Public Finance What s in it for the cities

Public Finance What’s in it for the cities?

What is point of Government? • • • Set and enforce rules of behavior Macroeconomic stabilization Deal with monopoly Provide Public Goods Deal with Externalities

What are Externalities? • Similar to Pubic Goods – What you do affects me – BUT: You do not take impact on me into account • Can be negative – What you do hurts me – You don’t compensate me – Examples? • Can be positive – What you do helps me – I don’t compensate you – Examples?

Impact of Negative Externality • Brewery & Pizza factory • Private Costs of brewer? • Supply Curve: Sp P Sp – Optimal Price: – Optimal Quantity: Qp Pp • Are these all the costs? Pp • What if beer fumes affect pizza makers? D Qs QP Q

Impact of Negative Externality • Negative Externality P – Private and Social Costs – Cost imposed on bystander Ss • Supply curve actually Ss – Optimal Price: Ps – Optimal Quantity: Qs • Market “fails” – Overproduction Sp Ps Pp D • What can government do? Qs QP Q

Impact of Positive Externality • Spose fumes make pizza makers more productive • Private v. social benefits • Market fails again! P S – Underproduction • What can government do? Ds Dp QP QS Q

Can a Stadium be a Profit Center for a City? • Revenues – Rental Payments – Share of Concessions, Parking, Luxury Boxes, etc. – Precise arrangements vary by facility • Costs – – Standard operating costs (labor, utilities, etc) Depreciation (facility will eventually be worthless) Opportunity Cost: Could have invested $$ Foregone tax revenue – city can’t pay itself • Average subsidy to team ~$7 Million/year

One Key: Externalities • City not like firm – Firm weighs direct costs and benefits – City looks more broadly • Teams can have negative externalities – Crime, noise, congestion, … • Teams can have positive externalities – Do they attract business? – No evidence that employment or pay rise as result

Public Good Aspects • Teams as “Civic Totems” – Sense of identity – “And now, YOUR Boston Celtics …” – Especially true for mid-size cities • Propaganda value – Berlin, 1936 – Moscow, 1980 – Beijing, 2008

What Do Sabres Bring to Buffalo? • • 2003 estimates by NY State Comptroller $31 M in gate receipts $8. 6 M in concessions revenue $4 M in advertising and broadcast revenue Subtotal: $43. 6 million Multiplies subtotal by “conservative” 1. 5 Total Impact = $65 million

Monetary Benefits: Direct Financial Benefits • Where does $43. 6 M come from? • Get local residents to spend more • Net exports rise – Imports fall • Residents spend locally instead of elsewhere – Exports rise • Outsiders spend locally

Are Direct Benefits Overstated? • Imports also rise – Money in and money out for concessions • Expenditures on “foreign” inputs – Players who live elsewhere – Team as conduit, not magnet • Opportunity Cost – Is all $43. 6 M new spending? – Hollywood & 1994 baseball strike

Conclusion: Direct Benefits are Small • MLB revenues < Fruit of the Loom – A new course on underwear? – Single team worth less than sizable department store • Other sports worth even less • Chicago has 5 major league franchises – 1 of 2 cities with all 4 sports in city proper – Sports account for. 08% of personal income

A Third Key: Indirect Benefits • The Multiplier Effect • Intuition: Pebble in a Lake – Has ripple effect • Initial expenditure = pebble – Expenditure => higher income • Higher income => Spend more: 1 st ripple – Subsequent spending raises income & spending

The Arithmetic of the Multiplier • DY=$X+$X*MPC+($X*MPC)*MPC+… • DY=$X*(1+MPC 2+MPC 3+MPC 4+…) – Numbers in () get smaller – Why? • Let S=(…) – Infinite sum – how to solve? • Consider S-MPC*S • Simple multiplier=1/(1 -MPC) • Income can rise far more than direct effect – MPC=0. 9 => Multiplier=10

What Determines Size of Multiplier? • MPC falls as income rises (Why? ) – Much of income goes to few highly-paid athletes – Earning lifetime of athletes highly compressed • MPC falls if income “leaks” out of local area – More likely for small towns than large – Most athletes/executives live outside of town

How Big is the Multiplier? • Noll & Zimbalist say = 1/(1 -MPC*f) – f = fraction of income spent inside community • MPC falls from 0. 9 to 0. 67 – N&Z think f= 0. 5 • Multiplier falls from 10 to 1. 5 • Multiplier in Buffalo seems about right

Teams and Jobs • D&T studied impact of AZ Diamondbacks – 340 full-time jobs – Cost to city: $240 Million – $706, 000 per job • Other studies smaller - but that much – Cost per job in Baltimore: $127, 000 - $331, 000

Measures of Benefits: Baade • Sets pattern for studies of teams & facilities • Dyit-1 = b 0 + b 1*NTit + b 2*NSit+…+ eit – LHS: Growth in per capita income • Actually growth in difference from sample mean – Function of #teams & #stadiums & controls • Uses sample of 30 cities 1958 -87 • Neither coefficient statistically significant • Simulates impact for specific cities – Significant impact only for Indianapolis – Rosentraub study questions even this

Other Studies • Coates and Humphreys look smaller – Look within cities – Find difference in immediate neighborhood – Falls off rapidly • Rappoport looks at property values – Finds higher property values in cities with teams – How to explain when income and jobs not affected?

Special Events: Super Bowls & Olympics • Different situation: 1 -time event • Still – how much does it add • Hotels in San Diego – How many would have been occupied anyway? • Study by Porter of Super Bowl – Looks at spending in counties with Super Bowls – Finds little or no impact

Problems with Stadium Funding • How to match benefits and costs? – Efficiency – Equity • Taxes seldom “stay put” • Example: Tax hotel stays – Try to “export” tax burden – Popular with residents – Does it work?

Jerry Jones v. Mary Kay • Jones wants new stadium for Cowboys • Dallas County raises hotel tax to 18% – Why hotel tax? • Wants to export tax to “foreigners” • Mary Kay objects – Large Dallas-based cosmetics seller – Threatens to move annual convention • Similar problem in Philly – Tax on cab rides & hotels bringing less than expected

Why the Fuss? • Tax Shifts Supply Curve – Say $10 higher – Does Price rise $10? • Price rises by less – At higher price: QD<QS – Pe rises by less than $10 P Pe ’ S’ D $10 S Pe • Hotel revenues fall – Share tax with guests Q

Burden of Tax • Before tax • Consumer Surplus P D S Q

Burden of Tax • • Before tax Consumer Surplus Producer Surplus Gain to society=sum P D S Q

Burden of Tax • Tax Shifts Supply Curve P D S’ S Q

Burden of Tax • What is cost of tax to society? • Consumer Surplus falls P D S’ S Q

Burden of Tax • What is cost of tax to society? • Consumer Surplus falls • Producer Surplus falls P D S’ S Q

Burden of Tax • What is cost of tax to society? • Consumer Surplus falls • Producer Surplus falls • Part of loss is transfer P D S’ S Q

Burden of Tax • What is cost of tax to society? • Consumer Surplus falls • Producer Surplus falls • Part of loss is transfer • Part of loss disappears P D S’ S – Deadweight loss – How to minimize DWL? Q

Lotteries in Baltimore • Voluntary tax: What could be better? • Who pays? – Poor and ill-educated – Regressive • Wasteful tax – 2/3 goes to support bloated bureaucracy

Sales Tax in Milwaukee • Funded Miller Park with 5 -county sales tax • Sales taxes regressive – Poor spend more of income than rich • Tax covers more than city – More closely matches benefits • Sales tax does poor job of matching costs and benefits

Seattle Fine Tunes Tax • Sales tax on restaurants & bars in King County – Tax businesses that benefit – A bit too broad, though • Tax on admissions to stadium – Gets at direct beneficiaries – Would be even better if taxed luxury boxes more • Tax on rental cars – Problems outlined above

How about Debt? • Ricardo Equivalence Theorem – Must pay back debt by raising taxes eventually • Municipal bonds tax deductible – Pay low interest rate – Export tax to other states • “Export” burden to later generations – Okay if later generations also benefit – Not if paying for empty stadium

A Public Choice Perspective • James Buchanan won Nobel for originating • Politicians act “economically” – Pursue own self-interest – Linked to political fortunes • Interest groups press own agenda • Highly organized groups have advantage – Well-defined goals – Access to political power

Logrolling • Majority may not desire • If gains to some high - and harm to others low • May “trade” votes – 2 policies & 3 voters • Policy A helps Nina & hurts others • Policy B helps John & hurts others – How can each get what s/he wants? • Both policies pass – Even though majority opposes each