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Thursday, January 13, 2005

Principals and Agents in DC

Yesterday the D.C. mayor signed legislation to provide $524m in public funding for a new baseball stadium. The voters didn't get a say in the matter, but what the hell? The politicians know a good deal when they see one. As the Washington Post points out, the locals won't pay for the stadium anyway:
Under the terms of the stadium package, the city will implement a gross receipts tax on large businesses and a utilities tax on businesses and federal buildings, while continuing to seek 50 percent private financing. A tax on concessions and an annual rent payment by the team also will provide revenue to pay off the bonds.

It is not clear if the DC politicians have convinced themselves that this plan will work or if the reporter is singing his own tune.

How long until large businesses relocate across the "tax border?" We know the federal government can't avoid the taxes, at least by relocating, so that means the rest of us will be paying for the DC stadium. Why doesn't the city impose a one million dollar per year tax on 534 federal buildings and get it over with? Perhaps Congress should pass a law prohibiting the city of DC from imposing taxes on federal buildings for the purpose of building stadiums.

The business tax is "brilliant." If businesses start to relocate out of the city, or decide not to relocate to the city, property values will decline (everything else the same) and property taxes will follow along. Unemployment might actually increase in the city proper if big businesses start to relocate out of the city. If businesses don't relocate, the franchise tax increases average cost, reducing profitability and imposing the cost on shareholders and firm owners nationwide or worldwide - including those who may never attend a game in the stadium. Perhaps big business (code word for government contractors?) will not have to relocate or suffer reduction in profits if they pass the cost on to the Federal goverenment. Yet, if this is the case then, again, the rest of us are paying for DC's stadium. When did I vote for that?

The annual rent payment by the team might come to $2 million a year (I haven't seen a hard figure yet) and will provide perhaps 5 percent of the annual debt service. The concession taxes (say 10% of 15 million per year) might yield another million or so to assist with debt service. Again, every little bit helps but it is a long way from being able to cover even a reasonable percentage of the debt service.

Finally, why would anyone agree to pay fifty percent of the stadium costs with private money when the city has already agreed to pay 100 percent of the stadium costs? That provision of the legislation makes no sense, but then when it comes to publicly built stadiums not much makes sense.

For students of economics, this is a prime example of the principal-agent problem. Principals (tax payers) get screwed while the agent (DC politicians) feather their nest.

Comments:
Are ther any big businesses in DC? I thought most of them had moved to Maryland and Virginia years ago.
 
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