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June 16, 2008

As IRS moves to close "loophole," ESDC fights for AY funding scheme

Atlantic Yards Report

Norman Oder digs deeper into the background of the controversy over IRS rules and tax-exempt bond financing for stadiums and arenas. Surprised?

The strategy under which the Empire State Development Corporation (ESDC) and developer Forest City Ratner seek tax-exempt bonds for the Atlantic Yards arena has been acknowledged by the chief counsel of the Internal Revenue Service (IRS) as a “loophole” the agency moved quickly to eliminate.

Donald Korb’s testimony came at a 3/29/07 oversight hearing of the Domestic Policy Subcommittee of the House Committee on Oversight and Reform, headed by Rep. Dennis Kucinich (D-OH). The hearing, covering “Taxpayer Financed Stadiums, Convention Centers, and Hotels,” mainly focused on the stadiums, starting from the premise that they do not bring economic development and potentially divert funds from critical infrastructure.

The IRS in July 2006 issued two Private Letter Rulings (PLRs) related to financing for stadiums for the New York Yankees and the New York Mets. (Here's one.) In both cases, the IRS agreed that payments in lieu of taxes (PILOTs) used to pay off the bonds could substitute for property taxes, even though critics warn that they do not seem commensurate with such taxes but simply mirror debt service.
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However, [American Tax Policy Institute Projects Director Dennis] Zimmerman said, "those who benefit most from stadiums (owners of teams, players, fans, some related businesses) learned how to utilize pseudo-economic studies to argue that the economic benefits from stadiums generated sufficient additional tax revenue to pay for the public subsidy, a proposition that runs counter to an extensive economics literature.... Second, the monopolistic structure of professional sports leagues maintains excess demand for franchises, forcing cities to compete for a limited number of franchises with offerings of stadium subsidies. As a result, many stadiums were built for which local taxpayers, who receive limited benefits, paid at least 90 percent of the debt service on the bonds."

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Posted by eric at June 16, 2008 8:51 AM