The President’s Budget Would Tax Municipal Bonds Used to Fund Sports and Entertainment Facilities

President Barack Obama recently released his budget proposal for Fiscal Year 2016, and municipalities, sports franchises, and owners of sports and entertainment facilities across the country will pay special attention to one line in particular.

The President’s budget would eliminate tax benefits that many municipalities use in connection with efforts to construct or modernize venues to attract and keep professional sports teams. Specifically, it would amend the tax code such that municipal bonds used to construct sports and entertainment facilities would no longer be tax-exempt. While this tax benefit has helped fund sports and entertainment facilities across the country and has enabled municipalities to retain their sports franchises, the President and others have suggested that it is an unnecessary benefit to professional sports franchises.

The Details of the Proposal

Under current law, individuals who purchase bonds from local governments pay no federal income tax on the interest earned, so long as one of two conditions is met: 1) 90 percent of the debt is serviced by the local government from taxes of general applicability; or 2) the bond issuance funds a project that is used for a government purpose 90 percent of the time. As a result of this tax benefit, lenders are able to charge less in interest, thus saving money for municipalities.

The President’s proposal would entirely eliminate this either/or test for tax exempt status and would instead make interest on municipal bonds tax free only if the project is used for a government purpose. Sports and entertainment facilities are unlikely to meet this requirement, and consequently municipal bonds issued to fund their construction would not achieve tax-exempt status.

The Takeaway

The Obama Administration has suggested that this is a smart way to force sports franchises to assume a greater share of stadium construction costs, as well as a way of saving taxpayer dollars. Others are concerned that it would eliminate an affordable way for local governments to engage in economic revitalization by using a sports franchise as an anchor tenant to support growth and gentrification. There is also a concern that this would encourage sports franchises to forum shop from jurisdiction to jurisdiction in order to get a new facility. And those opposed to the proposal note that, given the size of the federal budget, the savings generated would be relatively modest: only $542 million over the next decade.

In any event, this debate could be for naught: in the current political climate, the proposal is unlikely to become law. But it could spur a broader discussion in the new Congress on reforming the federal tax code generally and the municipal bond provisions specifically.


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