Public Teams, Private Profits

How Pro Sports Owners Run Up the Score on Fans and Taxpayers

By D. Stanley Eitzen

This article is from the March/April 2000 issue of Dollars and Sense: The Magazine of Economic Justice available at http://www.dollarsandsense.org/archives/2000/0300eitzen.html

This article is from the March/April 2000 issue of Dollars & Sense magazine.

issue 228 cover

The game is set to begin, and the home team jogs onto the field. As the excited voice on the public address system hails the appearance of "your Denver Broncos," or "your New York Yankees," the home crowd fans feel a tremor of pride: This team is our team, representing our city or region. We also have a financial stake in the players we’ve come to watch; the tickets we’re holding weren’t cheap. And in most cases we’ve helped underwrite, through our taxes, the stadium in which we’re sitting.

But the professional sports teams to which we give our allegiance are not really ours. With the exception of only one major league franchise — football’s Green Bay Packers — every pro team is owned by either an individual, a business partnership, or a corporation. The owner can sell or trade our favorite players. The owner decides how much we pay for our ticket. The owner can move "our" team to another city — even after getting massive public subsidies from the local community.

For the average fan, sports is about wins and losses, championships and heroes. But when we look at professional sports in economic terms — as a publicly subsidized business monopoly — we see a different picture. From this perspective, pro sports is an especially blatant case of corporate welfare.

Professional Sports as a Monopoly

An economics professor, trying to explain monopoly to a freshman class, could hardly find a more illuminating example than professional sports. The major leagues — the National Basketball Association (NBA), National Football League (NFL), National Hockey League (NHL), and others — maintain exclusive control over the supply of their sports. The United States does have some rules and regulations aimed at preventing monopolistic control of industry, but these might as well not exist where sports are concerned. Every league operates effectively as a cartel — a group of competitors joined together for mutual economic benefit.

The cartel arrangement gives participating teams the best of two worlds: It reduces competition among members, but still allows them freedom of action in areas not covered by the cartel agreement. Thus the league members agree on matters of common interest, such as game rules, number of teams allowed in the league, promotional campaigns, and media contracts. The competition takes place mainly on the field, when the athlete-employees of two teams meet in a game.

Being an economic cartel creates enormous benefits for a sports league, by reducing competition in areas that would otherwise cost owners more money. When teams bid against each other for the services of talented players, for example, the process is controlled by league rules regulating contracts, drafts and trades. In the annual college football draft, for instance, pro teams must take turns designating individual college athletes they wish to hire. The cartel also decides how many teams can be in the league, and where they can locate, thus limiting the number of potential employers the athletes can choose from.

Monopoly status also enables a league to negotiate TV contracts that benefit all members of the cartel. The 1961 Sports Broadcast Act allowed pro sports leagues to sell their TV rights as a group, without being subject to U.S. antitrust laws. As a result, national networks and cable systems may bid for the right to televise all the games for any particular league. In a deal struck at the end of 1997, Fox Television paid $17.6 billion for the right to televise NFL games until 2005. This amounts to about $75 million per team per season — a gain of $37 million per team from the previous contract.

Since owners rarely agree to add teams to a cartel, pro sports teams are scarce commodities — which means their worth appreciates much faster than other investments. In 1998, Forbes Magazine estimated that the 113 professional teams in football, basketball, baseball and hockey were worth an average of $196 million each — up from $146 million the year before.

In 1999, a group led by Howard Milstein bought football’s Washington Redskins for $800 million. This eclipsed the previous record for buying an NFL franchise, set only six months earlier when Alfred Lerner spent $530 million to buy the Cleveland Browns. As Washington Post columnist Paul Fahri summarized the situation: "In spite of periodic expansion by the leagues, the supply of franchises is strictly limited by the people who stand to gain the most from a restricted market — the owners."

Public Subsidies of Sports Franchises

Highly publicized, multi-million-dollar stadium deals are only the most visible way the public helps subsidize pro sports. In order to keep the gravy flowing, it’s common for team owners to tell the public that their teams are in financial difficulty — though this is usually a misleading claim. The subsidies come in three main forms: tax breaks, the provision of arenas at very low cost, and various "sweetheart" deals.

Tax Breaks: When a pro sports team is sold, the IRS considers the profits to be capital gains for the owner. Under current tax law these profits, like those realized from the sale of other U.S. businesses, are taxed at a lower rate than other sources of income — such as the paycheck of the janitor who cleans up the stadium after the game.

A second tax benefit is indirect, but hefty nonetheless. When a business buys game tickets, stadium food, or seats in a "skybox," then hands them out to its favored patrons, it is allowed to write off half the cost as a business expense. This means that taxpayers have to help corporations cover the high cost of sending their employees and business prospects to sporting events — which makes it more likely that companies will continue to offer this perk. It also helps maintain the inflated cost of tickets and skyboxes. This indirect subsidy alone costs the federal treasury more than $80 million in lost tax revenue.

Subsidized Stadiums: Perhaps the best known (and most reviled) form of public subsidy for sports teams is the provision of playing facilities at very low cost. Arenas and stadiums are essential to the financial success and spectator appeal of professional sports. Team owners seek new and improved facilities, usually at taxpayer expense, and typically get them. If they don’t, they’ll often move the team to a more accommodating locale.

Seattle Seahawks owner Paul Allen, for example, demanded that the state of Washington finance 75% of the cost of a new $425 million stadium for his team. Allen — the third richest person in the United States, worth an estimated $40 billion — warned that if he didn’t get the money, he would move the Seahawks. The state gave him what he wanted. (In an interesting note, both franchises in the 1999 Super Bowl, Tennessee and St. Louis, had been moved from other cities after their owners failed to get what they wanted from local taxpayers.)

This threat to move a team (some might call it "extortion"), whether openly stated or implied, has driven a construction boom. The "stadia mania" of the 1990s accounts for the construction or approval of 51 new sports facilities, with a combined worth of nearly $11 billion — most of it subsidized by taxpayers. Dean Bonham, CEO of a sports marketing firm, has predicted that by 2005, another 25 such projects will be built, at a cost of another $7 billion.

Sweetheart Deals: And the subsidies don’t end with the cost of the stadium. Fans need to be able to drive to the new facility — so the federal government pays the cost of new roads, overpasses, highway access, and the like. In addition, team owners typically get all or much of the revenue from parking, concessions, and nonsport events that take place in the new arena. Sometimes cities even provide owners with moving expenses, practice facilities, office space, land, and special investment opportunities to entice them to stay or to move their team to the city. Owners are usually allowed to sell the right to name the stadium or arena. For example, Baltimore Ravens owner (and former Cleveland Browns owner) Art Modell will receive $105 million over 20 years, for giving the name "PSINet Stadium" to the facility provided him by the city of Baltimore.

Owners Crying Poor

Even with all these advantages, owners will often resort to tricky accounting techniques to make it appear their teams are in poor financial condition. They do this to justify raising ticket prices, to get fans on their side in salary disputes with players, and to win support for further stadium subsidies. The claims by owners that they’re in financial distress are deceptive, however. Typically, the owner will cite accounting losses (expenses exceeding income) that are not really losses.

One reason is that team owners are allowed to deduct a portion of their players’ salaries as tax losses. This form of tax subsidy is unique to professional sports; no other business in the United States depreciates the value of human beings as part of the cost of its operation. In a curious twist of logic, showing the bias toward capital over human rights, players whose skills diminish with age do not receive a personal tax write-off; only their owners do.

Economist Richard Sheehan provides another example of creative accounting that, while not a tax subsidy to owners, is used to further misrepresent the fiscal health of professional teams. An owner will receive a large salary, which is then counted as a business expense that cuts into profits. In the NFL, some owners have paid themselves "salaries" as high as $7.5 million.

George Steinbrenner, owner of the New York Yankees, provides an egregious example: In the early 1980s he paid himself $25 million as a "fee" for negotiating the team’s cable contract. This fee, of course, was considered an expense for accounting purposes. The bottom line — what the public hears — is that the team is losing money, when in fact, the owner is simply pocketing profits as salary or in tax writeoffs.

As Toronto Blue Jays Vice President Paul Beeston explained, "Under generally accepted accounting principles, I can turn a $4 million profit into a $2 million loss, and I can get every nation’s accounting firm to agree with me."

Another way to manipulate the balance sheet so teams appear weaker financially occurs when a team is sold. The prospective team owner first creates a new ownership corporation. He then loans money to the company, which uses the loan as a down payment to buy the team. This loan, plus the interest payments, then has to be repaid to the owner from the subsequent income of the team, which lowers — for accounting purposes — the team’s stated profit. Once again, the owner pockets the money, and the accounting department records it as an expense.

Reverse Welfare

A large sector of U. S. society condemns giving social welfare to the poor. Far less criticism is directed at these subsidies to professional sports teams, which constitute welfare to rich owners and, less directly, to affluent athletes.

Currently, many federal and state politicians from both parties support the elimination of welfare, which is being replaced with "market-based" solutions to poverty. In 1996, the federal government made welfare assistance to families temporary, and withdrew $55 billion in federal aid to the poor. This approach was rationalized as necessary to rid the nation of a welfare system that was contrary to the American values of individualism, competition, and self-reliance.

At the same time, however, these same politicians, with the consent of the citizens, have encouraged a welfare system for wealthy team owners and their highly paid athletes. (Two exceptions are the voters of Minneapolis and Pittsburgh, who in 1997 both rejected tax increases to build new stadiums.) The system of subsidies that has emerged has created what economist Robert A. Baade calls the "reverse Robin Hood effect" — taking from the poor, the near-poor, the working class, and middle class, and giving to the rich.

When stadiums are built and paid for by taxpayers, there is a clear transfer of wealth from those taxpayers to owners and players. Urban scholar Mark Rosentraub says that "sales taxes paid by lower-income people produce excess profits that are divided between players and owners, all of whom enjoy salaries about which the taxpayers can only dream."

A stadium subsidy, in addition to defraying the owners’ construction or renovation costs, also increases the value of a team, so that when it is sold the owner reaps higher capital gains. In 1993, for example, baseball’s Cleveland Indians had a market value of $81 million. The next year, with the opening of their new Jacobs Field facility, the team’s value immediately jumped to $100 million, then to $125 million by 1996; last year, the team sold for $320 million — a return of 295% in the three years following the new stadium’s debut.

Transfer of wealth also takes place when luxury suites and club level seats are built, and the additional revenues they generate go to the owners. It’s estimated that Abe Pollin, owner of the Washington Wizards (basketball) and Washington Capitals (hockey), will receive about $28 million a year from the luxury boxes and club level seating provided in the new arena built for him in Washington, D.C.

Clearly the mayors, governors and legislators who work against welfare to the poor are more than generous with their handouts to the rich. And the wealthy team owners, who favor private enterprise and marketplace solutions in other business activities, insist on subsidies to maintain their lucrative professional franchises. Faced with what they consider inadequate subsidies, they’ll move their teams to new localities, where the public is more generous. The residents of America’s cities continue to put up with this hypocrisy — though by pouring money into a team, they actually make it less likely that many of them will be able to afford to see the games in person. The price of tickets — which is going up in any case — rises even faster when a new stadium is built. Thus the people who helped pay for the shiny new stadium may end up being priced out of entering it.

Some stadium commissioners are even requiring fans to buy a "personal seat license." In Charlotte, for example, the right to buy a season ticket costs $2,500. The result of practices like these is that the crowds in these new arenas are becoming more and more elite.

No matter what the public relations spin, the subsidies going to sports team owners are obviously welfare. Ironically, this is a kind of socialism for the rich, in which wealth is distributed upward — yet owners, civic boosters, editorial writers, and politicians, who sing the praises of the free market, defend it unabashedly.

end of article