Big Time College Sports Teams should lose their tax exempt status

 Was the focus on an opinion piece in the Washington Post, "It’s a strange ‘charity’ that pays fired football coaches $228M," calling attention to the high salaries of coaches and the outlandish costs of contract buyouts.  

In Pennsylvania, some county courts have ruled that the high salaries of nonprofit hospital presidents are such that local properties may/or not be eligible for tax exempt status, because the impact is similar to for profit hospitals ("“Eye-popping” executive salaries led these hospitals to lose their property tax benefits," Lown Institute).  But two years later, the Philadelphia Supreme Court reversed the decision ("Pennsylvania court rejects nonprofit hospital property tax exemptions," RSM).

One of the issues, is like with professional sports where private equity is increasingly buying into teams ("What is behind the growth of private equity in sports?," JPMorgan), is that the same thing is on the verge with college football and related sports.

In the past five years, private equity firms have acquired stakes in teams across all four of the major U.S. professional sports leagues (NFL, NBA, MLB and NHL), and nearly one in five teams now has some level of PE involvement. What’s driving this surge?

Sports team ownership was once the preserve of the uber-wealthy, and that is still largely the case. But as the total valuation of sports teams in the four major leagues approaches $500bn, and with the average NFL team valued around $7bn, some franchises are growing even beyond the means of the wealthiest buyers. Private capital investors taking minority stakes allow ownership and risk to be shared among a larger group of investors, bringing an infusion of cash for opportunities such as the development of stadiums and surrounding properties.

The University of California private equity investment fund wants to buy into the BIG Ten League ("Michigan is a hard no. Where does Ohio State stand on Big Ten private equity deal?" USA Today, "But some of the universities like Michigan, are opposed ("UC Investments puts $2.4 billion Big Ten deal on hold amid pushback from Michigan and USC," New York Times).  From USA Today:

As part of the proposed deal, UC Investments would earn 10% of the Big Ten’s media and sponsorship rights earnings for 15 years, after which it could sell its stake. The remaining 90% would be divided among the schools, with payouts varying based on a university’s earning potential.

... At a previously scheduled meeting of Michigan's Board of Regents in October, members Jordan Acker and Mark Bernstein criticized the idea of bringing private equity into the conference, calling the deal "reckless" and "short-sighted." Bernstein, the board's chairman, specifically compared the deal to a "payday loan."

One of those members went as far to say that Michigan would consider leaving the Big Ten when the current media rights deal expires in 2036 if the deal goes through without unanimous approval.

... USC has also expressed some concern with the deal, though it hasn't gone as far as Michigan. USC's issue seems to stem from its position outside the top tier of member institutions. The deal currently calls for a tiered distribution of funds based on a school’s market value. Ohio State, Michigan, and Penn State would be in the top tier and could receive as much as $190 million. The other schools would get anywhere from $110 million to $150 million.

But University of Utah, a decent football team but not often in the top 10, just pulled the trigger, and sold a portion of its sports operation to Otro Capital ("Utah approves partnership with private equity firm," ABC).  The expectation is that the sale will generate $500 million.

Otro Capital, based in New York, is the first for-profit company that will handle finances for Utes athletics. Decisions will still be made by athletic director Mark Harlan, but a new company called Utah Brands & Entertainment will oversee the department’s resources. Otro Capital will be a minority owner in Utah Brands & Entertainment. This will mark the first university partnership with a private equity firm in college sports.

(Rick Egan | The Salt Lake Tribune) Rice-Eccles Stadium on Saturday, Sept. 6, 2025.

Utah Brands & Entertainment will preside over tickets sales, stadium events, broadcasting, concessions, licensing, brand content and finance. However, coaches and athletes will remain with the athletics department. Fundraising will also remain with the school.

Also see "The risks and rewards of Utah’s private equity plans: Will others around college sports follow?," The Athletic.

Separately, Travis County, Utah is suing the University of Texas Club, a members-only private club that is an operation separate from the University, for property taxes ("Travis County sues UT Club over unpaid property taxes," Daily Texan).  It's reasonable as its a for profit business that happens to be located on nonprofit land.  There's really no public purpose.

Travis County filed the lawsuit on behalf of the Austin Independent School District, the city of Austin, Travis County, Travis County Health Care District and Austin Community College, which are all eligible to receive the county’s local property taxes, including taxes from the club, according to the lawsuit.

At the club’s cheapest membership level, it requires a $350 initiation fee and $125 monthly dues for non-faculty and staff members, according to the club’s website. It was recently renovated in 2024 and is the “epicenter of exquisite dining, first-class events, lively watch parties, vibrant social gatherings, and a celebration of Texas sports,” according to the website.

Increasingly, especially with massive television broadcast rights payouts, it seems that college football teams, and basketball, should be responsible for the payment of Unrelated Business Income Taxes (UBIT) as television revenues should not be considered a primary purpose of providing football as a university spectacle or opportunity for student athletes. 

====

Also see "Stadiums and arenas as the enabling infrastructure for "money-making" platforms" (2014)

Municipal finances face a shaky future

The entry, "The real lesson from Flint Michigan is about municipal finance" (2016) makes the point that in the US, financing systems for local government were created when the nation experienced rapid growth, and for the most part they've never been addressed in a substantive way since many cities have moved to a position of either equilibrium or shrinkage.

The problem with equilibrium or shrinkage is that personnel is the biggest cost for cities, and wages go up not down, not to mention the issue with retirees and pensions--typically local governments may stint on wages but in return offer great pensions often with health care, but these are underfunded creating significant financial overhang.

Center cities rely in large part on commercial property taxes, and the ancillary revenues that come in association with officer workers.

But the work from home phenomenon that has been driven by the pandemic is going to crash the value of commercial property, both in terms of office space and retail--which is worth a lot less when there are fewer customers ("Hold on tight: How NYC and state must prepare for the possible implosion of commercial real-estate values," New York Daily News).

The Philadelphia Inquirer has an article about this, "City finances, including Philadelphia’s, could go bad fast in this economy, bond expert says."  From the article:

Here are Kozlik’s observations on threats to city finance, many of which fell on his audience like a door slamming shut:

Scared borrowers. As recently as last spring, Kozlik and other analysts were predicting municipalities would borrow a record $500 billion this year by selling bonds to pension funds and other investors. But as interest rates have spiked, cities have been delaying commitments to long-term funding, and bond sales are unlikely to reach $400 billion, this year, or next, either. That translates into fewer jobs and business contracts, and a slower economy.

Rising interest rates. Pension funding, which has cost Philadelphia more than law enforcement in recent years, is no longer Wall Street’s main worry about local governments. Even though public pensions have been drained by the financial markets’ fall and many are badly underfunded, a recent survey shows analysts are even more concerned about rising interest rates and prices, the shrinking U.S. labor force, and divisive politics that prevents decisive policy, as causes for concern that cities will go broke.

Empty offices. Workers aren’t returning to office centers, including Philadelphia’s Center City. Nationally, restaurants, air travel, and apartment rentals have recovered, post-pandemic, but only half of workers have returned to office locations; in Philadelphia and San Francisco, it’s more like 40%.

Lower revenue. With offices shutting, property valuations and taxes are heading down, too.

Crime. Polls show Americans are more worried about crime, and less confident police will protect them.

Construction challenges. Labor and material shortages and cost increases have crimped construction to the point where, even if the federal government resumes billions in funding to cities, city managers have told Kozlik they would have a hard time spending it on projects in the near future.

Politics. Politicization of public policy, which has stalled Congress on immigration and other key issues since the 1980s, has been spreading among state and local governments. States like Texas are banning East Coast investment banks that have adopted anti-oil and anti-gun policies; in California, activists are pressing to punish banks that finance fossil fuels and weapons makers. What that means, in practical terms, is fewer banks available to sell public debt in those restrictive states, and, therefore, higher borrowing costs for taxpayers.

“The speed and magnitude of change, and the number of variables that are evolving is not being recognized by most people,” Kozlik said later in summary. “Most people across various industries are reacting to one or two changes in the landscape. Very few recognize the major transformation going on across the board with labor, technology, education, demographics, and politics.”

Communities growing have less at risk.  But rising prices and interest rates will press budgets, especially for capital planning.  

Constant pressure to reduce taxes is another risk.  But the other risk not mentioned is the constant pressure to reduce taxes.  For example, in Utah, the State Legislature does this every year "to share the benefits of growth."  But when you're growing you need to spend more money, not less, on infrastructure and other programs.  

Cities and counties face real pressure to provide the kinds of programs and facilities people want, as costs and demands rise.  

As conditions become more turbulent, cutting taxes increases risk.

The New York Daily News editorial suggests the following actions, to be proactive, in the face of declines in commercial property tax revenue:

• rethinking zoning. There’s no good reason that in a modern city, buildings are so rigidly categorized into classes, with minimal flexibility between light industrial, commercial, residential, medical and other. A nimbler New York would end unnecessary distinctions to let people find the best uses for space with minimal regulatory hurdles.
• budgeting smartly. Profligate spending that piles ever more recurring spending into the city’s $101 billion-and-growing fiscal plan risks throwing New York off a cliff if and when property receipts revenue plunges (personal income and related tax revenue is already expected to fall sharply this year). 
• Building up reserves and responsibly dialing back bureaucracy are the wisest insurance policies against sudden downward shifts — especially if those coincide with a recession.
• rethinking property tax collections, which have become unfair and incomprehensible over generations. Not only must New York rationalize levies on rentals, condos, coops and single-family homes; it must accept that golden-goose employers whose taxes have defrayed those from residences might not lay eggs forever.
• more sensitively implementing statutes that inflict huge costs on commercial real estate, like the law that will soon start punishing noncompliant buildings with big fines. That’s likely to accelerate a commercial exodus.
  

Local (and state) governments face massive budget shortfalls as a result of the Covd-19 Depression

Local governments--cities and counties--rely on two major sources of revenue, property taxes and sales taxes. See the 2016 blog entry, "The real lesson from Flint Michigan is about municipal finance."

The basic problem is that the system of finance for local governments was created during a period of rapid growth in the United States. It doesn't work well when growth stops, businesses close, etc.

These problems are only accentuated by the drumbeat of tax reductions, and limits on how much communities and states can build "rainy day funds" to be drawn on in times of crisis and penury.

Local governments are required to run balanced budgets. With most retail and hospitality outlets closed as a result of public health orders aimed at "flattening the curve" of the coronavirus, local tax revenues are down severely and are likely to be for much of the rest of the year.

This is already leading to furloughs and RIFs in some communities (e.g., "Coronavirus leads to staff reduction in one of Utah's biggest cities," Salt Lake Tribune).

The Washington Post ("More than 2,100 U.S. cities brace for budget shortfalls due to coronavirus, survey finds, with many planning cuts and layoffs") and Wall Street Journal ("Coronavirus Hits State and City Budgets" and "Smaller Cities Cry Foul on Coronavirus Aid") have articles on the issue.

State governments have the same issue.  Requirements for balanced budgets and revenue reductions and many states are already addressing the likely budget shortfalls ("Coronavirus deals one-two financial punch to state budgets," Associated Press; "Northam freezes new spending in the state budget amid coronavirus pandemic," Washington Post)

The Federal coronavirus stimulus bill has some provisions for providing aid to local and state governments, but the demand for help will probably be much greater than the amount allocated.

Bryce Harper's move to Philly will generate at least $5 million in wages taxes for the city, more if he lives there, compared to zero for DC when he played for the Washington Nationals

As I age, I become even more nuanced in my thinking -- what you can call "yes, but..." and I am weakening a bit on tax subsidies for sports teams and facilities--especially because in many situations, despite local opposition unless funding requires a public vote, the money will be provided to the team regardless.

I don't think there should be a blank check and there should be a cost benefit analysis in favor of reducing costs and maximizing benefits, and the application of a planning framework ("(Post Super Bowl) Towards a framework for maximizing community return on investment from professional sports venues," 2019) with the aim of maximizing benefits.

Game day income tax revenues from professional sports...  One of the benefits that every city and state has in the US EXCEPT DC wrt taxing professional sports players  is the ability to apply wage taxes on home and away players on the day of game.

What that means is that if you're the LA Lakers playing in Philadelphia, you end up getting taxed.  Or the Washington Capitals playing in Detroit, they get taxed.

exclude DC.  But in DC, because the city is banned by Congress from assessing nonresident income taxes--the primary aim is to protect the 70% of the people who work in the city but live elsewhere mostly in Virginia and Maryland--this also ends up restricting DC from taxing athletes on game day income.

The baseball player Bryce Harper will generate lots of wage tax revenue for Philadelphia. The Philadelphia Inquirer has an article ("How Bryce Harper’s Phillies contract could be a hit for Philly — in wage taxes alone") about how much Bryce Harper will pay in taxes to the city over the life of his contract, which is even more than it would be in DC, because the Washington Nationals proposed deferring 1/3 of the stated income, and not paying it out fully for more than 20 years.

Philadelphia Inquirer graphic.

From the article:

Outfielder Bryce Harper got a record-breaking $330 million, 13-year contract this week to leave the Washington Nationals and join the Phillies.

But there’s another number that’s almost as eye-popping: $12.6 million.

That’s the amount Harper could expect to pay in wage taxes if he made Philadelphia his primary residence for the duration of his contract, according to an Inquirer analysis.

Harper could save millions, however, if he lived outside the city, paying just $5.1 million in Philadelphia wage taxes in the next 13 years, the Inquirer estimated.
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Philadelphia’s wage tax, long among the highest in the nation, claims close to 4 percent of income earned by Philadelphia residents, and just under 3.5 percent for those who live elsewhere but work in the city.

Why the large difference between Harper’s tax burden if he lived in Philadelphia or elsewhere? Athletes who live outside the city have to pay wage taxes only for days that they work in Philadelphia. They don’t pay the tax for working days spent at spring training and away games — and that adds up for Phillies players.

If Harper decided to live in Philadelphia, however, 100 percent of his wages would be subject to the resident rate.

The article also discusses the "jock tax" on nonresident players:

Philadelphia also taxes visiting teams’ players for any time spent here — even if it’s just one game.

Harper, therefore, has already paid thousands of dollars to Philadelphia while playing for the Nationals. Last season, he played 10 games at Citizens Bank Park. Kidder said most baseball players have an average of 220 working “duty days” per year, meaning that about 4.5 percent of his salary could be taxed in Philadelphia for the time he spent here. He made $21.65 million in 2018, according to mlb.com, so Philadelphia would have collected nearly $34,000 in taxes.

Cities’ and states’ practice of taxing visiting athletes is known as a “jock tax.” In December alone, Philadelphia raised more than $2 million in wage taxes paid by sports teams, according to city revenue reports. It’s not the sector with the largest wage tax collections — workers in the health and social services sector paid more than $32 million in wage taxes that month — but large athlete salaries add up quickly when it comes to tax collections.

I don't think DC's tax reform is an exact model for the US

DC is the nation's only "city-state."

By that I mean that DC is a fully urbanized place (no rural or exurban land), a city with close to complete taxing power, including income taxes--with the huge exception that the city can't tax nonresident income, which among other effects means, unlike every other jurisdiction in the US, DC can't assess nonresident income tax on professional athletes (which is one way cities and states collect additional monies after subsidizing sports facilities).

Last week, the New York Times columnist James Stewart suggested ("For tax reform lessons, Congress needn't look far") that DC would be a great example for Congress to consider as a model for how to go about "tax reform" -- although tax "reform" if by reform you mean improvement seems to be off the table in favor of a tax cut for the rich.

From the article:

... in 2014 the council cut corporate and business taxes, reduced individual rates for everyone earning less than $1 million and broadened the tax base by eliminating many loopholes.

In the ensuing years, economic growth and tax receipts have surged, enabling the city to accelerate cuts that were being phased in. The legislation was not revenue neutral, in the sense that broadening the tax base offset the reduction in rates. It was a tax cut. But in a development that would surely warm the hearts of pro-growth Republicans, the economic lift was so strong that tax receipts increased, and last year hit a record.

Tax cuts were simultaneous with significant growth.  The problem with the argument is that DC's economy and population have been growing significantly over the past ten years.  It's easy to "cut" taxes when your economy is growing.

In the last nine years--despite the 2008 Great Recession--DC's population has grown by slightly more than 110,000 people ("D.C. population reaches four-decade high," Washington Post), an increase in population of almost 20% over the base number of 570,000 residents in 2007.

From 2014 when the tax cuts were approved and 2016, the population increased by about 3%, from 660,000 to 680,000. 

New condominium and apartment buildings continue to open and plans for large mixed use developments continue apace.

Income tax and property tax revenues were already increasing at an increasing rate.  Most of the new residents, excepting children, are paying out plenty in terms of income and sales taxes, and property taxes for home owners.

It's easy or at least comparatively easy to cut income taxes when the number of earners is growing and it's easy to cut property taxes when the number and size of buildings is growing, along with property values and assessments.

Plus, DC's property tax base is insulated somewhat by the inclusion of a hefty tranche of highly valued commercial property, primarily but not limited to Downtown DC.  DC's commercial property is highly valued in part as a safe place to park money from overseas, generated in countries with lower economic returns and/or more unstable economies.

Expanding the range of sales taxes had limited impact on revenue.  Complementing tax cuts by expanding somewhat the range of goods and services being taxed is likely a minimal proportion of the total revenue mix compared to the large increase in the number of people paying income taxes and rising property tax revenue from residential and commercial property.

Kansas as a lesson.  Although DC's economy is much stronger than that of Kansas, which has been wrecked by Governor Brownback's application of classic Republican supply-side tax cuts, which decimated state and local government funding, especially for schools because there was no increase in "animal spirits" and tax revenue in response ("Why Sam Brownback's tax cuts failed to make Kansas thrive," Bloomberg View; "The Kansas tax cut experiment," Brookings Institution), many of us worry about the tax cuts because of potential threats to the local economy that are out of the hands of the local government.

The economic winds buffeting DC are not favorable, and this will continue through the entire Trump Administration.  First, local employment and commercial building activity is very much susceptible to the vagaries of federal government policy, which these days is focused on reducing government spending, not increase it--except for the military.  This has a disproportionate effect on the regional economy of Washington ("Uncertainty in Washington is hurting D.C.'s job market, economists say, Post).

For example, a neighbor down the street works for a unit of the Labor Department, where next year's budget proposal calls for the unit to be downsized by 80% and hundreds of people will be fired.  Extend that example across most government agencies and you can see a tremendous negative impact on the local economy.

And the increase in military spending won't impact DC that much, because most of the local beneficiaries would be located outside of DC, in Maryland somewhat and Virginia especially.

Second, the commercial office sector is slowing anyway as federal agencies move out of DC proper,  law firms merge and contract, and as more companies reduce the amount of space per worker, leading to reduced need for commercial office space.

-- "Implications of a Trump/McConnell/Ryan Administration on DC's commercial real estate market," 2016
-- "Why Mayor Bowser is right to be leery of systematic lowering of taxes," 2015

Third, because the city's population is growing there is a greater demand for civic amenities, infrastructure expansions and improvements, and clamoring for various social programs such as an increased amount of services for the homeless and expansion of the amount of affordable housing.

-- "Town-City Management: We are all asset managers now," 2015

But this comes as the city's debt financing cap is close to being exhausted.

Conclusion.  Fortunately the city is in a much different place than Kansas.   The city is much smaller, urban, with fewer economic responsibilities.  But imagine the impact on risk management, predictability, and perception if there is a federal government shutdown, or Congress refuses, if only for awhile, to not raise the debt cap, and long term plans by the Republicans to shrink the federal government with its catastrophic effect on the local economy?

Then it's not out of the question to make the assessment that these tax cuts were foolish, that the city failed to plan for severe exogenous economic shocks that were foreseeable.

A brief comment on local government finance: Fairfax County, Virginia

In "The real lesson from Flint Michigan is about municipal finance," and other writings, I make the point that the system in the US for financing local governments was created during the time when the country was growing furiously, and since it was based on property taxes, local governments could rely on growing revenues.

Being dependent on property taxes is increasing risky.

Now, being reliant on property taxes puts many governments at financial risk, even if they are still successful and growing, because legacy programs cost more to maintain over time, and new programs cost more money, etc.

Earlier this week, the Washington Post had a story ("Fairfax, Va.’s largest county, again trims budget requests as revenues stay tepid") about financial issues in Fairfax County, Virginia. 

Fairfax County is economically successful, with more than one million residents.

According to the World Atlas ("Richest Counties In The United States") Fairfax is the second wealthiest counties nationally when rated by median household income (interestingly, Loudoun County is first, Howard County in Maryland is third, and Arlington County in Virginia is fifth).

But Fairfax's checkbook is not unlimited. From the article:

Long’s proposed $4.1 billion budget reflects a local economy still feeling the effects of the 2008 recession and 2013 federal sequestration cuts and a county bracing for the possibility of further reductions in government spending by the Trump administration.

County revenue — generated mostly by real estate taxes — increased by $88.2 million last year, not enough to cover rising pension costs, a growing public school student population and more elderly and low-income residents seeking government aid in a county of 1.1 million residents.

“Slow economic growth is, I think, here to stay,” Long told the county’s Board of Supervisors during a bleak presentation that also fell $13 million short of what agencies requested for disability services, public safety, maintenance of county trails and raises for nonschool county employees. ...

Long’s budget also leaves about $21.7 million in planned police department improvements unfunded, including $5.3 million for a “Diversion First” program that steers people with mental illnesses to counseling instead of jail.

It does not cover about $6.7 million in services for people with disabilities, and defers maintenance of county sidewalks and trails.

According to the article, property taxes make up 65% of the county's revenue stream. Even though parts of the county are booming, primarily those areas served by transit, other parts are not, and commercial property values are dropping in those areas that are more automobile-dependent.

When the nation's second richest county has problems financing local government, there is no question that the system of local government finance that we have created isn't working for today's conditions.

The article on Flint covers other potential revenue streams, including income taxes.

Cities with low property tax capacity.

=======
Toronto.  Note that this is a problem in other countries.  Toronto Star columnist Edward Keenan wrote about that city's budget travails despite being a world city ("What happens to Toronto when things get tough?")  From the article:

Toronto is a fantastically prosperous city: growing faster than almost any other place on the planet, enjoying a period of sustained economic boom, able to brag of being home to “12 key business sectors” (it is the most tax-competitive city in the world according to KPMG) that keep the city “resilient” and its population relatively wealthy.

And for all that, Toronto is a city that expects to shutter 7,500 units of social housing in the near future because it will not spend the money to keep it from falling apart.

Furthermore, after giving signs of agreement, in January, the Provincial Government refused to give Toronto authority to charge tolls on the city's two locally-controlled expressways, instead giving cities more gasoline tax revenues ("No tolls? Tory wants provincial money for DVP, Gardiner," Toronto Globe & Mail).  This was done to placate suburban jurisdictions, whose residents would pay the bulk of tolls were they to be assessed.

But Toronto countered that this will raise less money than tolls, and that unlike locally-controlled tolls, they will not be able to do debt financing against monies handed down and controlled by the Province, thereby reducing the city's ability to finance transit infrastructure.

The UK.  And cities in the UK are totally screwed by the central government's austerity program. There, the national government provides most of the funding for local government, and mandates, and by contrast to property tax collection in North America, local governments don't have similar revenue streams.  Local governments are finding their budgets cut by 50% ("Britain's local councils face financial crisis," Economist).

Medicine Hat.  Interestingly, Medicine Hat, Alberta, which through a fluke of history maintained ownership of the natural gas resources underneath the city, is planning on creating the equivalent of a sovereign wealth fund to better reap the benefits of this revenue stream going forward ("A Canadian City Thrives on Gas, Like a 'Wealthy Little Country'" New York Times).

Over the decades, the city has used the revenues to keep taxes low, and to recruit industry, including providing free or reduced price natural gas.

Now, with industrial decline and a fall in the price of gas and oil, the city needs to be more judicious about the use of this revenue stream.  Hence the proposal to create a wealth fund.

Oklahoma.  The Governor, Mary Fallin, proposes adding a variety of services categories to the sales tax, which would raise almost $800 million for cities and counties, and $900+ million for the state ("Gov. Mary Fallin's tax plan clarifies choices in Oklahoma," Daily Oklahoman). From the article:

The proposal is based, in part, on a desire to overhaul Oklahoma's tax code so it reflects the modern economy. Fallin's budget plan notes that, according to Bureau of Labor statistics, in 1939 service industries employed more people than manufacturing by a ratio of 2-to-1. Today that ratio has grown to around 5-to-1.

This means a sales tax applied primarily to goods reaps far less money than in decades past. Yet the impact of addressing that discrepancy in a single year is jarring to many citizens.

The master list.  Expanding the activities eligible for sales taxes is another item that should be added to what I thought of as the master list in the Flint blog entry.  

Yet another item would be dealing with "payments in lieu of taxes" for properties held by certain nonprofits, such as colleges and universities (past blog entry, "Changing the structure of local government revenue generation," 2013).

A correction (and update) to a March post on municipal finance: addition of land transfer tax to the list

The piece "The real lesson from Flint Michigan is about municipal finance" from March listed seven solutions for better harmonizing tax revenues with the financial needs of local governments and to provide more stable funding for local governments in spite of economic conditions.

1. Local income taxes.
2. Sales tax sharing.
3. Metropolitan tax base sharing.
4. Creating a consolidated "state/local" income tax.
5. State revenue sharing.
6. Multi-jurisdictional special service (tax) districts.
7. Sin taxes for the arts.

The point of the article is that the system for funding local governments in the US was created when most places were growing, and it turns out the methods don't work well when communities aren't growing and/or face financial problems such as loss of local industry.

For example, it's tiresome to read about how Democrats ran Flint into the ground when the reality is that Flint's economy was destroyed by the shrinkage of the manufacturing operations of General Motors--which now has fewer than 1/10 the number of employees in the city than it did at its peak.

With loss of manufacturing plants comes loss of jobs and loss of personal and corporate income, and declining tax revenues from residential and commercial property as economic prospects wither.

That's not about "the Democrats" on the City Council, that's about economic depression at the local and metropolitan scale.

What about the land transfer tax? Royson James' column, Eventually, we'll all have to pay for this," in the Toronto Star about Toronto's coming financial predicament as the city has big demands on its finances and the lowest property taxes in the Toronto region mentions in passing how Toronto's land transfer tax, authorized in the 1990s, has boosted the city's revenues, allowing it to coast somewhat, especially because of the burgeoning residential property market, which generates a lot of revenue from this tax. (Like SF, Toronto also raids the transit agency revenues for monies for other purposes.)

DC is one of many jurisdictions that has this tax, assessing 1.1% of the sale price on both the buyer and seller for properties under $400,000 and 1.45% for properties over $400,000 and for commercial property.  Technically, the tax on the seller is the land transfer tax and the tax on the buyer is a Deed Recordation Fee.  There are variations in the tax when certain ownership conditions change.  The tax is not triggered on mortgage refinancings when the property owners do not change.

-- Real Estate Transfer Taxes assessed in the US, National Council of State Legislatures

Adding the land transfer tax to the list.

1. Local income taxes. (local jurisdiction)
2. Land transfer taxes.  (local jurisdiction)
3. Sales tax sharing. (county)
4. Metropolitan tax base sharing. (metropolitan)
5. Creating a consolidated "state/local" income tax. (state)
6. State revenue sharing. (state)
7. Multi-jurisdictional special service (tax) districts. (metropolitan)
8. Sin taxes for the arts. (metropolitan)

Issues with a land transfer tax. It made me realize that I forgot to include that tax in the list, but at the same time, it's a problematic tax.  Regardless of the situation, real estate interests complain about it as a disincentive.  And in order to be able to assess the tax, while not encouraging people and business to locate elsewhere where such a tax isn't charged, your community has to be highly desirable.

In terms of generating revenues, it's great in a booming economy, revenues crash in a falling economy when new construction declines, and in declining communities, like Flint, Detroit, or small towns, it can be seen as a disincentive to new development, when new development is desired but hard to "pencil out" financially--and were such a tax in place, waiving it as part of a package of incentives means that it isn't all that reliable a source of revenue.

Reordering into a more logical and hierarchical framework.  From a hierarchical standpoint, the list should be reordered, depending on what level of government or government cooperation is required to be able to assess, collect, and distribute the revenues.  Note that all the taxation forms have to be authorized by the state.

Changes have to be made at the local, metropolitan, or state level to effectuate any of these taxing methods.  Also I would argue that land transfer taxes could be assessed at the metropolitan scale and added to the monies shared through metropolitan tax base sharing systems, as discussed in the original post, which could be added to item 4.

1. Local income taxes. (local jurisdiction)
2. Land transfer taxes.  (local jurisdiction)
3. Sales tax sharing. (county)
4. Metropolitan tax base sharing. (metropolitan)
5. Multi-jurisdictional special service (tax) districts. (metropolitan)
6. Sin taxes for the arts. (metropolitan)
7. Creating a consolidated "state/local" income tax. (state)
8. State revenue sharing. (state)

Update: Kansas City-St. Louis earnings tax.  As an example of how state action is required to authorize the ability to tax at the local level, the State of Missouri authorized St. Louis and Kansas City to have earning taxes on residents and nonresidents.  As discussed in the earlier post, this can be a problem in terms of spurring some businesses to relocate out of the city.

In KC, the 1% tax on earnings generates 40% of the city's revenue and half the revenues come from nonresidents working in the city.

But it can be a problem because of outside forces focused on an anti-tax agenda.  In Missouri, St. Louis billionaire businessman Rex Sinquefield ("King Rex" POLITICO) argues that the tax is bad, and has successfully got the Missouri Legislature to pass legislation requiring that the tax be re-authorized every five years, and he helps to fund local campaigns seeking to overturn the tax.

But in the most recent vote in Kansas City last month, the tax was supported by voters overwhelmingly ("Kansas City voters overwhelmingly approve earnings tax renewal," Kansas City Star). After all, why wouldn't residents be supportive of a tax that generates a fair amount of revenue from non-residents?)  In April, the tax was reapproved in St. Louis.

In spite of failures to overturn the tax in local elections, anti-tax interests continue to lobby the Missouri Legislation to de-authorize the local earnings tax.

The real lesson from Flint Michigan is about municipal finance

Aaron Renn of Urbanophile has a podcast about Flint, based on a talk he gave in Midland, Michigan (home of Dow Chemical), and it reminded me that I have been meaning to write about the "real lesson from Flint."

-- watch on You Tube.

Well, there are actually more lessons, others being "if you run a water system be sure to properly treat the water," and "if you regulate water systems be sure to ensure they're doing what they are supposed to be doing."

A fourth would be "cover ups and misdirections come to light eventually, all you're doing is putting off the reckoning."  (A fifth lesson is a lot of times there is no real reckoning, some resignations and Congressional hearings notwithstanding.)

Just like I am sick of prognosticators writing about Houston's success being due to a lack of zoning when it was really a result of Houston's being the economic center of the oil and gas industry--which is why the economy there is tanking now, just as it has during other oil industry downturns dating to the 1980s-- I get tired of comments on newspaper articles about how urban governments run by Democrats have run their cities into the ground.

While there is a bit of truth to that when it comes to the pensions issue, and the way that municipal labor unions can dominate the local political agenda, the reality is much more complicated.

The political stripe of the people in charge doesn't matter all that much.  In a paradigm of suburban outmigration, cities were consigned to economic failure, as they lost population and business activity.

Flint, "Vehicle City" no longer.

Flint/Genessee County Michigan is a perfect example, as General Motors and parts suppliers provided the bulk of jobs and property and income tax revenues collected by the city and county, and as GM closed most of its plants--now employing 5,000 people from a peak of just over 82,000 employees in the city--how could the economy not tank?

Furthermore, the multiplier effect of an automobile industry job was calculated at 3.6, and while not all of those jobs would have been located in the immediate area, it's obvious that as the company downsized its Flint-area operations, non-company employment would also take a big hit

 ("GM Weld Tool Center closing: [Timeline of] General Motors history in Flint," [2013] Flint Journal; " General Motors closes Buick City complex in Flint, Michigan [1999]," WSWS; The Economic Impact of the Automotive Industry on Urban Communities)

How can local elected officials--Republican or Democrat--deal with that level of economic destruction?

The basic lesson is that the US developed a system of financing local governments that is an artifact of the period in which it was developed, that of significant economic growth of the US economy.

A now vacant GM plant.  Flint Journal photo.

Local governments are typically funded from a few sources--property taxes are the largest source, sales tax revenues (usually shared with the state), fees (permits, rentals, etc.), and funds from state and maybe the federal governments--are the primary sources.

When a local economy tumbles, usually property tax and sales tax revenues tumble precipitously.  And if the state economy is in free fall simultaneously, state transfers to local governments typically fall precipitously also.

The financing system for local government, primarily reliant on commercial and residential property tax revenue, works only when communities are growing or at least, stable.

When local economies are contracting and property values are dropping, and property is abandoned, it doesn't work.  And it doesn't matter who is running the local government, Republicans or Democrats (although Democrats tend to be in charge in cities), they lack the tools to be able to respond, other than cutting government to the bone, which they can't do, because they still have to provide services like water, policing, schools, etc.

Photo: Thomas Simonetti, Flint Journal.

Putting off pension liabilities is one example of this.  If your revenues continue to grow you can probably pay off future pensions.  If you're in a phase of slow or no growth, or contraction, you can't.

In fact, from a financing and operating standpoint, many of the local government institutions that have been created work well only in times of growth, and since at best the economy is at a reasonable steady state, and massive growth is not likely to occur in most places, most local governments are seriously pressed economically.

It's even worse in those places, like California, which have laws (because of Proposition 13 in California) which seriously restrict the ability of local governments to raise taxes.

Sure, Flint's economics deteriorated to the point where the state appointed a receiver, and it was the receiver, seeking to save some money, who started the chain of decisions that resulted in the "Flint Water Crisis" (MLive).

But Flint's economic disaster was pre-ordained, once GM began closing plants--ultimately 93% of GM's employee base in Genessee County disappeard..

Some solutions to provide more stable funding for local governments.  Below I list seven solutions for better harmonizing local tax revenues:

1.  Local income taxes.
2.  Sales tax sharing.
3.  Metropolitan tax base sharing.
4.  Creating a consolidated "state/local" income tax.
5.  State revenue sharing.
6.  Multi-jurisdictional special service (tax) districts.
7.  Sin taxes for the arts.

I recommend #4, #5 and #6 as a package.  #3 is great, but it's better to do it at the scale of an entire state, which is what #4 does.

The problem though is that all of these solutions require state government approval, and as the writings of Gerald Frug point out, state legislatures aren't inclined to pass laws that help cities, and each of these solutions requires state authorization.

And note that these solutions are designed for communities that are functioning somewhat at a basic level.  What happened to Flint's economy is the equivalent of the Great Depression or a Natural Disaster like a volcano eruption, earthquake, hurricane, or tornado that completely wipes out a community.  A local income tax won't generate much revenue when the local economy is leveled.

1.  Local income taxes.
Counterproductive.  Relatively "easy" to do if state authority to do so has already been granted.  Very difficult if approvals aren't already in place.

This is a sort of solution, New York City has an income tax as do many other cities.  The micro-city of Highland Park, Michigan had an income tax when Chrysler Corporation was based there. Philadelphia has a wage tax.  Communities that are business centers, with lots of employment and where many of the employees don't live in the city, benefit from such taxes on non-resident earners.

But the problem with a local income tax is that if other area jurisdictions do not have the same kind of taxing system, businesses and residents are encouraged to relocate away from those communities with higher taxation regimes.

That is a particular problem for Philadelphia, which unlike other major cities on the East Coast (NYC, Boston, DC), has not been successful at maintaining its place as a headquarters for business, which instead continues to move to New Jersey (such as the Philadelphia 76ers), Suburban Pennsylvania, and Delaware (which doesn't have state or sales taxes--although this may change over time given the changes coming for the Dupont Corporation, which had the same economic impact on Delaware's economy that GM once had on Flint, and Michigan more generally).

From the Philadelphia Inquirer article "To see impact of wage tax, just look at City Avenue":

The office buildings spread along City Avenue starkly illustrate how Philadelphia's taxes hurt its economy.

The north side is packed with office buildings full of high-paid workers. On the south side, there are low-paying retail jobs and few offices.

Both sides of the busy commercial street are served by the same highways and public transportation. Workers have access to the same restaurants, gas stations and housing.

But the north side, where there is no wage or gross-receipts tax, has 93 percent of the avenue's office space - 2.6 million square feet. It is in Montgomery County.

The south side, in Philadelphia, has 7 percent - a mere 200,000 square feet, according to the Central Philadelphia Development Corp.

"Everyone would prefer to be on the other side of City Line," said George Goldstone, chairman of Herbert Yentis & Co., a Philadelphia development company on City Avenue.

"The only way we can sell a vacancy on the city side is by offering a lower rental to compensate for the taxes," he said. ...

By every measure, the tax burden on Philadelphians is 20 to 30 percent higher than in virtually every major city in the United States, including Baltimore, Detroit, Los Angeles and Washington.

2.   Sales tax sharing.
Good practice.

In states where the county, not individual jurisdictions, collects sales tax revenues, there may be instances where certain jurisdictions receive revenues from the county based more on need, rather than in terms of how much revenue was generated within the community.

This can't happen in Virginia, because cities are legally independent of counties.  This creates significant competition between cities and between cities and counties for tax-generating businesses. A key example is between Colonial Heights and Petersburg, Virginia.  Petersburg is the county seat and back in the day of traditional commercial districts, was the premier destination in the area.  These days, Colonial Heights is where the major regional shopping mall is located, and it generates the bulk of sales tax revenues in the area, but there is no vehicle for tax sharing between the jurisdictions.

3.  Metropolitan tax base sharing.
Fair.  Shares the value of growth.  Few states have authorized this kind of tax sharing system.  Does not work across state boundaries.

To counter income tax-spurred outmigration and intra-metropolitan competition for businesses generating high tax revenues, in Metropolitan Minneapolis, local governments agreed to create a pool of a portion of tax revenue derived from new growth, and to share the revenue with communities not experiencing growth.  It is intended to minimize the negative impact of large employers/tax generators moving from one jurisdiction to another.  From the book Regional Planning from a Sustainable America:

... the Twin Cities Fiscal Disparities program ... places 40 percent of the growth in commercial-industrial tax base in each municipality in each year into a seven-county, regional pool and then distributes the tax base back to participating municipalities and school districts based on tax base and population. The re-distributed tax-base is then taxed by each location at its own tax rate.

While part of Hudson and Bergen Counties in New Jersey operate a similar program (NJ Meadowlands Tax Sharing Program), this type of program is exceedingly rare, and in any case, only works in areas that are still experiencing some level of economic growth, even if the pattern of growth is varied.

And judging by the experience in New Jersey, there can be plenty of discord amongst the municipalities participating in the program, both those communities paying in ("Frustrated over Meadowlands tax-sharing program, Secaucus mayor shoots off letter to Gov. Christie," New Jersey Star-Ledger), and receiving harmonization payments ("Meadowlands tax-sharing program modified after North Arlington protest," Bergen Record).

From the Star-Ledger article:

Created in 1973, the Meadowlands District Inter-Municipal Tax Sharing program is designed to take money from municipalities within the 14-town district that reap benefits of development and share the wealth with towns with severe restrictions on development.

In his letter to the governor, Gonnelli said "we were told by the Meadowlands Commission Executive Director Marcia Karrow that while the issue was being taken seriously, the Governor's Office was having a difficult time understanding tax sharing."

Of the four Hudson County municipalities in the district, Secaucus and North Bergen pay into the shared pool, while Jersey City and Kearny receive annually. Secaucus is expected to pay nearly $2.7 million into the fund this year, while Kearny is expected to receive more than $4 million from the fund.

Last year some of the paying municipalities within the district temporarily withheld payments in an attempt to get state officials of focus on what they called the unfair tax-sharing program.

A program like this is impossible to create across state lines, and many metropolitan areas (New York City, Philadelphia, Washington, DC, Chicago, St. Louis among others) have multi-state boundaries.

4.  Creating a consolidated "state/local" income tax.
Probably the best solution, though still subject to decline in revenues in recessionary periods.

Most state governments assess an income tax (Washington State and Delaware are key exceptions). Maryland is one of a handful of examples where the state income tax is actually a combined state/local income tax, where the counties and Baltimore City include a "piggyback" tax that ranges from 1.25% to 3.2% of the state tax obligation, depending on the jurisdiction.

A consolidated filing and collection process simplifies matters for taxpayers and the local governments.

While at the local level, the system favors counties over separately incorporated cities (e.g., citizens in cities like Rockville or Takoma Park are overtaxed compared to residents in unincorporated parts of Montgomery County), the local governments have a more diversified revenue stream compared to those places which rely on property taxes for the bulk of their revenues.

According to the Tax Foundation, this kind of system, while rare, is also in place in Indiana, Ohio, Pennsylvania, Michigan, and Iowa, although depending on the state, not all jurisdictions, which can extend to school districts, assess such a tax.

5.  State revenue sharing.
A pretty good solution, though still subject to decline in revenues in recessionary periods.

Until the Reagan era, the Federal Government shared some tax revenues with center cities ("Federal Revenue-Sharing - Born 1972. Died 1986. R.I.P.," New York Times).

Some states still have a form of intra-state revenue sharing.  Probably the best known example is Minnesota's Local Government Aid program, which was created at the state level in return for localities agreeing to not assess local income or sales taxes ("The basics of local government aid in Minnesota," Minnesota Public Radio).

While not all cities receive LGA, it massages the economic differences that otherwise might exist between localities, so that all communities can offer comparable services for its residents.  Instead of there being a system of separate local income and sales taxes, Minnesota shares state income and sales taxes with localities.

-- City LGA Program, Minnesota House of Representatives
-- County Aid Program, Minnesota House of Representatives

To make up for severe disparities, like with Flint or other declining cities in a state, I'd recommend a system of "Local Government Aid/State Revenue Sharing" in addition to a consolidated state/local income tax.

6.  Multi-jurisdictional special service (tax) districts.
A pretty good approach, good for cost reduction, but not a game changer.  Because costs rise over time, this creates a dynamic where some jurisdictions may opt out.  In fact, seeking to lower costs in the face of legacy systems is the economic justification for outsourcing/privatization of services typically provided by government agencies, transit being a particularly common example.

These aren't new--utilities and regional park systems are typically funded in this way.  Examples include the Huron-Clinton Metropolitan Parks Authority in Southeastern Michigan ("13 parks of the Huron-Clinton Metropolitan Authority are made for fun all year," Woods-n-Water News) created in 1939 and funded by a property tax assessment covering multiple counties or the Northern Virginia Parks Authority--which started as a multi-jurisdictional effort to protect water resources.

Water service is a primary example.  Baltimore City's water system also serves Baltimore and Howard Counties.  Detroit's system is multi-county as well, serving most of Southeastern Michigan.

A problem that arises with these services is common to any system, legacy costs, aging facilities, pensions, etc., lead to higher costs over time, and so it is always possible that by opting out, the locality will start off at a new lower cost basis.  (Note that the "Detroit" water authority has been transferred to a multi-county Great Lakes Water Authority--not unlike how the State of New York took over "New York City" transit--to spread out costs, although in the Detroit instance, some activists criticize this as the suburbs stealing the city's assets.  See "Great Lakes Water Authority takes over regional operations," Oakland Press.)

In fact that was what spurred Flint to seek "less expensive water" and is why Mid-Michigan governments are creating their own water authority, so that they don't have to pay towards maintaining the aging water service infrastructure emanating from Detroit ("Karegnondi water system rooted in frustration," Detroit News).

Rising costs and beliefs that some cities pay more than their fair share for service is leading to discord within member jurisdictions of the Orange County Fire Authority in Southern California ("Fire Authority faces financial deficit, pensions and Irvine threatening to drop it," Orange County Register) which could lead to opt out and the creation of new fire department operations in some Orange County cities, which will lead to higher costs for the Fire Authority.

Arts.  Another example is the Regional Asset District in Allegheny County, Pennsylvania, which is funded from a county-wide sales and use tax ("How the Regional Asset District rode to the rescue of Allegheny County attractions," Pittsburgh Post-Gazette).

Historically, the City of Pittsburgh paid for and provided regionally-serving cultural assets (museums, zoo, etc.) without support from other area jurisdictions.  As cities lost population and business activity, funding such facilities became an increasing strain.  The RAD, also supporting cultural assets in the County, was a way to spread out the cost.

From the article:

In the early 1990s, the city was facing major financial troubles, he said, and was in no position to continue to fund attractions like the zoo and the aviary, particularly when studies showed that as many as 85 percent of those visiting them came from outside the city.

Ms. Masloff championed the asset district as a way of providing a stable source of funding for such assets while at the same time getting the many visitors from outside the city to help pay for them. It didn't hurt that surveys found that about 25 percent of the people who pay the sales tax in Allegheny County live outside the region.

In retrospect, the asset district has "done exactly what it was intended to do. It has funded the primary regional assets. It has added to that a large number of smaller regional assets. It's helped to bring into fruition other regional assets [like PNC Park and Heinz Field]," Mr. Turner said.

Greater Denver has a similar program ("Another round in the tense battle over metro-Denver arts funding," Denver Business Journal).  (Note that smaller organizations may not benefit as much as larger organizations from such funding streams, which creates discord.)

More recently, cultural facilities in Greater Detroit, such as the Zoo and the Detroit Institute of Arts, which had been funded solely by the City of Detroit, now are supported by a multi-county property tax.  But in Detroit, by contrast to Pittsburgh, each facility seeks its own tax and approval process, whereas in Pittsburgh, the program covers a multitude of cultural facilities in a single funding system.

7.  Sin taxes for the arts.
I'm not a fan.

In a variant of the multi-jurisdictional special service (tax) districts, Cuyahoga County, Ohio (Cleveland) charges a special tax on tobacco, to fund arts programs ("Cuyahoga cigarette tax for the arts grows in importance as other sources of government support shrink: new report," Cleveland Plain Dealer).  I don't think it's a particularly fair tax, and instead recommend a property tax funding stream comparable to the Regional Asset District.

Economic restructuring of cities: Detroit etc. (with a comment on local income taxes)

Today, Michigan Governor, Republican Rick Snyder, announced the appointment of Kevyn Orr, a 53-year old bankruptcy lawyer at DC power firm Jones Day, as the Emergency Financial Manager for the City of Detroit. See "Kevyn Orr confidently tackles Detroit EFM job: 'This is the Olympics of restructuring'" from the Detroit Free Press.

Last week, I was reading in Christian Science Monitor about the trial of former Detroit Mayor Kwame Kilpatrick and a past story link ("Detroit retooled") mentioned my old neighborhood, North Rosedale Park, so I was looking up my old neighborhood in terms of real estate values.  I was shocked, flabbergasted, distressed.

Recognize that in the mid-1960s, when we lived there, our Congresswoman lived one or two blocks down our street (which is probably why we had great snow removal services for our street and sidewalk, although sidewalk clearance may have been paid for by the resident association) and one of my fellow Cub Scouts was the son of a future Mayor of Detroit. My old house, over 1,900 square feet on a lot that is 1/5 of an acre, is worth less than $60,000. Although back when I lived there, we had big trees in the front yard--although this was also the period when American Elm trees were dying.


If that doesn't tell you that Detroit's economy is irreparably broken, I don't know what does.

The Main Street commercial district revitalization program is historic preservation based, but mostly focused on the economic elements of a commercial district.

Although the first Downtown manager position was created in the early 1960s in Corning, New York, in response to the impact of the creation of shopping malls, which were known for both common property ownership and management, it was not until the late 1970s, when the National Trust for Historic Preservation, in response to calls for action from small towns in the Midwest seeking a way to rebuild their Downtowns, created the Main Street pilot program.

Going into the project and into the cities, they thought they were dealing with a historic preservation issue, but quickly they realized the issue was more about the functioning of the Downtown business district as a successful or failing economic entity.

But the Main Street Approach calls this function "economic restructuring" and many Main Street groups find the term and the process more harsh than they'd like.

But economic restructuring is what it is.  And you either do it when you see the writing on the wall, or you don't do it and you fail and then it happens anyway.

That's what's happening with cities like Detroit on a much larger scale, although just as the failure of US steel companies in the 1980s presaged the failure of the US-based automobile industry in 2008, the failure  New York City in the 1970s, and later, various cities around the country, including Washington, DC in the 1990s.  Economic restructuring.

The movie, "Citizen Koch," out now on former Mayor Ed Koch of New York City reminded me about this process, and so I was poking through City Limits by Paul Peterson, which has a discussion about NYC's financial straits--due to rising wages and pensions, rising social expenditures (not just the local hospital system, but then they paid the full costs of the City University of New York system as well), and falling revenues.

Because it's very difficult for local politicians to make the kinds of restructuring decisions that they need to to get local budgets in balance, plus they can't usually assess income taxes, cities with massive population and business losses and limited options are likely to tumble into bankruptcy.

A way forward for local income taxes

Some cities levy an income tax or other taxes.  This can be very damaging on a regional basis, when cities have such taxes and suburban jurisdictions do not.  Philadelphia has this problem with their "wage tax."

What Maryland does is probably the best option for localities.  My understanding is that what people consider the State Income Tax in Maryland is actually split 50/50 between the state and the counties (and Baltimore City).  That means that Maryland localities have access to a more regular and stable funding stream.

I think more states should move in this direction.