public finance whats in it for the cities?. what is point of government? set and enforce rules of...

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