On June 13, 2017, U.S. Senators Cory Booker (D-NJ) and James Lankford (R-OK) introduced the latest bill (S. 1342) (“Senate Bill”) intended to end tax-exempt financing of professional sports stadiums.  The Senate Bill mirrors the bill (H.R. 811) introduced by Rep. Steve Russell (R-OK) on February 1, 2017, reported in this blog by Johnny Hutchinson (link).  Tax-exempt financing of professional sports stadiums has long been a controversial subject and was the subject of my post on April 14, 2016 (link).  The debate prompted by the introduction of legislative bills is a healthy exercise.  However, arguments that are misleading or inaccurate don’t further but impede that debate.  When the bills’ advocates get off track of a productive and thoughtful debate, the misleading arguments need to be called out.  That is the subject of today’s post.

The Senate Bill was accompanied by a statement explaining and supporting the Bill.  That statement included several misleading, if not downright inaccurate, comments.

First, the statement described the bill as closing a “loophole” in the Internal Revenue Code “that allows professional sports teams to finance new stadiums with municipal bonds that are exempt from federal taxes.”  Before getting to my real focus in the preceding sentence, I can’t resist noting the obvious to readers of this blog (although it will probably fool or mislead the general public):  Teams don’t finance the stadiums. In other words, they don’t issue the bonds in question; governmental entities issue the debt.  This is a very important distinction because it means that the host governmental entity is necessarily making the judgment that devoting tax revenues to this economic development purpose is warranted and desirable.

But my real focus in the quoted sentence from the statement is the labeling of tax-exempt financing of stadiums as a “loophole.”  Anyone familiar with the most basic rules of tax-exempt finance knows that state or local government bonds can qualify for tax-exemption if the bonds do not exceed either the private business use limit or the private security or payment limit.  Tax-exempt financing of professional sports stadiums satisfies the tax law because the latter limit is not exceeded.  This is a fundamental tenet of the tax-exempt bond rules.  It is hardly a loophole.  The reason that advocates label this a loophole is obvious –loopholes are inherently “evil” and indefensible.  Thus, merely attaching this judgmental label is intended as advocacy without the thoughtfulness required for a substantive argument.  This is a common trick and cannot stand unchallenged.  In short, labeling a tax-exempt financing structure based on the most general of tax rules as a loophole does not address the merits of the issue and does nothing to advance the argument of the bill’s proponents.

Further, the statement of the Senators argues:

“In eliminating this wasteful expenditure, the bill also unties the hands of local governments to finance their stadium subsidies with taxes on tickets and in-stadium purchases—in other words, allowing states to target taxes on the people who actually use and benefit from the subsidy. Current tax law does not allow local governments to finance federal stadium subsidies by levying taxes on stadium purchases.”

Again relying on the fact that most people don’t understand the rules of tax-exempt finance, this statement misleads in two important respects.  First, the unstated premise of the statement is that tax-exempt financing would be precluded by imposition of a ticket tax or a tax on purchases in the stadium.  This is simply not correct, as the private security or payment regulations (1.141-4) make abundantly clear.  These taxes are private payments only if the taxes are targeted at the stadium and other facilities benefiting from tax-favored financing.  If the taxes are more broadly imposed, they are “taxes of general applicability,” are not private payments, and do not preclude tax-exempt financing.  Thus, the governmental entity that issues the bonds can impose taxes on the users of the facility without precluding tax-exempt financing.

More fundamentally, the quoted statement misleads in that current tax law does not prohibit local governments from imposing even taxes narrowly targeted to users of the financed facility, whether in the form of ticket taxes, taxes on purchases within the facility, etc.  Those taxes might preclude tax-exempt financing, but the taxes are not (and likely could not be) prohibited by federal law.  Thus, federal tax law presents the choice of tax-exempt financing supported by generally applicable taxes or taxable financing supported by targeted taxes.  In other words, as the tax law has done for almost 50 years, local governments already have the choice of what economic development projects are worthy of their support and how that support should be provided.

We should all support a thoughtful debate regarding tax-exempt financing of professional sports facilities but that debate must be transparent and honest, qualities that are not advanced by the Senators’ statement in support of the Senate Bill.