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

– Optimal Price: Pp

– Optimal Quantity: Qp

• Are these all the costs?• What if beer fumes affect

pizza makers?

P

Sp

D

QQs QP

Pp

Impact of Negative Externality

• Negative Externality– Private and Social Costs– Cost imposed on bystander

• Supply curve actually Ss

– Optimal Price: Ps

– Optimal Quantity: Qs

• Market “fails”– Overproduction

• What can government do?

PSs

Sp

D

QQs QP

Ps

Pp

Impact of Positive Externality

• Spose fumes make pizza makers more productive

• Private v. social benefits• Market fails again!

– Underproduction

• What can government do?

P

S

Ds

Dp

QQP QS

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

• $31M 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 $43.6M 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 $43.6M 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: 1st ripple– Subsequent spending raises income & spending

The Arithmetic of the Multiplier

Y=$X+$X*MPC+($X*MPC)*MPC+… Y=$X*(1+MPC+MPC2+MPC3+MPC4+…)

– 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 yit-yit-1 = b0 + b1*NTit + b2*NSit+…+ it

– 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

• Hotel revenues fall– Share tax with guests

P

Q

S

S’

$10

D

Pe

Pe’

Burden of Tax

• Before tax• Consumer Surplus

PD

S

Q

Burden of Tax

• Before tax• Consumer Surplus • Producer Surplus• Gain to society=sum

PD

S

Q

Burden of Tax

• Tax Shifts Supply Curve PD

S’

S

Q

Burden of Tax

• What is cost of tax to society?

• Consumer Surplus falls

PD

S’

S

Q

Burden of Tax

• What is cost of tax to society?

• Consumer Surplus falls• Producer Surplus falls

PD

S’

S

Q

Burden of Tax

• What is cost of tax to society?

• Consumer Surplus falls• Producer Surplus falls• Part of loss is transfer

PD

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

– Deadweight loss

– How to minimize DWL?

PD

S’

S

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