There's More To 'Big City' Than Sports
BY JONATHAN WILLNER
Oklahoma City residents are, once again, being asked to approve a sales tax on themselves. In this instance the sales tax will go to building an arena largely to support an NBA franchise – the Oklahoma City Thunder. The expected $850 million raised over 6 years constitutes 94% of the projected cost of construction.
As is commonly done in these situations, a consulting firm created an economic impact study. And so, we have the “Economic and Revenue Impacts of the Oklahoma City Arena,” prepared by Applied Economics of Phoenix, AZ.
Economic impact studies attempt to forecast the consequences of some action. Forecasting is difficult work, relying on the past for guidance and trying to see what the future may hold. The longer into the future they peer, the less certain the forecast. That’s the nature of the beast.
The best we can hope for is that such reports are unbiased in the sense that some things are overestimated and others are underestimated, with no particular tendency. Economic research done after the fact, unfortunately, shows us that these forecasts routinely overstate the impact of public subsidies for arenas and stadiums.
This is not a claim of fraud or malintent, it is more a choice of what to consider and how to factor it in to the forecast.
On a side note, sales taxes are, by their nature and human behavior, regressive. That is, lower income people pay a higher share of their income in sales taxes than to do higher income people. This is largely a result of saving.
Lower income people simply do not have room to save and thus pay sales taxes on most of their income. Higher income people save so that they avoid sales taxes on some of their income.
So, the proposed arena will be paid for by all, but disproportionately by lower income households, as a share of income. High income residents will pay more in absolute terms, but less as a share of income.
There are at least three major issues typically ignored in economic impact forecasts for public subsidies of sports venues: opportunity costs, substitution, and crowding out. These issues are often addressed – in their consequences – with “after the fact” economic studies. Many such studies have been done and generally find little economic benefit from these venues, despite the very positive economic impact studies forecast.
Any action taken means that some other action[s] is [are] not taken. In economics, the action[s] not taken is called “opportunity cost.” Suppose the proposed sales tax was defeated and the arena was not built, what then? Would all of the Applied Economics estimate of $590 million annual economic activity disappear? That’s highly unlikely.
The proposed sales tax, if defeated, would mean about $141 million per year left in the hands of OKC taxpayers to spend as they choose. This means the residents of OKC could spend more on what each individual wants – food, clothing, restaurants, etc. That means many local businesses would see increased traffic, leading to more local hiring and more local wages.
The virtuous cycle of spending is not limited to spending on a new arena. The spending generated would then lead to tax revenue, at the lower sales tax rate.
The Applied Economics study estimates that “Annual Tax Impacts from Employees and Visitors” will be $9 million in “city taxes” and $4 million in “county and school taxes.” The relevant question is whether the economic activity generated by citizens spending their income as they see fit is greater than that of the arena.
Though the expected cost of the arena is $900 million, Applied Economics estimates that “hard construction that could support local jobs and economic impacts could total $693 million.” Two things to note: First, “could” appears twice in the same sentence; clearly there is significant room for doubt. Second, where did the other $207 million go? Apparently, it is not expected to stay in OKC.
The “Substitution Effect,” in this case, is the idea that that when people spend money on one thing, they cannot spend it on something else at the same time. As an example: a visitor from Edmond comes to OKC for a Thunder game, buys a ticket, some food, etc. Is it the case that, absent the Thunder, they would never come to OKC and spend? Maybe more on a restaurant? Bar? Other entertainment?
As noted in the "study" the Thunder constitute 47 entertainment events per year. Most of those are evenings, when concerts, etc. could use the venue.
What else could be booked in? According to Applied Economics there were 53 “Third Party Events” per year in the current arena. How many Thunder slots could be used for additional such events?
What else [a water park? a museum?] could be attracting folks to OKC? The “Crowding Out Effect” is the idea that people may not come to OKC during a Thunder game who would have, but for the Thunder [or any other event]. Part of crowding out is simply the avoidance of crowds or crowds of a particular nature. For potential overnight visitors, hotel rooms may be unavailable because a concert-goer has booked it earlier – so one visitor “crowds out” another visitor, but only one room night is purchased either way.
On a side note, I once asked a waitress in Bricktown how great the Thunder were for her. She hated game day. It killed her income. Restaurants and particularly waitstaff rely on tips. Tips come from "turning tables."
On game day, people without tickets show up early, have dinner and drinks then sit at a table for hours watching the game. Tables don't turn. Fewer meals are ordered and fewer drinks [drinking slows as driving time approaches].
Those with tickets arrive early, as well, then leave before the game. The empty table is not filled [turned], apparently because few people wish to brave the parking issue for an uncertain table.
A few other potentially noteworthy thoughts on this particular study: One of the headline numbers in the study is "Arena and OKC Thunder Operations" and the line item "Annual Payroll" of $207 million; $127 million of that goes to the 18 roster players for the Thunder. There are about 150 other Thunder employees. So it's more like 820 arena employees and $80 million. Still a large number. However, many of these jobs are part-time with the attendant low wages.
Most of these employees are undoubtedly residents of OKC and so their income stays in the city. It is highly unlikely that the players, with a minimum salary of $1.8 million, spend much of their income in OKC. Much of their income should rightly go to building wealth by investing where it will have a solid return.
As an example of “after the fact” research, quite a few years ago, working with two former colleagues [I’ve retired], we examined how the arrival of the Thunder led to changes in the growth rate of collections of various taxes in OKC. What we found, through 2014, was [drum roll] "… little role for the Oklahoma City Thunder in change of tax revenue growth rates. Where there is a significant relationship, this relationship is usually negative. This lack of relationship is consistent for total growth rates and across likely categories of tax revenue."
Yep. Not a thing. Our results are consistent with a large body of similar and related ex post studies. Quite simply, the ex ante studies almost always widely over estimate what will happen [see: https://econjwatch.org/articles/do-economists-reach-a-conclusion-on-subsidies-for-sports-franchises-stadiums-and-mega-events].
OKC voters have a choice to make. To continue to pay 1% more on purchases made in OKC or not. The voters should be informed about the consequences of those votes. There is more to a “Big City” than top tier professional sports.
Jonathan Willner is PhD Emeritus Professor of Economics, Oklahoma City University. This essay also appeared in the December 2023 print edition of The Oklahoma Observer.