Economists at odds over proposed arena tax
by Brian Brus
The Journal Record February 19, 2008
OKLAHOMA CITY – Mayor Mick Cornett has repeatedly touted the multimillion-dollar refurbishment of the Ford Center arena in downtown Oklahoma City as an economic development engine that would create new jobs as well as draw visitors and money to the area.
But weighing the projected economic impact of luring a professional basketball team against the tax cost to the public brings up questions that even economics professors at the same university can’t agree on.
“I’ve been having a number of discussions about this lately. It’s very disturbing,” said economist Jonathon Wilner at Oklahoma City University’s Meinders Business School. “This is a well-researched topic in economics. People keep saying it will have positive economic impact, and every once in a very long while it will. … But based on systemic research, they are neutral to negative in their effects.”
His peer, OCU economics professor David May, thinks otherwise. May said he would vote to support a temporary sales tax to raise $120 million for a new stadium to attract a professional basketball team to Oklahoma City.
“There are external benefits to an enterprise like this that cannot be measured directly,” May said. “Clearly, the people who go to the new arena wouldn’t be buying tickets if they weren’t realizing some sort of benefit. But also I think people who don’t go also realize a benefit just by recognizing the availability of it, or ‘existence value.’ There is some value to having a bald eagle as a symbol, for example, even though you may never see one yourself.”
Offense and defense
The issue will be decided March 4, when Oklahoma City residents vote on a 1-cent, 15-month sales tax. If passed, the tax will fund massive changes at the arena, adding public rooms, business offices and team warm-up areas, and upgrading the complex to support additional restaurants and business.
The goal is to make the arena NBA-worthy so that the basketball league’s board of governors will be more likely to allow Oklahoma City businessman Clay Bennett and his partners to move the SuperSonics team from its current home in Seattle. If the issue passes but the NBA doesn’t allow the team’s relocation, the tax would shrink by three months to fund $100 million in upgrades the arena needs anyway, city officials said.
Cornett is the arena’s most visible proponent, backed by the Greater Oklahoma City Chamber. Cornett has repeatedly said the team doesn’t stand a chance of relocation unless the arena is improved enough to establish the metro area as a “big league city.”
The chamber has sponsored a Web page, BigLeagueCity.com, in support of the issue. An account has also been created on the MySpace online social portal, using the same BigLeagueCity identity.
The issue has drawn some organized opposition, with Web page addresses such as MapsForMillionaires.org and March4Vote.org, with pointers to the unrelated FieldOfSchemes.com that tracks pro sports arena development. Those against arena subsidization point to the same economic research May and Wilner study.
“Independent scholarship in general has not supported the thesis that professional sports induce significant increases in economic activity for host cities,” economists Robert Baade and Victor Matheson say in a recent issue of the Contemporary Economic Policy journal.
Baade is a professor at Lake Forest College in Chicago; Matheson teaches at College of the Holy Cross in Massachusetts. Among their many research projects on pro sports, they’ve analyzed the extent to which the city of New Orleans should direct its redevelopment dollars toward its sports infrastructure.
Even before Hurricane Katrina severely damaged that city, the authors say, “the lack of population base and both personal and corporate wealth places New Orleans at a considerable disadvantage in supporting and, therefore, retaining either the Saints (NFL team) or the Hornets (NBA team).”
By the latest figures available for Baade and Matheson’s study, in 2004 New Orleans had 1.36 million people, a per capita income of $30,693, and two professional league teams. At the same time, Oklahoma City had 1.21 million people and a per capita income of $30,033. If Oklahoma City were to secure an NBA team, it would be the smallest of the top 50 population cities in the country to host a professional team and near the bottom of the per capita scale, statistics show.
Baade and Matheson say that even given the importance of entertainment tourism to New Orleans, which is much larger compared with most of the country, sports has little overall economic value even at the most basic level.
“Despite the high salaries paid professional athletes, the spectator sports industry typically accounts for less than 1 percent of a city’s payroll,” Baade and Matheson say. “By that measure, the industry is not economically vital to cities in the United States, including New Orleans.”
Impact zone
So what leads promoters to believe in positive results? Impact studies, economists say. The typical study used by league and event promoters estimates a number of visitors expected to attend, the number of days each spectator will probably spend in the city, and the amount of money they’ll spend each day. That figure is then subjected to a multiplier to account for the money’s effect as it passes from person to person, business to business.
In January, for example, Game Plan LLC Chairman Bob Caporale told The Journal Record that if the Sonics come to Oklahoma, “The team itself will have a budget that could be close to $100 million, and those dollars will be spent primarily in the local area. And from the business of games being played, it obviously generates substantial additional revenue in and around the facility. … So you get a real ripple effect around the facility and in the community.”
Oklahoma City officials have regularly tapped Caporale and Game Plan for help on the issue. Game Plan provides consulting, financial advisory and investment banking services in the acquisition, sale and financing of professional sports teams and the development and financing of sports facilities.
Game Plan’s client is SMG, a Philadelphia-based company that manages the Ford Center and more than 200 public assembly facilities nationwide, including arenas, stadiums, performing arts theaters and convention and trade centers. Although the company does not represent the city of Oklahoma City, Cornett said officials sometimes rely on Caporale’s experience in the industry to provide perspective.
And that’s a problem, according to Baade, Matheson and Robert Baumann in a study in the Southern Economic Journal. Anytime there’s potential profit to be made, numbers become suspect.
“Leagues, team owners, and event organizers have a strong incentive to provide economic impact numbers that are as large as possible in order to justify heavy public subsidies,” the economists say. “When leagues consider expansion or franchise relocations, they frequently highlight the potential economic benefits of a new franchise in order to minimize the team’s or league’s required contribution to the funding of the stadium or arena in which the team will play.”
As Baade and his peers point out, such economic impact projections have a few problems that are rarely examined. The first is a substitution effect: Many local sports spectators are merely shifting their available entertainment budget from other restaurants, movie theaters and retailers in the same area. Such spending is not truly new economic activity.
And Wilner referred to a study of the Anaheim Angels baseball team in which it was discovered that game spectators had decided to visit the city for other reasons not directly related to the team, the local Disney park being most notable. “But they were attributing all of the money that came into the city as an economic impact due to the Angels,” Wilner said.
The host city also benefits less from ticket sales than some might believe, Wilner said. Vanderbilt University professor John Siegfried and Andrew Zimbalist at Smith College say in a recent article in the Journal of Economic Perspectives that only 29 percent of NBA players live in the same metro area in which they play. So most of their paychecks are spent elsewhere, not in the cities where their fans are paying to see them play.
In the big leagues
Ultimately, the question may be answered on personal beliefs and not necessarily numbers.
“For people who like professional sports and think that the opportunity to attend these games and be associated with these teams is something of value, then, yes, those people get some sort of emotional pleasure,” Wilner said. “But the underlying issue is that the professional team is a private company and they’re asking for public money. So is the gain to the public’s sense of well-being worth the money that’s being put in? And that’s a much harder thing to evaluate.”
May, who considers himself an environmental and resource economist, said studies in his field have tried to pin down the value of intangibles such as a beautiful view or a beachfront lot – or the presence of a sports team. For example, one study asked people how much they would be willing to spend for one extra sunny day of weather each year; the usual answer ranged from $7 to $12. In a city of a million people, that’s about $50 million over five years.
He pointed to a recent article in the Sport Management Review by economics lecturer Emily Sparvero and sport management professor Laurence Chalip at the University of Texas in which the writers say for cities to reap pro sports benefits, city leaders must shift their focus from impact to leverage.
A sports team can serve economic development indirectly by stabilizing the work force and fostering area development, Chalip and Sparvero said. Leveraging enables a team to be built into city branding, which can be complemented by tactics to attract business and tourists, and it can boost community self-esteem.
As economists Gerald Carlino and N. Edward Coulson said in a 2004 Business Review quarterly for the Philadelphia branch of the Federal Reserve Bank, “Perhaps residents should think of a professional sports team in the way they think of a new art museum or a new symphony hall. … It’s a commodity from which they receive enjoyment just by having it around.”
And that value is verifiable on the ledgers, they said: Annual housing rents in NFL cities rose by about 8 percent more than in non-football league cities, Carlino and Coulson found. Higher rents imply higher housing prices and increased property tax revenues, they conclude.
Cornett has repeatedly stressed that an NBA team would help Oklahoma City be known as a “big league city” that could compete against other major metro areas for business and tourism. And for every mention of the Sonics in the news, Oklahoma City wins exposure.
Wilner is certain the cons far outweigh the pros on the point.
“Kerr-McGee didn’t move to Houston because of the Rockets. It had a lot more to do with the economic implications of the agglomeration effects of the oil and gas businesses already down there,” he said. “You don’t develop a business community by doing this. It’s a hell of a lot of money to attract an executive. … The cost of building an arena doesn’t justify word-of-mouth or news media coverage that brings attention to the city.”
May said he will vote in favor of the tax; down the hall in their offices at OCU, Wilner said he is against it.
“Most economists would say that in the presence of perfect information, everybody makes a perfect decision. Or the marginal benefits exceed the marginal cost of that decision-making,” May said. “The problem is that almost nothing we do in real life is information-perfect.”
Re: The NBA in OKC Megathread
Reply With Quote
Originally Posted by betts
Re: The NBA in OKC Megathread
Bookmarks