Posts about Taxes
Arlington voters will pick a replacement for county board member Chris Zimmerman in a special election
April 4 April 8. While the two candidates have a lot in common, their take on the Columbia Pike streetcar sets them apart. One calls it an important part of the county's transportation network, while the other says it's a waste of money.
Democratic nominee Alan Howze, who was selected in a January caucus, and independent John Vihstadt aren't that far apart on most issues. Both support the county's efforts on smart growth and affordable housing. They also both support the county's move to establish a new homeless shelter at Courthouse, and they agree on some national issues, like marriage equality.
But they're divided over the Columbia Pike streetcar, the 4.9-mile line between Pentagon City and Bailey's Crossroads which has the support of most of the current board, but strong opposition from some.
Vihstadt is a member of Arlingtonians for Sensible Transit, an anti-streetcar group which argues the streetcar is too expensive and will not move as many people as estimated. If elected, Vihstadt would join board member Libby Garvey, who also opposes the streetcar.
He told the pro-streetcar group Arlington Streetcar Now that he wants to evaluate how BRT performs on the Crystal City/Potomac Yard transitway before committing funds to any project on Columbia Pike. AST has been advocating for Bus Rapid Transit on Columbia Pike, but their comments, and Vihstadt's statement here, glosses over the issue that BRT is not possible on Columbia Pike since there is no room for a dedicated lane, unlike for Crystal City-Potomac Yard.
Vihstadt would split the money dedicated to the project between buses on Columbia Pike and other projects throughout the county, which is appealing to some voters elsewhere in the county that want more resources spent on projects in their area.
Despite initially being publicly on the fence about the project, Howze does support the streetcar. He believes it will move more people and help support new development. In a position paper on the subject, he rejects the criticism that funds for the project will take away resources from other county priorities like schools, noting that schools take up half of the county's capital projects budget, and the streetcar hovers at around 10%.
But it's clear that calls to rein in county spending have had an effect on him. Howze has repeated that he's not someone who will just rubberstamp projects and not pay attention to costs. He says that "no project has a blank check" in regards to the county's proposed Long Bridge Aquatic Center. At a recent candidates' forum, he said the county spent too much money on a new dog park in Clarendon.
The special election's unusual date means that voter turnout will be low. Howze will have to count on Democrats being happy with the way the county has performed and the priorities it has set. Vihstadt, meanwhile, is banking on support from unhappy voters across the political spectrum who want to reverse or slow down the pace of some projects in the county. He says being the only non-Democrat on the board would be a strength, arguing the board needs more political diversity.
At the same time, there is a primary election coming up on June 8 to select a nominee to succeed retiring Rep. Jim Moran. That primary features many local leaders in Arlington, Alexandria, and Fairfax, which means it has gotten a lot of attention while many voters may not be focusing closely on the county board race.
Some observers think that by taking a reluctant stance toward many county projects, Howze may generate lower levels of enthusiasm among his potential supporters as compared to Vihstadt, who has been trying to appeal to various groups of voters that have a specific bone of contention with the current board. If few people vote and enough disgruntled Democrats in Arlington vote with independents and Republicans, Vihstadt is likely to win.
The victor will not have much time to rest, as the winner will have to defend his seat again in November's general election.
Yesterday, Montgomery County Executive Ike Leggett unveiled his proposed budget, and it has no good news for transit riders. Ride On will get more state aid and hike fares, but it will not run any more buses. Instead, transit revenue will be used to cut real estate taxes.
The cost of running Ride On, as shown in the budget will go up $3.5 million, from $98 million to $101.6 million. Meanwhile, the county will receive $7 million in new revenues, double the cost increase. $5 million in new state aid will come from the gas tax increase passed last year. And fares will rise $2 million, likely a result of matching Metro's fare increase.
Where will this money go? The county's "mass transit tax," a component of the real estate tax, will drop by $5 million. Bus riders, many of whom have low incomes or are renters, will pay more while a tax cut disproportionately benefits the county's wealthiest homeowners.
When Maryland discussed a gas tax increase last year, many groups complained about "raids" on the state's transportation trust fund, including county governments, legislators, conservatives, and the highway lobby. It will be interesting to see how these groups react to this diversion of trust fund money to non-transportation purposes.
Ride On could put the new money it is getting from the state and its riders to good use. The system lacks relief buses, or vehicles on standby, stationed around the county to fill in when other buses break down.
The county counts all late buses equally when it tracks Ride On's performance, but for a rider, there's a vast difference between a replacement bus that comes late and a bus that doesn't come at all. If there's no replacement, the next bus half an hour later might be so full that you can't get on.
Other needed upgrades include restoring the connection to Frederick County buses in Urbana, straightening out the tangle of bus routes around downtown Bethesda, and better weekend service. Funding is also needed for Metrobus's Priority Corridor Initiative, which would improve service on several of the county's highest-ridership routes.
The budget now goes to the County Council for approval. Hopefully, bus riders will find friends there.
Last year, DC announced a tentative deal to fund and build a new soccer stadium for DC United through a land swap. The details haven't been worked out yet, though concern is growing that the soccer team may ask more of DC than it will give back in return. By making sure DC United accepts more risk, the city can get a better deal.
Under the deal, DC would swap land in Buzzard Point owned by developer Akridge for the city-owned Reeves Center. Then, for $1 a year, it would
donate rent the land to DC United to build the stadium. While it appears better than the baseball stadium deal, considering how expensive it was, that's not a particularly high hurdle to get over.
Both the DC Council and local budget activists have begun to question whether the deal is fair or wise. And public skepticism about the deal could help drive a discussion about how to craft a better one.
A new DC United stadium and a successful franchise could be good for the city. It could bring in business and tax revenue and create opportunities for entertainment, local unity, prestige, and civic pride. These things have value, and it would not be unreasonable for DC to help DC United as long as the benefit exceeded the cost, because a stadium is unlikely to happen without some public contribution.
Even AT&T Park in San Francisco, which is often billed as privately financed, got help with the land and transportation improvements along with continued city service to the park. Without any contribution from the city, no stadium will be built and it's possible DC United could move.
So what would a good deal look like?
Have DC buy the land outright. They already own some of the land that the stadium sits on and they have the power to force landowners to sell if they need to. The District's lack of borrowing ability is something of an impediment, but it can probably still buy and assemble the land necessary for less than DC United can.
And the city is, by definition, invested in the area, so it can hold the land for a very long time if the deal goes south. This makes it a low-cost, low-risk way to help the team. The District would continue to own the land and could always sell it later.
Use a crowdsourcing campaign to pay for transaction costs. Assembling the land will require title work and environmental site assessments that will cost a lot of money. DC United fans are eager to have a stadium. Let them raise $1 million of their own money to make it happen.
Periodically, the Green Bay Packers sell "stock" in the team to raise money for stadium-related projects, but this stock consists mostly of a piece of paper that doesn't pay dividends. A similar campaign for DC United would demonstrate public support and allow those who care the most to pay the most, while reducing the city's burden. It would also be a way to get fans outside of the city to pay more.
Let the District pay for environmental remediation. Currently an industrial site, the future stadium location will require environmental remediation. The cost of the land plus the cost of remediation should be somewhat related to the land's value afterwards, suggesting that DC could recapture most of this expense when they sell.
DC United commits to pay for the stadium's eventual removal. One day, the stadium will reach the end of its life, and DC United should be responsible for restoring the land to the condition in which they get it. They could meet this requirement by either posting a bond to cover the cost, or paying insurance to cover it in case they go bankrupt.
DC United pays market-rate rent and full property tax, eventually. The term sheet has DC United paying $1 in rent per year and getting a reduced property tax for 20 years. By buying and preparing the land for DC United, the District is already taking on a large portion of the risk for them.
But the price of the land will include the potential rent they can charge. Paying $1 in rent regardless of revenue, as is currently proposed, means that DC is losing money on its land investment. It's a clever way to mask the contribution, but it isn't in the best interest of the city. Nor is reducing the property taxes.
If soccer is doing as well as its proponents argue, then covering these expenses shouldn't be too difficult. It would make sense to create a system for deferring these payments without penalty when revenue is low, or in the early years while the league is still growing. But they should be paid eventually, at an interest rate similar to what the city pays on its bonds.
Stadium-related sales taxes go to DC whether DC United profits or not. The current deal makes the tax revenue related to ticket sales, concessions, parking and merchandise available to DC United. In exchange, DC would share 50% of the revenue (which includes the tax revenue that DC would normally get) if DC United makes more than a reasonable profit.
This places all the risk on the city, but splits the reward with DC United. Because of concerns that the team will refuse to open its books or to move money around in such a way that it will never turn a profit, City Administrator Allen Y. Lew has stated that this part of the deal may not happen.
This is a good thing. It's far better for the District to be involved in normal government functions like collecting taxes, than trying to be a business partner of Major League Soccer. Being their landlord is enough.
Tax future development to pay for transportation and security. If the argument is that the stadium will generate spillover development in the area, then it can help pay for stadium-related costs, like security and transportation improvements. In addition, the city could also dedicate about $5.5 million in stadium-construction-related taxes it will earn.
Instead of a land swap, sell the land with open bidding. Once DC determines the value of the properties it proposes swapping, potential buyers willing to pay more should do so. DC and developers on the other side of the swap could split the excess value.
This is actually not too far from what DC is already proposing. But it moves more risk and cost to DC United, its fans and the landowners near the stadium that will benefit most from it, which is where those risks and costs should go. By allowing DC United to defer some payments in the early years, DC can create a cushion for DC United to grow into this investment. That's what a good deal would look like.
Last week, we looked at how much DC taxpayers have paid to build and maintain Nationals Park. What are they getting in return? And will the city's deal to build a new soccer stadium be worth it?
In 2003, baseball boosters hired consulting firm Brailsford & Dunlavey to estimate the benefits of a Major League Baseball team in DC. Later, they would help manage the design and construction of the stadium. They determined that the construction of a $272 million stadium would result in $5 million in one-time tax revenues. The stadium cost over twice as much, so if the same ratio holds, it produced $12.9 million in tax benefits.
But supporters also cite external benefits. Tourism would create jobs and tax revenue. Baseball and the stadium would be a cultural amenity, attracting concerts and other events. The stadium would also spur the redevelopment of Capitol Riverfront. But there just isn't any hard evidence that Nationals Park has led to any development.
The stadium didn't cause development
There were many other factors at play in Near Southeast that led to redevelopment, much of which occurred before the stadium site was selected. If the stadium truly were a catalyst, development would have occurred around it first, rather than scattered throughout the neighborhood.
On the 10 squares immediately adjacent to the stadium, only 2 smaller projects have broken ground: the Camden South Capitol apartment complex across the street and 55 M Street, whose main tenant DDOT moved there because of its proximity to the US Department of Transportation. Meanwhile, NoMa, where the stadium was originally supposed to be built, has experienced rapid development without one.
Research shows that stadiums do not spur development. In a survey of the economics of sports facilities, Siegfried and Zimbalist concluded that there is "no statistically significant positive correlation between sports facility construction and economic development." Even Brailsford & Dunlavey didn't assign a value to it at Nationals Park.
The stadium doesn't produce a lot of tax revenue
The stadium also generates some tax revenue, through hotel and restaurant taxes and income taxes from newly created jobs. Councilmember Jack Evans estimates the stadium produces up to $500,000 in tax revenue per game during the playoffs, which would require visitors to spend at least $3.5 million at hotels and restaurants.
Where Evans got that number is anyone's guess, but economists with the Kansas City Federal Reserve estimate that the average imported tax revenue for a MLB stadium is about $1.5 million a year. However, that includes tickets and parking, which we've already counted, and it assumes that 20% of fans are from outside of the metro area. But 85% of Nationals fans come from Virginia and Maryland.
Assuming there are 2.5 million tickets sold each year and each ticketholder spends an average of $33 outside the stadium, we get a total imported tax of ~$5.6 million. It's worth noting that that number is probably higher than it should be, because much of it represents hotel spending, but fans from Northern Virginia or Maryland are unlikely to rent a hotel room. It's also higher than Brailsford & Dunlavey's $4.7 million estimate.
The same study estimates the job creation and income tax benefits of a MLB stadium at $1.365 million a year. It's possible that DC's income tax take would be lower since, like its fan base, its employees are more likely to live in Virginia or Maryland.
Brailsford & Dunlavey also estimated that the city would collect $4.2 million in increased business franchise taxes from baseball-related activities, though it's unclear how they determined this and the city does not report it separately.
Is Nationals Park a cultural asset?
Stadium supporters say that venues and sports teams provide a significant cultural amenity in the form of entertainment, local unity, prestige, and civic pride. Having a sports team makes people happy, and a city has a legitimate role in helping people to be happy and making a city appealing. But what is this worth?
A 2001 study of the Pittsburgh Penguins' contributions to the public good tried to answer that question and put the value of the team between $4.20 and $6.94 per household. If we multiply $6.94 by DC's 260,136 households, we get a value of $1.81 million in public good benefits.
That value is for the team alone, not the stadium, which may add some cultural benefits by hosting concerts, weddings, and other events. So I'll round up to $2 million a year.
DC also spent $82.6 million for transportation infrastructure to support Nationals Park, but it has limited value outside of baseball. A second, $20 million entrance for the Navy Yard Metro station is nice, but is probably unnecessary outside of event days. Most of the $27 million spent on rebuilding the Frederick Douglass Bridge next to the stadium was to improve its aesthetics. But DDOT also resurfaced the bridge, did structural work, and added new streetlights and guardrails, extending its life and usefulness to travelers.
Therefore, in return for their investment, DC taxpayers get ~$11.2 million in jobs and tax benefits, another ~$2 million in public goods benefits, some development benefits, and a grab-bag of transportation improvements.
It's possible that the team's future success will lead to greater attendance and thus greater revenue to offset the stadium debt. But for now, DC is out $127.9 million and losing at least another $10.735 million every year on its stadium investment. Even Brailsford & Dunleavy's estimate, which stadium boosters used to justify the stadium, predicted the 30-year net present value of the stadium, which cost $670 million, to be just $526 million.
What about DC United?
DC pays $150 million for land and infrastructure improvements. DC United pays the same amount to build the stadium. If the team makes a high enough profit, then the city would get a cut. Much of the land is unused right now, so there would be less use of eminent domain.
But it's hard to see DC United Stadium providing as much in external benefits that Nationals Park does.
Major League Soccer just isn't as popular as baseball and it plays fewer games, so per team attendance is about one-eighth as high as baseball's. Assuming that visitors spend the same amount of money, the amount of expected tax revenue falls to just $2.9 million. That includes public good of the team, even though it's not a given that DC United would leave the DC area if they didn't get a stadium. It also includes sales taxes, even though there doesn't appear to be any plans for a special soccer tax.
The rent DC United will pay will be $1 a year, though DC United will pay up to $6 million a year in property tax, and any sales tax collected at the stadium could be paid back to DC United if they don't make a "reasonable profit."
This is not quite the same as guaranteeing DC United's profit, as the DC Fiscal Policy Institute has been saying, but it is a pretty sweet deal, and one that any other business in the city would love to have.
Meanwhile, DC is also contributing about twice as much for its stadium as the average MLS city does. As DCFPI points out, there is no cap on the land acquisition costs, so the price could easily go up, just as it did with the baseball stadium. The whole thing will be funded by complicated land swaps that lack transparency or the assurance that DC is getting the best possible price for its assets.
Though the costs of this stadium deal will be far lower, it is likely the benefits will be too. Those benefits would need to amount to at least $9.5 million a year to cover the $150 million price tag. In order for that to happen, the $150 million price to DC would have to hold steady and DC United would need to be successful enough to pay its entire property tax and generate revenue per attendee similar to the Nationals, while paying DC an additional $600,000 from profit sharing and covering its own security.
While DC stands to benefit if soccer does well, they're at risk to lose money if soccer does poorly. There may be a deal out there that can make breaking even a likelihood, but so far, this doesn't appear to be it.
DC has proposed building a new soccer stadium at Buzzard Point with help from public funds. The city already did this for Nationals Park, but did it work? We can find out by doing a cost-benefit analysis.
Building Nationals Park cost $701.3 million, according to a 2008 estimate. DC contributed $670.3 million, paying $135 million upfront and borrowing another $535 million. In addition, the city spent $82.6 million of federal money on upgrades to the Navy Yard Metro station, South Capitol Street and the Douglass Bridge. That doesn't account for all the costs, but it's the final dollar cost.
In this post, we'll look at money spent on the stadium and how much the Nationals contributed. Later, we'll look at the externalities caused by the stadium and what they mean for DC United.
What the stadium cost
In addition to the costs noted above, the District lost some existing revenue. Of the $670.3 million DC paid for the stadium, $57 million went to buying and cleaning up the land for the stadium. At that price, the land likely generated as much as $200,000-$500,000 in property taxes each year, but now it's been moved off of the property tax roll. Several of the displaced businesses have left town, as did some of the residents there.
There were some additional one time costs that are hard to quantify. The city took the land by eminent domain, which Jim Titus noted carries a social cost. District employees spent time and resources preparing for baseball, not all of which were billed to the stadium.
There are also continuing costs from the stadium and baseball. Paying for the stadium pushed the District to its debt limit, which means the city can't borrow money for anything else, including the new soccer stadium. That's why the District has offered to trade the land for a soccer stadium for the city-owned Reeves Center at 14th & U streets. The games have traffic and parking impacts that would not exist otherwise, and the District often spends tens of thousands of dollars per game for security. The DC Sports and Entertainment Commission must pay $1.5 million every year to maintain and enhance the stadium, and set aside another $5 million for a Contingency Reserve Fund.
Aside for the maintenance fund, none of these other costs have been accounted for. Ignoring those, a conservative estimate is that DC paid $675 million for the stadium, $82 million for transportation upgrades to support it, and another $1.5 million a year for maintenance.
How DC pays for it
DC's budget paid for the $135 million in upfront costs for Nationals Park, but Major League Baseball (MLB) could have paid for this. MLB bought the Expos in 2001 for $120 million and then sold them in 2006 for $450 million, turning a cool profit that would have easily covered this expense. But MLB only kicked in $20 million. The Nationals paid another $11 million.
To pay the bonds it issued to cover the $535 million stadium debt, the city created four sources of revenue: A gross receipts tax on businesses that make more than $5 million a year, a share of the utility taxes paid by every non-residential taxpayer, a 4.25% special sales tax on stadium sales, and rent paid by the Nationals.
The first two are just untargeted taxes on DC businesses, and are thus related to baseball only in that the revenue is dedicated to paying for the stadium. But the sales tax is a user tax on baseball fans and the rent is obviously a direct payment by the Nationals, so those can reasonably be counted as annual baseball contributions.
Unfortunately, when DC reports sales taxes from Nationals Park, they combine the special sales tax with the regular sales tax, which is currently 6% on the same items, and the 10% tax on concessions. Is this fair? All taxpayers pay the regular sales tax and concessions tax, which pay for things like roads, schools, and other things the DC government does. This approach to calculation suggests that baseball doesn't contribute to schools or roads.
I'm sure every business would like to dedicate their sales tax to paying off their construction debt, but that isn't how anyone else gets to do things. How much of the total sales tax is the special sales tax? According to Jonah
Kerry Keri in his book Baseball Between The Numbers, concession revenue is about 30% the size of ticket revenue and merchandise is about 10%. So, we could estimate the amount of the reported sales tax that is from the special baseball tax only at about 30% of the total sales tax.
In addition, much of this sales tax revenue comes from entertainment spending that would have happened without baseball. This is what economists call the substitution effect. "As sport- and stadium-related activities increase, other spending declines because people substitute spending on sports for other spending," sports economist Brad Humphreys said. "If the stadium simply displaces dollar-for-dollar spending that would have occurred otherwise, there are no net benefits generated."
Rent for the ballpark started at $3.5 million in 2009 and climbed to $5.5 million this year. From now on, rent goes up by a little less than 1.9% per year, which is below the 3.22% average rate of inflation over the last 100 years. That means that rent in real dollars will likely go down.
In addition, the Nationals would pay an extra $1 for every full price ticket sold after the first 2.5 million. So far, that's never happened. Meanwhile, property taxes on a $500 million stadium, which the Nationals don't pay, would total more than $9 million.
The total amount paid in baseball sales tax and rent for 2008-11 averaged $14.2 million, well below the $30 million a year total estimated in 2005 and the $23.5 million estimated in 2008. It would go up to $15.6 million if the Nationals were paying the full $5.5 million rent.
The debt service on Nationals Park costs the District $38 million, meaning that city taxpayers are paying between $22.4 and $23.8 million a year just on the bonds, or $30.8 million if we use only the special baseball tax. And then there's an additional $1.5 million a year in maintenance and more still on security.
Again, the Nationals could pay this. In 2010, the team made $36.6 million dollars in operating income, which means they could pay the additional bonds and the maintenance costs and still have $11.3 million in profit. Even if we use the discounted baseball sales tax and add in security costs, the Nationals would still be able to keep whatever part of $4.3 million they don't need for security. And of course, after 30 years, they would own the stadium outright. But that isn't how the deal was cut.
So far, DC taxpayers have paid $140 million to build and maintain the stadium, $82.6 million for stadium-related transportation upgrades, and another $24-32 million a year to pay off the debt and maintain the stadium. In the next segment, we'll look at the external benefits to see if DC is getting a return on such a large investment.
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