I don't often agree with the Tax Foundation in its analysis of various tax issues. For example, it tends to push the notion of "tax-free day" every year, in its attempt to propagandize its objections to taxes, with the implication that you are working "for the government" until sometime in the year when you've earned enough to pay the taxes and then are working "for yourself". Of course, there are lots of problems with the concept of a "tax free day" in the first place. It's based on a mistaken notion that the money that is paid to the government is "lost" to the payers, whereas even given the imperfections of human institutions, the money spent for the government is, on the whole, being spent for activities that support the country's citizens. We won't all agree with all of the expenditures, but there will be a large number of them that we see as beneficial--from defense to emergency assistance through FEMA, from Centers for Disease Control to the National Institutes of Health, from national parks to the running of the Congress itself. And it essentially a fiction in more ways than one, since it averages taxes paid across taxpayers to come up with "everybody's" tax free day. You can read more in earlier postings on ataxingmatter here, since I don't really want to deal with that as the primary topic of this post.
What I do want to talk about is the Tax Foundation's recent "Fiscal Fact" on tax-exempt bonds and public-private property. In this case, Fiscal Fact No. 167 , "From the House That Ruth Built to the House the IRS Built", Apr. 6, 2009, deals with New York City's use of $942 million of tax exempt bonds to raise funds to build Yankee Stadium (for a total cost of a staggering $1.3 billion), which will be city-owned and exempt from city, state and federal taxes, and will have as its primary user the Yankees baseball team, which will pay no rent but will pay high "payments in lieu of taxes" (customarily called by the acronym, PILOTs).
The point of the authors is that the stadium bonds will be repaid by New York City out of the PILOT payments from the Yankees. But the PILOT payments, the study claims, are "inflated by overvaluing the stadium property by three times that of comparable property". Having such significant PILOT payments makes it possible for the City to tell its taxpayers that the Yankees are paying for most of the stadium's cost, a result that is more pleasing to taxpayers than hearing that they are subsidizing the Yankees' owners huge profits from owning the team by building the team a free stadium. But the Tax Foundation notes a Catch 22: to avoid being "private activity bonds" -- the interest on which won't be eligible for tax exemption under section 103 unless the bonds are within the subgroup of such bonds that are "qualified" under section 141(e) -- the stadium needs to be a genuine City facility. But the City was in the red when it built the stadiuum with bond revenues, and it inflated the PILOT payments so that the bonds are being paid off by the Yankees, not by the City, and that covers most of the cost of the stadium, so the bonds, the Tax Foundation argues, should really be considered unqualified "private activity bonds". So the Tax Foundation says, the "shell game" means "the City can say to taxpayers that the Yankees are paying a significant part of the stadium's cost, while telling the IRS that the City is paying for almost all of it." The net effect--the Yankees owners get an expensive new stadium at lower cost--a savings of about $231 - $471 million over 30 years per the Tax Foundation analysis, that lets them make big profits (some seats cost as much as $2500). As Dennis Kucinich said at congressional hearings on the subject (as quoted in the report), this subsidy is a "transfer from the many to the wealthy."
The IRS under Bush signed off on the Yankee Stadium deal in a private letter ruling, treating the payments as taxes rather than debt service, so getting out from a part of the test regarding private payments on the bonds. The IRS does defer to cities in assessing public benefit of projects, but the Tax Foundation claims that the IRS didn't apply its own rules about PILOTs appropriate here.
As in many cases, the IRS lets the cat out of the bag, and then it closes the bag. So regulations under section 141, which " limit the volume of tax exempt bonds that finance the activities of nongovernmental persons" were substantially amended in October 2008 to ensure such "shell games" don't happen in the future. Reg. 1.141-4 on the private security or payment test narrows the definition of PILOTs and thus limits the gambit employed in connection with Yankee Stadium.
Net result, according to the Tax Foundation's analysis of the PILOT payments as inflated, taxpayers are subsidizing the construction of the stadium for the Yankees and that amounts to a subsidy for the Yankees' wealthy owners paid for out of taxpayers' pockets. Lesson for everyone, as the Tax Foundation points out--transparency and accountability are important when it comes to "subsidizing private uses with public funds."
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