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Commentary By Steven Malanga

If You Let Them Build the Stadium...

Cities, Economics, Economics Tax & Budget

Many of the business leaders in Washington, D.C., knew they were getting a raw deal when the city slapped a gross receipts tax on them to help pay for construction of the $611 million Washington Nationals ballpark. Businesses worried that lofty pre-construction projections of stadium attendance and local economic impact were vastly overstated. Even worse, businesses feared that politicians would find the revenues from the new tax so tempting that they would use them not only for paying off the stadium bonds, but for whatever struck their fancy.

They were right. The new stadium is turning out to be a disaster for business taxpayers. Despite the ballpark, attendance at Nationals game is weak, leaving sales tax revenue generated at the stadium well below projections. Meanwhile, the stadium is producing virtually no economic bounce in the surrounding neighborhood that it was supposed to revive. The only thing that’s ahead of projections is collections from the business tax, which the Washington city council has appropriated to plug its budget holes, dashing hopes in the business community that the city would use any tax surplus to accelerate paying off the bonds that financed construction of the stadium.

This has become a rather familiar story, which should be filed under the heading, if you build it for them, they will fleece you. For years we’ve understood that most sports and entertainment venues constructed with taxpayer money rarely achieve the lofty economic projections used to justify their construction. But what’s also become apparent is that once taxpayers let a government put in place the funding mechanism to finance these projects, politicians or sports teams often find a way to milk them for their own purposes, leaving taxpayers on the hook for millions of dollars even in the cases when a venue initially succeeds.

While our nation’s capital can count on years of struggles with its new stadium because it’s doubtful that the Baltimore-Washington area can support two teams (especially two perennially woeful ones), even more troubling is the burden that stadiums become to municipalities after the ballparks are empty or have been torn down.

Take Houston. The Astrodome was opened in 1965 and for years housed both professional baseball and football teams. It’s since lost both and stands virtually empty. Desperately in need of safety upgrades, it’s closed to all but security and maintenance personnel. But here’s the catch. There’s still $32 million in debt on a stadium originally constructed for just $35 million, thanks to some $60 million in obligations floated on the dome in the 1980s for upgrades. With no current revenues, the dome must be supported entirely by local taxes, which cover about $2.4 million in annual debt payments (which stretch for 22 years) and another $2 million in upkeep. The solution? More debt, of course. The Harris County Commissioners, who control the stadium, are looking at a plan to turn the whole place into a giant conference and meeting center, at a cost of $900 million in new debt. Either that or spend $128 million to tear the place down.

Houston was squeezed by its professional sports teams to keep spending money upgrading the stadium rather than preparing for the day when it would go dark. Increasingly this is a problem plaguing many venues: They have no exit strategy. Either politicians seize the surplus revenues when times are good, or they pile on the debt to invest more as teams threaten to move on. That’s why we’re seeing vacant lots with big debt still attached to them.

Giants Stadium in the Meadowlands was demolished in May. It was the original catalyst for building the sports complex starting in the 1970s, after the state lured the Giants from New York. The stadium is now rubble and the new stadium next door will only generate about one-third the revenues for the state. Still, the original $300 million in debt on the complex has grown exponentially as politicians siphoned revenues into the state budget and floated new bonds. Since the sports complex no longer generates much in the way of revenues (an arena next door, which once housed an NBA and NHL franchise, is also now largely vacant), Jersey taxpayers will have to pony up about $1 billion of taxpayer money to pay off the debt, which stretches to 2025.

Jersey taxpayers are not alone. The Seattle Kingdome was occupied for just 24 years before the city agreed to build new stadiums for its baseball and football franchises. When it was demolished in 2000 the stadium still had $150 million in debt on it, according to the Post-Intelligencer. Seattle will be paying that debt off through 2015.

Three Rivers Stadium had $26 million in debt on it when it was reduced to rubble in 2001. Also lying beneath that rubble were a whole bunch of unrealistic expectations for a stadium that was supposed to be built without public subsidy and serve as a catalyst to revive a whole swath of the city. Instead, as the Pittsburgh Post-Gazette reported, "no significant development took place around the stadium." Ironically, that claim was first made by the Pittsburg Pirates, residents of the stadium, in a lawsuit they filed years ago against the public authority running Three Rivers.

When it comes to publicly funded sports and entertainment venues, there seems to be several predictable scenarios. Either a venue fails to reach its lofty projections and taxpayers must make up the difference, or a facility hits a home run and government milks it for its revenues, eventually leaving taxpayers stuck with the bill anyway.

Tax revolt? Maybe what some cities and states need is a debt revolt.

This piece originally appeared in RealClearMarkets

This piece originally appeared in RealClearMarkets