be through the issuance of taxable bonds to institutional investors. What if the Yankees merely get a loan from a money center bank? Do you think that the money center bank will have to pay taxes at the highest corporate rate on the interest income? That will not happen.

If you said that municipal bonds should not be used for private actors because they don't deserve the break in interest payments or the underlying guarantee, that's fine and you're certainly entitled to that opinion and I tend to agree with you. But when you say that when such bonds are issued for the benefit of private parties that it amounts to the government giving the private party money that the government would otherwise be able to use, that's just not factually accurate and betrays a basic misunderstanding of finance.

Why on earth would an investor from Missouri buy triple-tax-exempt New York City bonds? That would be leaving a chunk of the tax benefit on the table, while taking the lower interest rate of the tax-exempt bonds.

As for whether the Yankees would substitute with a bank loan, that's more complicated, and I'll ask IBO about how the fiscal impacts would shake out. But we're still left with the question of: If, as you argue, tax-exempt bonds don't really cost the government anything, why not make them available to everybody? If we got rid of taxable bonds entirely, would that still have no fiscal impact? At what point does this supposed free lunch lose its pixie dust?

Oh, wow. The investor from Missouri might buy the bonds if you took away the tax exemption, in which case they would not be triple exempt New York City bonds. That seems mind blowingly obvious and the whole reason why your analysis is specious. And getting rid of tax exempt bonds would raise the cost of operations for local governments but would likely be net-neutral as to revenue raising. Economically, letting a local tax paying employer have cheap funding is likely net tax beneficial to the local government as they have more money to spend on the physical plant project and the other single highest cost of running a business, i.e., payroll, which is taxed based on location of work and therefore harder to migrate to a tax efficient locality.

Let me ask you a serious question: you seem to have next to zero understanding of finance, tax or economics. What exactly makes you think you are qualified to write a book and run a website that as its premise requires a working knowledge of those subjects? Self-righteousness?

What part of "Call me crazy, but I'm going to go with the folks I know have economics degrees on this one" didn't you understand? The IBO says it's accounted for who'd be buying the bonds, in-state or out-of-state - if you want to challenge their methodology, go look at their reports and tell us what's wrong with it.

And in any case, the state and city subsidies, as I noted above, are small in this case compared to the federal subsidy. The city and state are putting in plenty of money for other things, but the tax-free bond subsidy is mostly being paid for by Red Sox and Rays fans.

The IBO doesn't disclose their methodology on their website as far as I could see, but their report does include the following with regard to assumptions they used in drawing conclusions as to foregone revenue:

"The impacts on the city and state budgets depend on how many of the investors who buy
the bonds are New York residents. It is likely that a not- insignificant share would be residents, given the triple tax- free nature of these bonds and the existence of municipal bond mutual funds targeted for New York investors. Assuming that half of the buyers reside in the city, the cost to the city budget is about $2.2 million over 30 years and the cost to the state budget is roughly $4.1 million."

As I pointed out above, those are inappropriate assumptions to make when ostensibly comparing a tax exempt bond targeted at residents and the alternative financing in the form of either a non-exempt bond that would provide no extra incentive to local investors or a loan from a money center bank. They are awfully convenient assumptions when you're just trying to make a political point and the facts just don't support you. Knavery or foolishness, it's not a confidence inspiring performance, despite the fact that some of the people who work for the IBO have degrees in economics.

You keep comparing the bondholders for a tax-exempt bond (likely NYers) with the bondholders for a non-tax-exempt bond (likely out of towners), but is that the right comparison? The point here is fiscal impact on the city, after all, not on the bonds. The point is that by issuing additional tax-exempt bonds, it allows certain New Yorkers to avoid paying taxes on part of their income.

If the Yanks sold taxable bonds, the people who are currently buying the tax-free bonds would have to invest their money somewhere else, and that would either be 1) something taxable, or 2) different tax-free bonds, which would mean the people who would otherwise buy *those* bonds would get shifted to something taxable. (There may not be a finite amount of tax-free debt that *can be* offered, but there certainly is a finite amount that *is* offered, and somebody's got to be left without a chair when the music stops.) Either way, issuing more tax-free debt means collecting less taxes - we can argue about how much, but it's not zero.

Tax-exempt bonds are overwhelmingly purchased by (a) individuals with high incomes and therefore high marginal tax rates on income or (b) by pooled investment vehicles (e.g., mutual funds) that purchase the bonds so that high income individuals can invest in the pools and get the tax free income. In a world where no additional tax-exempt bonds are issued (i.e., where supply is low), there will be an increase in the number of tax-exempt investors trying to purchase the existing tax-exempt bonds (i.e., demand will increase). So tax-exempt investors will have to pay more to purchase the tax-exempt investments. Tax-exempt investors might even pay more than future income flows from the investments if they thought that alternative investments would perform even more poorly, e.g., if they were concerned about the credit risk of non-governmental borrowers. If there absolutely no tax-exempt investments in the matket that were available at an income-producing price, investment pools would just invest less as they would never invest in taxable bonds because that is not their business. The individuals might invest in assets that produce taxable income, but they might also invest in assets that generate potential capital gains down the road which, for individuals, are treated more favorably than ordinary income under the code. Either way, you cannot responsibly assume any appreciable increase in revenue on the basis of some general limitation on the pool of tax-exempt investments in NYC.

If you knew that the borrower was going to spend the proceess of borrowed money on a labor intensive project that was limited geographically in scope, e.g., a site specific building project, you could make assumptions that the proceeds of the borrowing would be transformed in large part into the two greatest inputs into such a project, i.e., payroll and materials. If you gather revenues from taxing wage income earned in your jurisdiction or by your residents, as New York State and City both do, you could count on some increase in revenue based on the percentage of that borrowed money that is transformed into salaries (granted that taxable wage income is subject to credits/deductions and that non-NYC residents would not have to pay NYC income tax for work performed in NYC thanks to Sheldon Silver). So any debt servicing payments foregone by having a lower interest rate would logically lead to some increase in revenue based on the increase in taxable wage income. That's the sort of analysis a rational observer concerned about revenue would make.

Your first point, if I understand it, comes down to "People are going to find a way to avoid paying taxes one way or another, so you might as well give them a tax break for something you want them to invest in." But even capital gains taxes are better than no taxes at all. Again, I think we can argue about the amount of municipal revenue loss, but not that there is some loss attached to granting tax breaks.

As for the second paragraph, are you seriously arguing that because the Yankees are getting a discount on their stadium bill, they're taking that extra cash and spending it on more stadium? I don't think that's true. And even if it were, the total local economic impact of the Yanks' stadium spending has already been calculated by the city (badly, in my opinion - after ten minutes of talking to the guy who conducted the economic impact analysis I realized I knew more about economics than him, which I'm sure you'll agree is a scary thought), and it doesn't come close to paying off the city's direct capital costs, let alone indirect tax subsidies and the like. (See last two paragraphs of the Voice article linked below.) Yes, there are benefits to the Yankees project; yes, the local cost of the tax-free bonds is very small compared to the federal hit; but even taking those into account, the stadium is a big-time money suck on the city treasury.

http://blogs.villagevoice.com/runninscared/archives/2008/10/pinsky_yanks_st.php

That is not my first point.

You made the argument that the state was foregoing revenue that would otherwise be received because the NY resident investor who bought the Yankee bonds and now enjoying tax exempt interest income would have been forced to invest their money on something that would produce revenue for the state. My point is that this is an entirely false assumption - the Yankee bondholder, in probably 99.999999999% of the cases, would do no such thing. The folks buying the Yankee bonds had the prime motivation of taking their money and investing it in order to generate tax-exempt income, not in order to build a stadium.

The tax-exemption has a negligible effect on state and city revenues for the reasons I pointed out above, i.e., alternative financing would not have created comparable interest income that NY could have taxed. The IBO's assumption that NY purchasers of exempt bonds would have instead purchased taxable bonds and would have to pay taxes on those bonds (i.e., that they did not have offsetting deductions) is just plain screwy. You would be fired from a private sector job if you ran projections based on assumptions like that.

What happened with the Yankee bonds was the city and state decided to provide the use of tax-free bonds in order to lower the Yankee's cost of building the stadium. They determined that they would rather have some of the money that the Yankees would have spent servicing debt instead spent on construction and operations and that this would increase the revenue the state could get from construction of the stadium (i.e., sales tax on materials, income tax on wages paid on construction jobs) and from the stadium itself (i.e., sales tax on concessions and income tax on wages paid to stadium employees). The state had a free tool (the tax exemption) that they could use to conjure up those revenues and so they, quite rationally and in their self-interest used that tool.

A person making a fuss that the Yankees pulled one over on the taxpayers doesn't understand finance.