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April 06, 2010
Tax-deductible seats and the juicing of ticket prices
Just noticed the op-ed in yesterday's New York Times arguing that the tax deductibility of luxury boxes has ruined baseball:
Over the last two decades, the average ticket price for a Chicago Cubs game has increased 265 percent, more than four times the inflation rate. Add in parking, concessions and souvenirs, and a family trip to one of this week's opening day games could easily cost a few hundred dollars.
There are many reasons for the price explosion, but a critical factor has been the ability of businesses to write off tickets as entertainment expenses — essentially a huge, and wholly unnecessary, government subsidy.
These deductions have led to higher ticket prices in two ways. On the demand side, they have fueled competition for scarce seats, with business taxpayers bidding in part with dollars they save through the deductions.
On the supply side, the large number of businesses bidding for expensive seats has driven the expansion of luxury skyboxes and a reduction in overall seats in new ballparks.
It's an issue I've raised before, and Joanna and I noted it way back in the first edition of our book. The deductibility of sports tickets has bounced around a bit — it's currently at 50% of the face value of tickets — but it remains a huge incentive for corporations to pay more than they otherwise would for tickets, driving up prices overall — and helping spur teams to demand new stadiums with more luxury seating that they can sell to the artifically inflated corporate market.
The op-ed authors, Duke law professor Richard Schmalbeck and Rutgers business professor Jay Soled, argue that while it would be ideal to eliminate the business-entertainment deduction for sports tickets entirely, probably a more feasible reform would be to cap the deduction at $50 per seat. That wouldn't end the juicing of ticket prices, but it would at least blunt it somewhat.
Why should seats for a ballgame- any ballgame- be tax deductible?
Neil? Any ideas?
Luxury boxes are good vehicles for businesses to entertain customers, they could be used as an employee retreat, and instead of paying an employee's salary, which is tax deductible for a business because it's an expense, that employee could get a luxury box. These are examples of how luxury boxes could be a legitimate business expense.
Posted by Arthur Andersen on April 6, 2010 07:31 PM
It's not luxury boxes provided as employee perks, it's tickets used to entertain clients. Same deal as a three-martini lunch — corporations are allowed to deduct "entertainment" of clients as a cost of doing business. It's an invitation to abuse, but (aside from that third martini) nobody's ever been able to do much about it.
Posted by Neil on April 6, 2010 08:01 PM
While the tax deduction for non-luxury premium seats are a factor, you can't overlook the embrace of technology by teams and the secondary market to control the flow of ticket sales. Gone are the days when you can come up to the window and expect a good deal on a couple of decent seats at the decent price. When was the last time anyone off the street bought a Yankee game ticket from the Yankees, for example? (Tickets "on the house" to celebrities don't count) Everything is either through Ticketmaster, Stubhub or some other secondary market seller. Chances are if there is a big homestand that is coming up or even once the schedule of games comes out, tickets that you might like to have are already sold before you say "I would have liked to go to that Yankee-Red Sox game in September."
Well, there's always the Pirates and Royals, if you don't mind traveling hundreds of miles for a ballgame.
Posted by Transic on April 6, 2010 08:58 PM
Absolutely, but even with the advent of StubHub and the like, the demand has to exist — you can't sell out games at exorbitant prices unless somebody's buying the tickets. The business-entertainment deduction is a big part of that; an even bigger part is probably the increased polarization of income that has created so many more millionaires while not many fewer people living in poverty. Sell enough tickets to people for whom money is no object, and the rest of the metropolitan area is forced to fight over the scraps, scrounging up enough money to pay top dollar for a game or two a year.
The only risk is that you stop selling out, demand collapses, and suddenly you're the Cleveland Indians, where nobody goes there anymore, it's too crowded. I can't see that happening to the Yankees or Red Sox, but the Mets, maybe.
By coincidence we learn the Cubs have the highest average ticket price in the majors:
http://www.chicagobreakingsports.com/2010/04/cubs-have-highest-average-ticket-price-in-baseball-in-2010.html
Not by coincidence the Cubs are one of the teams featured on ESPN and Fox. Then people wonder why the audiences for those telecasts are low compared to, say, the NFL.
Posted by Charles on April 7, 2010 09:07 PM
Arthur:
Perhaps they can be called legitimate business expenses in some cases (such as 'employee rewards', as you suggest... which are not the standard uses for such perks. In fact, gov't monitors often frown on giving such perks to employees as they are considered taxable benefits in some districts).
They can also be called unreasonable inducements or bribes, depending on your POV. If a client needs discretionary use of a free luxury box to sign on the dotted line with company A, perhaps the deal is not as beneficial as it should be for that corporation (or it's shareholders)? The proffering of gifts does call into question the legitimacy of any transaction. Tributes or loyalty benefits do not figure into Mr. Smith's "willing buyer - willing seller" discussion.
Put another way, if it's ok to offer luxury boxes or team merchandise, why not cash? Why not a new car? And at the prices some suites command, a car might be cheaper...
Good point. And that's not to mention how hokey is the idea of using sporting events as a place to do business. Yes, some businesspeople are avid sports fans as well. However, if I'm in business the last thing I want to worry about when attending a sporting event is thinking about that next buy for an advertising campaign for a Fortune 500 company. I want to put that all behind me and think about how my team is going to come back from behind in the bottom of the 9th.
I realize skyboxes have been around for decades now but the whole idea just sounds...minor league. But then, look at the roster of owners we have.
Posted by Transic on April 12, 2010 12:08 AM
"Not by coincidence the Cubs are one of the teams featured on ESPN and Fox. Then people wonder why the audiences for those telecasts are low compared to, say, the NFL."
Could it have nothing to do with the possibility that Cubs fans are more willing to...oh...buy silly stuff, especially anything that has a Cubs logo on them?
Posted by Transic on April 12, 2010 12:13 AM
Great commentary. How can we allow write-offs for entertaiment expenses such as stadium suites, vacations, and even lap-dances? And I cannot even deduct my education that got me to the point to where I can make a living. Where are are priorities?
Posted by Joe on May 5, 2010 05:39 PM