Field of Schemes new post Recrunching the Seattle arena numbers: Hansen plan should be pretty darn close to break-even for local taxpayers

Chris Hansen has a new post on his arena website running down the reasons why his plan meets the criteria of Initiative 91, in which he acknowledges that

we are not saying that the City/County is making a 7.0%+ PROFIT on this investment. The point we are making is that the RETURN on the $200 million Arena is 7.0%+.

So points to Hansen for clarifying his earlier statements, though his continued focus on rate of return is still likely to be confusing for readers who think that a "return" should actually leave you with more money than you started with.

In any event, this is a good excuse to go back and recalculate the total public cost of Hansen's arena plan, with all the new information we've gathered since then. Since there's lots we still don't know about substitution effects — at least until we get a real economic impact study — there are going to be some decent sized error bars, but we'll include that in our numbers and see what we end up with.

So:

• For starters, we can safely ignore the $200 million in bonds being taken out by the city and county, as those will be entirely paid back by rent from Hansen and arena-related taxes. Since by definition of the MOU, outgoing bond payments equal incoming rent and taxes, this is a wash — except for any extent to which the taxes are cannibalized from existing tax streams. So on to the taxes...
• The big item is $71.8 million in arena admissions taxes, which Hansen counts as new money because nobody would be paying admissions taxes on tickets for an arena that didn't exist. Fair enough, except for two points: 1) all other entertainment venues in Seattle pay the admissions tax, so this is still a $71.8 million subsidy for Hansen (i.e., it saves him $71.8 million over what he'd pay if he built an arena under normal circumstances); 2) if those people are currently spending their money at other Seattle venues that do pay admissions tax, then shifting the spending to a venue where the city doesn't get the tax money would be a net loss. How much? It's nearly impossible to say, but let's figure somewhere between 10% (Hansen's substitution estimate) and 50% (Bill Beyers' estimate for how much Key Arena spending is substituted — though that's countywide, there are also reasons to believe it's an underestimate since it doesn't account for out-of-towners who would be spending their money in Seattle while on vacation regardless). That gives us a public cost of between $7 million and $36 million, most of it coming from the city, with undetermined slivers from elsewhere in the county and state.
• $15.7 million in business taxes being kicked back to pay for arena costs is, again, a subsidy to Hansen (since he would have to pay them normally), but only a cost to the public if bringing new teams to Seattle ends up reducing the value of other Seattle-arena businesses, and thus the taxes they pay. I don't know of any studies of the impact of new teams on other business values, so let's say this effect is anywhere from 0-50%, for a public cost of $0-8 million.
• Hansen would get to keep $15.1 million in incremental property taxes on the arena site. Again, if raising property values in SoDo reduces them elsewhere, some of this could be cannibalized from elsewhere, but this is likely to be such a small effect that I wouldn't bother worrying about it. Let's call it $0-1 million in cost and move on.
• $5.8 million in arena sales taxes. This is the one that has the clearest substitution effect, because it cannibalizes from existing tax revenue if people would have spent it anywhere else in Seattle, not just at a place that charges admission tax. (So restaurants, in particular, would count too.) Using Beyers' Key Arena estimate as a baseline, let's figure anywhere from 25-75% substitution here, which means a public cost (again, split between the city, elsewhere in the county, and elsewhere in the state) of between $1.4 million and $4.3 million.
• Hansen is giving the city about $50 million worth of SoDo land as part of the deal (technically the city is buying the land, but with the same rent and tax payments mentioned above, so it doesn't really cost them anything). The catch, of course, is that the city doesn't get to use any of the land until 30 years have passed and Hansen's lease expires (and the by-then-obsolete arena is demolished, at a cost of around $30 million). Depending on whether you expect SoDo land to wildly appreciate between now and then, and how you discount present value of land 30 years from now, let's say this is a benefit to the city of between $20 million and $40 million.
• Taking that land off the city tax rolls means the existing property taxes stop coming in. This isn't much, but assuming the leasehold excise taxes are meant to offset that (though they then just get kicked back to pay for arena costs), let's figure $4 million in present value.
• Money spent at a basketball arena rather than at local restaurants results in more "leakage" out of the economy, since a higher percentage of money exits the local area (because a huge percentage of it goes to players who don't live locally year-round) rather than being respent there. I can't even begin to estimate a figure for this, so I won't, but it needs mentioning.
• What else? Well, one thing an arena will undeniably do is get more people spending money in the neighborhood around the arena, as opposed to 1) elsewhere in Seattle, 2) elsewhere in the county, or 3) back home in Cucamonga when the tourists return from vacation. I don't think anyone has a good grip on how much this will be, but figuring that total outside-arena expenditures will be at most equal to inside-arena expenditures, we get maybe $6 million in new non-arena tax revenues, maybe half of which just gets shifted from elsewhere in the county. (Or if you figure it another way, one million tickets sold per year, times say $20 per person in outside-the-arena spending, times the 2.6% Seattle sales tax rate, equals roughly $500,000 a year in new tax revenue, which over 30 years in present value is $7 million — close enough to the above for government work.)

Add it all up, and what do you get? Seattle taxpayers end up with anywhere from a $14 million or so in profit to a $7 million loss, with taxpayers elsewhere in the county and state losing a few million dollars here and there thanks to money being spent in Seattle rather than in their local areas. Hansen, meanwhile — after factoring in his various tax breaks, less the $50 million in land he'd be giving up — would net about $63 million in savings over what he'd need to spend without the city's help (plus the benefits of the lower interest rate he'd get with municipal bonds — part of which would come out of federal taxpayers' pockets through the tax exemption on bonds, but that's another story).

It's up to Seattle residents and elected officials to determine whether this is a good use of the city's bonding capacity. But one thing seems pretty clear: It's an outstanding deal compared to just about any other stadium or arena deal of the past 20 years — I'd even say it's better than the San Francisco Giants deal for Pac Bell Park, since there the city paid for land acquisition, and here the city would only be paying for part of the land cost.

In short: The Seattle arena wouldn't be a windfall for local taxpayers, and it isn't risk-free. But it does look like a deal where the vast majority of the cost, and the risk, would fall on the private team owners. I'd still like to see a formal economic impact study to firm up some of the numbers above (remember: me, not an economist), but if you're a Seattleite concerned about getting hung out to dry by unexpected hidden costs on this deal, you can breathe at least a preliminary sigh of relief.

from Field of Schemes http://www.fieldofschemes.com/news/archives/2012/07/5018_post_37.html