Public Subsidies For Sports Stadiums Don't Spur Economic Growth

April 04, 2000

Public Subsidies For Sports Stadiums Don’t Spur Economic Growth
by Daniel Sutter, Ph.D.

America is in the midst of a sports stadium building binge fueled by a considerable dose of public funding. Nationally, public subsidies for stadiums exceed $500 million a year. Oklahoma City joined the building binge by funding a new 18,000-seat arena as part of the MAPS program. Subsidies have not been limited to major league sports; many communities have built facilities for minor-league sports teams as well.

Proponents offer several rationales for the subsidies. The most popular argument is that of stadiums as catalysts of local economic development or as anchors for downtown revitalization projects. Spending by fans attending games spills over to local stores, restaurants, taverns and motels, the argument goes. The stadiums and teams create jobs, and these workers’ spending can have a multiplier effect. The Camden Yards parks in Baltimore’s Inner Harbor district and Cleveland’s Jacobs Field are the models for other cities to follow. The spending and jobs create tax revenues; proponents sometimes claim that the increased tax revenues will exceed the cost of subsidies for stadium construction. Other arguments for stadium subsidies include image benefits for the host city (the benefit of being “major league”), the public-good benefits of sports teams, and the need to respond to subsidies offered by other cities.

Oklahoma City recently attracted an Arena Football League team and considered a deal to lure an International Hockey League team as well. Hopes of attracting an NHL team have not been abandoned. We are likely to hear a lot about the potential development benefits of sports in the years ahead.

Economists, however, have found the economic impact of sports to be very modest. From a national perspective, stadium subsidies do not contribute to economic growth. Sports and sports-related spending is merely diverted from other recreational and entertainment activities.

Money spent on football games or baseball games typically is offset by reduced spending on movies or amusement parks or camping. Related spending also is typically diverted; people go out to eat at restaurants near the stadium instead of near the theater. Travel destinations and hotel spending are also diverted.

Communities care about the location of such spending and a local jurisdiction can benefit fiscally from the geographical diversion of entertainment spending. Oklahoma City is better off if the new hockey arena or Bricktown Ballpark diverts entertainment spending from Edmond or Norman. The diversion effect declines sharply as the size of the jurisdiction increases: the Oklahoma City metro area benefits only from spending diverted from outside the area, that is, from Lawton or Tulsa or out-of-state. Spending diverted from within the jurisdiction does not generate new tax revenues. Purchases made at stores in Bricktown instead of at Penn Square Mall do not increase state sales tax revenues.

Valid economic-impact studies must consider several factors, including: (1) the fraction of fans attending games from outside the local community; (2) whether these trips would occur without the new stadium; (3) the portion of the incomes generated by sports spent within the community (for multiplier purposes); and (4) the number of jobs this spending creates. If Oklahomans plan to go to Dallas for the weekend anyway and happen to take in a Rangers game on their trip, this spending is merely diverted from other sources of entertainment. Professional athletes often do not live in the off-season in the city where they play, so a substantial portion of the income generated by a sports team leaks out of the community.

Impact studies which do not take these factors into account overstate the job creation effects of teams and stadiums. A pro-subsidy study estimated that the new stadiums for the Cincinnati Reds and Bengals would generate 7,645 new jobs, while a more sober study estimated only 3,530 jobs. Proponents estimated an NFL team in Jacksonville would produce 3,000 new jobs, while an impact study following the expansion estimated that only about 300 jobs were actually created. Arizona’s Bank One Ballpark created 340 jobs at a cost of $240 million in subsidies.

Other studies examine overall metropolitan area performance to take into account any spillover effects of teams on the local economy. Again the impact of stadiums is modest. Economist Robert Baade examined the impact of teams and stadiums using a data set of 48 metropolitan statistical areas (MSAs), including all cities hosting sports teams between 1958 and 1987. In 30 of 32 MSAs experiencing a change in the number of teams and 27 of 30 MSAs with a change in the number of new stadiums, Baade found no statistical correlation between sports and growth in per capita personal income. Another study by Baade found no significant impact of teams or stadiums on non-manufacturing employment. Economist Mark Rosentraub found that Indianapolis’ employment and payroll growth was comparable to other Midwestern cities despite the city’s significant investment in professional and amateur sports.

The sports industry is extremely small, which helps explain their weak impact on local economic development. Professional sports in 1992 provided no more than 0.4 percent of all private-sector employment or more than 0.5 percent of all private-sector payrolls in any of the 161 largest counties in the U.S. Even the impact of the broader entertainment industry is modest. Total entertainment spending (including restaurants and hotels) in Arlington, Texas—home to the Texas Rangers baseball team, two major amusement parks, and a convention center—amounted to 11.4 percent of private-sector payrolls in the city in 1992.

The design of modern stadiums minimizes the spillover benefits for neighborhoods. Inclusion of restaurants and souvenir shops within the stadium and provision of municipal parking facilities direct fans’ spending to the team, not local merchants. Furthermore, teams play a limited number of home games, so stadiums are usually empty. The financial spillovers from stadiums on the nearby neighborhood will raise property values to the benefit of property owners, not the operators or employees of these businesses. Increased demand at Bricktown restaurants produce higher rents for the property. The local economic development benefits of stadiums basically amount to capital gains for property owners.

Sports are a public good; that is, fans can follow the local team (on television news or in the paper, in discussions with friends and coworkers) without having to pay the team. Conceivably public subsidies for sports could address this problem and allow leagues to remain in existence. But teams secure tens of millions of dollars in revenue annually, certainly sufficient revenue to provide the product. What about the many teams allegedly in financial trouble? Player salaries today are a product of the revenues generated by the sport, and greatly exceed players’ supply price—the minimum amount they would need to be paid to be professional athletes. Also the new generation of stadiums have many luxuries and frills beyond what is necessary for a stadium. Public subsidies have driven up the cost of stadiums. With the public sector paying, no team owner will settle for hamburger; they all will order caviar and filet mignon.

Stadium subsidies do not increase economic activity in total and are not necessary to keep sports leagues in existence. Cities, though, face competition for sports teams; small market cities particularly might need to offer subsidies in response to remain competitive with larger markets. Riverfront Stadium in Cincinnati had not reached the end of its usefulness. But with other cities offering stadium deals, the Reds and Bengals secured new stadiums at a total cost over $500 million. If residents wish to support a team in this case, they should recognize that the subsidy reallocates resources, and investing resources means more sports but less of something else: police and fire protection, road repair, parks, or private consumption. The proper question to ask in this case is, do we prefer consumption of sports to improved public services or additional private consumption? Bruce Hamilton and Peter Kahn estimate that the subsidies for the Camden Yards baseball park cost each Baltimore household about $14 per year. If citizens feel this is good value for their money, the subsidy is worthwhile.

Local governments can make themselves and some of their residents better off, but these local gains are transfers from other jurisdictions. Is enriching one group at the expense of another really a proper function of government? Inclusion of the costs of political lobbying turns beggar-thy-neighbor local economic development policy into a negative sum game. The federal government underwrites typically 10 to 20 percent of stadium subsidies through the tax exemption on interest from state and local bonds. Given that stadium subsidies provide no economic growth at the national level, is this the type of activity the Federal government should be encouraging local governments to undertake?

An OCPA adjunct scholar, Dr. Sutter is assistant professor of economics at the University of Oklahoma. Footnotes for this article are available upon request from OCPA.

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