Financing Facilities

1. Financing Facilities Here we want to explore various ways of financing facilities and implications of these ways.

2. User fees User fees have as a philosophical underpinning the idea that if you benefit from something you should pay for it. Some have argued stadiums should not use general city money. The money should come from user fees. City residents already have a hard enough time making ends meet, let alone affording to attend games and buying cable to see more games on TV. Do not tax the city residents! Suburbanites benefit from the stadium - have user fees to make them pay.

3. Sales (what we earlier called an excise) tax P Some wonder if a sales tax should just be placed on a product or group of products. Their initial thinking is if Q1 units are being sold and if you put a tax a $T per unit then the tax revenue will be $T times Q1. Sbt Dbt Q P1 Q1

4. Sales (what we earlier called an excise) tax Sat P The problem is with a tax the supply shifts up by the amount of the tax. This raises market price and reduces market quantity. Only $TQ2 is raised as revenue. Sbt Dbt Q P2 P1 P2 - T Q2 Q1 P2 – P1 is the increase in the market price and as such is said to be that part of the tax paid by the consumer. (Note above Q2 the difference in the 2 supply curves is the tax per unit. P2 – P1 is only part of this distance.) P1 – (P2 – T) is the decrease in the amount sellers get when they sell a unit of the product and as such is said to be that part of the tax paid by producers.

5. Sales (what we earlier called an excise) tax Sat P The shaded rectangle is the tax revenue. The triangle to the right of the tax rectangle is the deadweight loss of taxation and is a reflection of the output reduction from Q1 to Q2. Sbt Dbt Q P2 P1 P2 - T Q2 Q1 If taxes are put on inelastic demand products the reduction in output is low and thus the deadweight loss is low. Most of the tax in that case is borne by the consumer.

6. Incremental Financing With incremental financing of a stadium there is actually no new taxes. But, the city assumes that when the new structure is built that more folks will come and visit the city and thus the city will have more in tax revenue. The extra revenue will be marked to pay back the stadium expenses.

7. Unique situations In Milwaukee when Miller Park was built the 5 counties in and around Milwaukee were brought together and treated as 1 entity for tax purposes. This means the new tax didn’t have to have a higher rate because the base has been spread out. This is some relief to city residents so they didn’t have to fund the whole deal. In Seattle they taxed bars, restaurants and even taxed the tickets to the stadium. The thinking here is they increased taxes on those most likely to go to the stadium for games.

8. Debt Financing As we mentioned in a previous set of notes, cities often float bonds to put up the stadium. This means they borrow from many today and payback later, interest included. They have to use tax dollars to pay back because teams rarely pay the full cost of the stadium. David Ricardo recognized long ago that if bonds are sold that eventually taxes will have to be raised. Some claim folks start saving for the tax right way. This ricardian equivalence means maybe that the impact of the stadium is diminished because folks do not spend as much as before.

9. Debt Financing Recall F = P(1 + r)^n. In a simple case of a 1 year bond, P is what folks pay today to get F one year from today at interest rate r. In this context F is a fixed known amount. With n = 1, the we can say the higher P is the less r is. Bond prices and interest rates move in opposite directions. At the federal level people can deduct from their income the interest they earn on city bonds. This makes the demand for city bonds higher than would be and thus the price goes up. This means city bonds have lower interest rates. This helps cities raise funds for such work.

10. Debt Financing The interest deductibility of interest on city bonds means the city really gets the help of the federal government because the tax dollars would flow to feds. The last thing about the city debt financing is that since it takes several years to pay off the debt, future generations will pay taxes that go to the stadium. This is not all bad since future city dwellers will likely be a user of the facility. But, it seems stadiums last fewer years today! Summary – we have seen various way to pay for a facility and we see some caveats of each plan.