By Tim Kianka on March 6, 2013

I.  Introduction 

Professional sports franchises receive public funding and tax subsidies from all levels of government, including the federal government, state governments, county governments, and local governments.[1]  The use of taxpayer money to fund the construction of professional sports stadiums has a long and controversial history.[2]  This article will provide a short history of the controversial use of taxpayer money to fund private professional sports stadiums and will provide a brief synopsis of how the Internal Revenue Code allows taxpayer funds to effectively subsidize billionaires who own sports franchises.

II.  History 

In 1923, the Los Angeles Coliseum became the first stadium to be financed completely by taxpayer money.[3]  When the Los Angeles Coliseum was constructed, public financing of sports stadiums was rare.[4]  During the same time period, Soldier Field in Chicago (1929) and Municipal Stadium in Cleveland (1931) were publicly funded in an attempt to lure the Olympics to each city, respectively.[5]  Until 1953, all professional sports facilities were built with private funds.[6]  However, by the 1950s, public financing of professional sports stadiums became commonplace.[7]  The construction of the first sports stadium built exclusively with public money occurred in Milwaukee, and coincided with the first sports franchise movement in major league baseball since 1903, when the Boston Braves sought a referendum for a new stadium and thus moved to Milwaukee.[8]  This ushered in an era where the movement of sports franchises and the construction of sports stadiums through public funds became common.[9]  Between 1953 and 1970, thirty new sports stadiums were constructed.[10]  In 1988, it was estimated that eighty percent of all stadiums used by professional sports franchises were publicly funded and owned.[11]  The frequent movement by sports teams to new locations, along with the threat of relocation, has had significant impacts on the ability of a sports team to receive a new publicly funded stadium or a favorable stadium lease.[12]  Studies have noted that “it was estimated in 1997 that of the 115 major professional sports franchises composing Major League Baseball (MLB), the National Hockey League (NHL), the National Football League (NFL), and the National Basketball Association (NBA), half had either requested new stadiums or were getting them.”[13]  As a result, the amount of money spent on stadium construction during the 1990s is believed to be between $8 billion and $11 billion.[14]

III.  How the Internal Revenue Code Allows Taxpayer Funding of Professional Sports Stadiums 

One of the most common ways that sports franchises receive public funding is through the use of tax-exempt municipal bonds.[15] Government entities, such as state or city governments or other governmental agencies, will offer investors an opportunity to purchase tax-exempt municipal bonds, typically at relatively low rates.[16]  When investors purchase the municipal bonds, they are essentially lending money to the government agency that issues the bond with a promise from the government agency to repay the principal of the bond with interest on either an annual or semiannual basis.[17]  Tax-exempt municipal bonds are attractive to investors because, as the name applies, the interest payments received on the municipal bonds are exempt from federal income tax under Internal Revenue Code section 103(a).[18] As a result, government entities that issue municipal bonds can offer investors lower interest rates on the municipal bonds because the investors do not have to pay income taxes on the bonds’ interest.[19]  Thus, governments that need to borrow money tend to prefer municipal bonds over other forms of debt when funding the construction or a renovation of large sports stadiums.[20]   This is because it allows them to pay less interest and because it allows them to easily raise money because they can offer the bonds to investors at lower rates than other bonds on the private market.[21]

In order for municipal bonds to be exempt from federal income tax they must not fall under the definition of a “private activity bond” as defined in section 141 of the Internal Revenue Code.[22]  Determining whether a bond is a private activity bond under section 141 is a two-part test.[23]   The first test is the “private business use test.”[24]   The private business use test is satisfied if more than ten percent of the bond proceeds are used to fund any private business use.[25]   Section 141(b)(6) of the Internal Revenue Code defines private business use as “use (directly or indirectly) in a trade or business carried on by any person other than a governmental unit.”[26]   A sports stadium almost always meets this test because the primary users of the facilities are privately-owned, professional sports franchises rather than governmental units.[27] >  The second test is the “private security test.”[28]   The private security test is satisfied if at least ten percent of the principal or interest payments of the bond are secured by a property interest used for private business.[29]

In order to be classified as a private activity bond, the bond must meet both tests.[30]   Thus, investors want the bonds to fail at least one of the tests under section 141 because private activity bonds are not exempt from federal income tax.[31]   Since the private business use test is almost always met, government entities that issue the bonds and investors who purchase the bonds want to ensure that the bonds will fail the private security test in order to ensure that the bond is classified as a tax-exempt municipal bond.[32]   Therefore, in the context of issuing bonds for the construction of sports stadiums, the stadium must not secure more than ten percent of the bond debt or else the bond will be classified as a private activity bond, making it less attractive to potential investors.[33]  This means that the government entity issuing the bond is responsible for securing at least ninety percent of the bond debt.[34]  In this instance, this means that government entities look to taxpayers to secure the bond debt.[35]

IV. Conclusion

State, county, and local governments are often creative in their efforts to raise money to repay the bond obligations that are used to provide financial assistance to professional sports franchises for stadium construction and renovation.[36]   These government entities offer financial assistance in a variety of ways, including “property tax abatements, state income tax rebates, expenditures for infrastructure costs, and repayment of bond debt with general funds and special taxes.”[37]   The different types of special taxes that state, county, and local governments may levy include, but are not limited to, sin taxes on items such as cigarettes or alcohol, tourist taxes, business taxes, and other types of sales taxes.[38]   Similarly, revenue generated from personal seat licenses, ticket surcharges, and lotteries are also often tapped into in order to satisfy bond obligations.[39]   Either way, when you do the math, taxpayers end up paying the burden of new stadium construction.  Ultimately, the question is, should taxpayers have to subsidize America’s wealthiest people, the billionaires who own professional sports franchises?

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[1] See Scott A. Jensen, Financing Professional Sports Facilities with Federal Tax Subsidies: Is it Sound Policy?, 10 Marq. Sports L.J. 425, 429-31 (2000) (indicating that funds for publicly funded sports stadiums come from many different levels of government).
[2]See Brent Bordson, Public Sports Stadium Funding: Communities Being Held Hostage by Professional Sports Team Owners, 21 Hamline L. Rev. 505, 505 (1998) (noting public funding for professional stadiums is controversial among both legislators and public citizens).
[3]See Zachary A. Phelps, Stadium Construction for Professional Sports: Reversing the Inequities Through Tax Incentives, 18 St. John’s J. Legal Comment. 981, 983 (2004) (detailing history of stadium financing).  While the Los Angeles Coliseum was constructed using taxpayer money, the Los Angeles Coliseum was not constructed for use by a single professional sports team.  The coliseum was built in an unsuccessful attempt to bring the Olympics to southern California.  See id.
[4] See id. (discussing rareness of publicly funded professional sports stadiums in United States in early 1900s).
[5] See John Siegfried & Andrew Zimbalist, The Economics of Sports Facilities and Their Communities, 14 J. of Econ. Persp. 95, 96 (2000) (indicating that first publicly financed stadiums were all built in attempts to lure Olympics to each respective city).
[6] See id. (stating that until 1953, professional sports stadiums were typically privately financed as opposed to publicly funded by taxpayers).
[7] See Phelps, supra note 3, at 984 (discussing shift from privately financed professional sports stadiums to publicly funded professional sports stadiums).
[8] See Siegfried & Zimbalist, supra note 5, at 96 (presenting idea that first completely publicly funded professional sports stadium coincided with first Major League Baseball franchise movement since 1903).
[9] See id. (stating that sports franchise movement became popular begininng in 1950s).
[10] See Phelps, supra note 3, at 984 (providing stadium construction statistics).  This is an average of one and three-quarter new sports stadiums built each year.  See id.
[11] See John Wilson, Playing by the Rules: Sport, Society, and State 241 (1994) (detailing amount of professional sports stadiums that played in publicly funded stadiums during 1980s).
[12] See Charles C. Euchner, Playing the Field: Why Sports Teams Move and Cities Fight to Keep Them 4-11 (1993) (discussing why sports franchises move to different cities).
[13] See Jensen, supra note 1, at 426 (discussing high number of professional sports franchises that have requested new stadiums).
[14] See id. (providing stadium construction statistics).
[15]See About Municipal Bonds,, (last visited Sep. 5, 2012), (discussing tax-exempt municipal bonds).
[16] See id. (explaining tax-exempt municipal bonds).
[17]See id. (detailing concepts behind investing in tax-exempt bonds).
[18] See I.R.C. § 103(a) (2012) (“Except as provided in subsection [103](b), gross income does not include interest on any State or local bond.”).
[19] See Bordson, supra note 2, at 521 (“Thus, lenders can issue bonds at lower rates of interest because investors do not have to pay income taxes on the interest they receive from the bond purchases).
[20] See Phelps, supra note 3, at 987-88 (discussing why governments prefer offering tax-exempt municipal bonds to investors, over other forms of borrowing money).
[21] See id. (describing why governments use tax-exempt municipal bonds to fund professional sports stadiums).
[22] See I.R.C. § 103(b)(1) (2012) (“Subsection [103](a) shall not apply to [a]ny private activity bond which is not a qualified bond (within the meaning of section 141”).
[23] See I.R.C. § 141(a) (2012) (“For purposes of this title, the term ‘private activity bond’ means any bond issued as part of an issue – (1) which meets (A) the private business use test of paragraph (1) of subsection (b), and (B) the private security or payment test of paragraph (2) of subsection (b).”).
[24] See I.R.C. § 141(b)(1) (2012) (listing steps to determine whether bond is private activity bond or not).
[25] See id. (“Except as otherwise provided in this subsection, an issue meets the test of this paragraph if more than 10 percent of the proceeds of the issue are to be used for any private business use.”).
[26] See id. § 141(b)(6) (defining private business use).
[27] See Phelps, supra note 3, at 988 (discussing likeliness of bonds issued for construction of professional sports stadiums to pass private business use test).
[28] See § 141(b)(2) (listing requirements for determination of bond status).
[29] See id.  (“Except as otherwise provided in this subsection, an issue meets the test of this paragraph if the payment of the principal of, or the interest on, more than 10 percent of the proceeds of such issue is (under the terms of such issue or any underlying arrangement) directly or indirectly.”).
[30] See id. § 141(a) (indicating that bond must meet private business use test of § 141(b)(1) and private security test of 141(b)(2)).
[31] See Phelps, supra note 3, at 990 (acknowledging that investors would rather invest in tax-exempt bonds than private activity bonds and therefore want bond to fail either private business use test or private security test).
[32] See id. (noting that bonds issued for stadium construction typically must fail private security test because of high probability of passing private business use test).
[33] See id. (discussing classification of bonds as private activity bonds).
[34] See id. (clarifying ramifications of not wanting bonds to be classified as private activity bonds).
[35] See id. (noting that taxpayer money is used to secure bond debts).
[36] See Euchner, supra note 12, at 6 (“Cities have been innovative in their financing of new facilities.”).
[37] Jensen, supra note 1, at 430-31 (mentioning some specific ways governments raise taxes to repay bond obligations).
[38] See id. (noting other ways governments create taxes to repayd bond debt).
[39] See id. at 431 (stating methods of bond repayment).


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