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September 28, 2004

D.C. At The Bat

Who Would Pay for Washington's New Stadium?

by Neil deMause

If MLB officials are to be believed--and at this point Bud's cabal should have less credibility than Ahmed Chalabi--then by the end of the week, the Montreal Expos will at last be turning in their tricolor M's for W's, as the third incarnation of the Washington Senators. (Or, if you prefer, the second of the Nats.)

It's been a long, strange trip for Bud Selig's traveling extortion road show, one that likely would still be going strong, ironically, if D.C. voters hadn't gotten together and kicked out three incumbent council members in favor of three declared opponents of public stadium dollars. With the threat of democracy suddenly at the door--the Backlash Three, led by Disgraced Former Mayor Marion Barry, figure to take office in January--it shook both MLB and D.C. officials loose from their mutual game of chicken, with Jerry Reinsdorf's relocation posse rushing to anoint Washington as the chosen one, while the lame-duck council produced in a matter of days a bona fide stadium plan, complete with one of those waterfront sites that gets the sports pundits drooling.

But enough backstory. Now that everybody's cards are on the table, the question to be asked is: After two years of threats, cross-continental junkets, and messing around with Terrmel Sledge's career, what did Bud finally get for his fellow owners? And on the other side of the ledger, what kind of deal are Mayor Anthony Williams and his council cronies proposing for D.C. taxpayers?

Including construction, site acquisition, and all the trimmings, the total price tag on Mayor Williams' plan is $440 million. The Washington Post broke down the payments this way:

Rent payments by the Expos/Sens/Nats owner: $5.5 mil. a year
In-stadium taxes on tickets, concessions and merchandise: $11-14 mil. a year
Tax surcharge on large D.C. businesses: $21-24 mil. a year

(Note that the total--about $40 million a year--is a bit more than what's needed to pay off $440 million in 30-year stadium bonds. The buffer is there to make the bond underwriters happy, with any excess presumably going toward retiring the bonds early.)

Seems straightforward enough, right? The team would pay a small share, baseball fans a somewhat larger one, and the largest hit would be on the corporate bigwigs who'd be sloshing about in the luxury suites. It was this that's allowed Williams' office to claim that "there is no money that will come from the general fund" for the ballpark, while D.C. Baseball echoed that it "will not be paid for by DC residents' tax dollars."

In stadium financing, though, nothing is ever that simple. The D.C. stadium plan, in fact, provides a valuable lesson in how to break down a stadium finance plan, and learn which costs really fall on the private side of the ledger, and which on the public.

Let's take them one at a time:

$5.5 million a year in rent payments by the team

By the standards of modern-day stadium deals, this would be a fairly high rent: the Orioles pay $6 million a year on Camden Yards, but other teams in new stadiums pay far less. The cost would, however, be offset by a huge public asset--the naming rights to the new stadium--that would effectively be given to the team for free. This is standard operating procedure in most stadium deals, and it's an enormous hidden subsidy that skews the stated public/private funding mix. For example, the Mariners are paying $700,000 a year in rent to the state of Washington, but that comes right off the top of the $1.8 million a year they earn in naming-rights fees from Safeco.

Naming-rights values have been all over the place of late--how the Astros managed to stick first Enron, then Minute Maid for $6 million a year is beyond me--but around $2.5 million a year seems like a reasonable benchmark. Split this one, then, into about 45% public cost, 55% team.

$11-14 million a year in "in-stadium taxes"

This is a major fudge by stadium proponents, as what's being called "in-stadium" is a mix of existing sales taxes on stadium goodies, plus a new surcharge on tickets and parking. While this whole business of new vs. existing taxes may seem like a trivial matter, it's anything but. Ask most economists, and they'll tell you that surcharges on such things as tickets and parking ultimately end up coming out of owners' pockets. If fans are willing to pay 40 bucks for a box seat, goes the argument, they're going to pay the same whether the tickets have a $40 face value or a $36 face value plus a $4 tax surcharge. So (apologies in advance for using "rational" and "owner" in the same sentence) a rational profit-maximizing owner would charge the same either way, eating any tax surcharge.

Existing taxes are a whole 'nother kettle of wax. Ballpark boosters like to sell the use of stadium sales taxes as some sort of poetic justice--baseball fans get the benefit, baseball fans pay the fare--and since there would be no team without a stadium, it's all found money anyway, right? Hogwash, say economists: Baseball fans are just people, and they're going to spend their disposable income somehow, whether it's at a ballgame or a movie or a bowling alley. (For some reason economists really love examples about bowling alleys.) If this "substitution effect" just cannibalizes the sale of movie tickets that would generate sales taxes, and replaces them with baseball tickets that wouldn't, it's a net loss to the public purse.

The current plan, according to the D.C. mayor's office, is to divert all stadium sales tax revenue to pay off the construction bonds: the existing 5.75% sales tax, plus a 4.25% surcharge. (Food sales are already taxed at 10% in D.C., and parking at 12%, so these would have no additional surcharge.) It's hard to guess what the substitution effect would be in this case--D.C. has two neighboring states to draw spending away from, but it's also already the region's entertainment hub. Let's figure (based on Doug Pappas' numbers) that about two-thirds of ballpark sales would be on tickets and souvenirs that would have the added surcharge, and further guesstimate that at least half of the ballpark spending would be diverted from elsewhere in the District... OK, I think we need a table here:


                                       % of total revenue

Tickets and souvenir sales tax                19%
  (diverted from elsewhere in D.C.)
Parking and food sales tax                    17%
  (diverted from elsewhere in D.C.)

Tickets and souvenir sales tax                19%
  (new revenue)
Parking and food sales tax                    17%
  (new revenue)

Tickets and souvenir surcharge                28%

So for this revenue stream, that's a total of 36% public, 28% private--and 36% siphoned off of the public treasuries of Maryland, Virginia, and wherever else stadium visitors hail from.

$21-24 million a year in a large-business tax

As Maury Brown of SABR's Business of Baseball Committee has pointed out, this number has undergone a remarkable metamorphosis in the past few months. In 2003 it was to be $9 million a year, by this June it had hit $18-20 million, and now it's soared past the $20 million mark. Either the proposed tax rate has been raised, or the D.C. finance department just got an extra-large shipment of rose-colored glasses.

The business tax would be a new surcharge, so there are no worries about funneling off existing tax revenue. The thing about new taxes, though, is that you can only pass them once. Notes Ed Lazere of the D.C. Fiscal Policy Institute, a budget watchdog group opposed to the current stadium deal: "Elected officials are always saying, 'Well, we raised taxes last year, we shouldn't be going to the well again.'"

And sometimes the well just runs dry, as their neighbors in Maryland found out when that state built Baltimore's two new downtown sports stadiums with revenue from four new statewide sports lotteries. Leaving aside for the moment the wisdom of paying for stadiums via state-sponsored gambling (if you're interested in the effects on low-income Baltimoreans, there's an excellent chapter on it in Peter Richmond's book Ballpark, the fiscal consequences came crashing down when, in 1997, local lawmakers proposed legalizing casino gambling to help fund education programs--and were promptly informed that the gambling market had already been tapped out. The O's and Ravens had already staked their claim, so Maryland schoolkids got left in the dust.

Of course, it does matter from a public policy standpoint who's being taxed--if you're a cigarette smoker, a rental-car driver, or the owner of a large D.C. business, it probably matters to you a lot. But from a fiscal standpoint, a tax is a tax, and by passing a tax now to benefit a baseball team, D.C. residents would be forgoing potential future tax revenue that could be spent on, say, better schools. (Or something else they don't have.) The business tax, then, is still a 100% public subsidy.

There are still more unknowns about the stadium deal: Who would pay for any cost overruns, in both construction and land acquisition? (The D.C. plan already budgets for expected overruns of 20-30%, but cost increases of more than that aren't unheard of.) What would be the cost to the district in lost property taxes from businesses that would be relocated to make way for the stadium? Would the District try to avail itself of tax-exempt bonds, which effectively reduce construction costs by passing a percentage along to the federal treasury? All these details are yet to be worked out.

Still, we have enough information to make some--ahem--ballpark estimates:


                    D.C.'s share        Private share    MD/VA share
Rent payments       $2.5m               $3m              $0
In-stadium taxes    $4-5m               $3-4m            $4-5m
Business tax        $21-24m             $0m              $0

Total annual cost   $27.5-31.5m         $6-7m            $4-5

Ignoring the poor bean-counters in Annapolis and Richmond for the moment, that's more than 80% public, less than 20% team--or roughly $320 million from D.C., and about $70 million from MLB's other 29 teams. That's not exactly a great deal for D.C. taxpayers, especially when you consider that the most recent team to cut a stadium deal, the St. Louis Cardinals, privately funded two-thirds of the total. (Press reports will tell you the Cards are paying three-quarters, but we've seen how far you can trust press reports--I've discussed the Cards' finance plan in greater detail elsewhere.) Still, it's also not the 100% publicly financed stadium that Bud hoped for when he set the Expos roulette wheel spinning; that MLB is apparently set to accept close to a fifth of the costs is a sign of how few other viable options they have.

And if the D.C. council realizes this, then things could start to get interesting, because there's nothing stopping council members from whittling away at the public's cost between now and November. Once the MLB cabal sends up the white smoke, after all, it's not like they have many options: It's either accept what's offered by D.C., or take the Expos and retreat to the other 51st state to wallow in another year of red ink.

How this all plays out will set an important precedent. For instance, when the A's sit down to negotiate a stadium deal, whether it's with Oakland, San Jose, or Portland, you know they're going to point to the D.C. deal in setting the "industry standard"--baseball franchise speak for "everybody else got away with it, so we should too." As the political machinations in D.C. unfold over the next three months, watch closely, for the wallet being tapped could some day be your own.

Neil deMause is co-author of the book Field of Schemes, and runs the fieldofschemes.com Web site. He lives in Brooklyn with his partner Mindy, their son Jordan, and a circa-1986 Yankee Stadium bleacher seat. Neil can be reached at neil@demause.net.

Neil deMause is an author of Baseball Prospectus. 
Click here to see Neil's other articles. You can contact Neil by clicking here

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