Selling the game: estimating the economic impact of professional sports through taxable sales.

• Author: Baade, Robert A.
• Position: Marketing professionla sports to increase awarness

Sports leagues, franchises, and civic boosters tout the economic benefits of professional sports as an incentive for host cities to construct new stadiums or arenas at considerable public expense. Past league-sponsored studies have estimated that new stadiums, franchises, and mega-events such as the Super Bowl increase economic activity by potentially hundreds of millions of dollars in host cities. A detailed regression analysis of taxable sales in Florida over the period extending from 1980 to 2005 fails to support these claims. New stadiums, arenas, and franchises, as well as mega-events, appear to be as likely to reduce taxable sales as increase them. Similarly, strikes and lockouts in professional sports have not systematically lead to reductions in local taxable sales.

JEL Classification: L83

1. Introduction

   Sports boosters often claim that sports teams, facilities, and events inject large sums of money into the cities lucky enough to host them. Promoters envision hoards of wealthy sports fans descending on a city's hotels, restaurants, and businesses and showering them with fistfuls of dollars. For example, the National Football League (NFL) typically claims an economic impact from the Super Bowl of around $400 million (National Football League 1999), Major League Baseball (MLB) attaches a $75 million benefit to the All-Star Game (Selig, Harrington, and Healey 1999) and up to $250 million for the World Series (Ackman 2000), and the estimated effect of the National Collegiate Athletic Association (NCAA) Men's Basketball Final Four ranges from $30 million to $110 million (Mensheha 1998; Anderson 2001). Multiday events such as the Olympics or soccer's World Cup produce even larger figures. The preOlympics estimates for the 1996 Games in Atlanta indicated that the event would generate $5.1 billion in direct and indirect economic activity as well as 77,000 new jobs in Georgia (Humphreys and Plummet 1995). A study of soccer's 2002 World Cup (by the Dentsu Institute for Human Studies) estimated a $24.8 billion impact for Japan and an $8.9 billion impact for South Korea. As a percentage of national income, these figures represent 0.6% and 2.2% of the total Japanese and South Korean economies, respectively (Finer 2002). Initial economic impact studies of the 2010 Winter Olympics in Vancouver/Whistler predict a gain to the local economy of up to $10 C billion.

   Even regular season games prompt claims of huge benefits. For example, the Oregon Baseball Campaign, a group dedicated to bringing MLB to Portland, reported that "a MLB team and ballpark would generate between $170 and $300 million annually in gross expenditures to the state of Oregon" (Oregon Baseball Campaign 2002), while a similar analysis completed for the Virginia Baseball Authority stated that a "a major league baseball franchise and stadium in northern Virginia would pump more than $8.6 billion into the economy over 30 years," or $287 million annually. The St. Louis (Missouri) Regional Chamber and Growth Association estimated that the Cardinals brought $301 million in annual economic benefits to the region, with another potential $40 to $48 million in benefits from a post-season appearance (Saint Louis Regional Chamber and Growth Association 2000). Of course, baseball is not the only sport to provide rosy economic impact numbers. A study of the NFL's New Orleans Saints estimated the impact of the team on the state at $402 million in 2002 (Ryan 2003), and the Seattle Supersonics of the NBA claimed that they pump $234 million into the area's economy annually (Feit 2006). Boosters are often vague about exactly what is being measured in these claims of hundreds of millions of dollars of benefits, making direct comparisons difficult, but the overall claims are clear: Professional sports provide huge economic windfalls for host cities.

   Of course, leagues, team owners, and event organizers have a strong incentive to provide economic impact numbers that are as large as possible in order to justify heavy public subsidies. When leagues consider expansion or franchise relocations, they frequently highlight the potential economic benefits of a new franchise in order to minimize the team's or league's required contribution to the funding of the stadium or arena in which the team will play. Similarly, the NFL and MLB use the Super Bowl and baseball's All-Star Game as carrots to prompt otherwise-reluctant city officials and taxpayers to provide lavish funding for new stadiums to the great financial benefit of the existing owners. For example, in baseball, of the 15 new major league stadiums built between 1970 and 1997, 13 were selected by the MLB to host an All-Star Game within five years of their construction (Baade and Matheson 2001). Similarly, during a visit to the Dallas-Fort Worth, Texas, area just before a crucial vote on public funding for a new stadium, NFL Commissioner Paul Tagliabue suggested that the construction of a new stadium would lead to the opportunity for the metro area to host the Super Bowl in the next decade. Since the NFL touts economic benefits from hosting the Super Bowl of $350 to $400 million, an amount that exceeded the proposed $325 million public subsidy for the stadium, in effect, Commissioner Tagliabue was saying that combined with a Super Bowl, Arlington, Texas, would be getting a new stadium for free.

   With an event like the Olympics, the huge costs of hosting the event to the standards now required by the International Olympic Committee, as well as those associated with providing adequate security, almost necessitate an infusion of taxpayer money. For example, while on paper the 2002 Winter Olympics in Salt Lake City, Utah, made a profit, the cost figures did not include millions of dollars of additional security provided by the U.S. Department of Defense at no cost to the local organizing committee. For the 2004 Summer Games, the government in Athens, Greece, spent $1.5 billion on security alone. These figures illustrate why organizers often rely on lofty reports that promise huge monetary windfalls to host cities. Since many economic impact studies are commissioned by owners, leagues, or event organizers, which stand to benefit directly from the public subsidies such reports are designed to elicit, one must question whether such studies can be believed.

2. Ex Ante versus Ex Post Studies

   A typical ex ante economic impact study used by league and event promoters estimates the number of visitors an event or team is expected to draw, the number of days each spectator is expected to stay in the city, and the amount each visitor will spend each day. Combining these figures, an estimate of the "direct economic impact" is obtained. This direct impact is then subjected to a multiplier, usually around two, to account for the initial round of spending recirculating through the economy. This additional spending is known as "indirect economic impact." Thus, the total economic impact is roughly double the size of the initial spending. While such an estimation method is relatively straightforward, academic economists have been quick to point out the failings of such ex ante studies, as they often rely on poor methodology and also suffer from several theoretical problems.

   First, many booster estimates are wildly optimistic about the number of potential guests and their spending habits. In March 2005, Denver, Colorado, tourism officials predicted 100,000 visitors for the NBA All-Star Game. Considering that the Pepsi Center, the game's venue, only holds 20,000 fans and taking into account that Denver has only about 6000 hotel rooms, it is not clear exactly how such an influx of basketball fans would be possible.

   In many cases, the variation in estimated benefits alone is enough to question the validity of the studies. A series of studies of the NBA All-Star Game produced numbers ranging from a $3 million windfall for the 1992 game in Orlando, Florida, to a $35 million bonanza for the game three years earlier in Houston, Texas (Houck 2000). Similarly, the 1997 NCAA Women's Basketball Final Four was estimated to have an economic impact of $7 million on the local economy of Cincinnati, Ohio, but the same event was predicted to produce a $32 million impact on the San Jose, California, economy just two years later (Knight Ridder News Service 1999). The 10-fold disparity in the estimated impact for the same annual event illustrates the ad hoc nature of these studies. In some cases, economic impact figures appear to be completely fabricated. While city or league officials may suggest a certain monetary figure for a particular event, when pressed on the details, the "missing study" syndrome arises (Anderson 2004).

   Even when ex ante studies are done in a carefully considered manner, they suffer from three primary theoretical deficiencies: the substitution effect, crowding out, and leakages. The substitution effect occurs when consumers spend money at a sporting event rather than on other goods and services in the local economy. A local resident who goes to a baseball game is spending money at the game that likely would have been spent at local restaurants, theaters, or retail establishments in the absence of the game. Therefore, the local consumer's spending on a sporting event is not new economic activity; rather, it represents a reshuffling of local spending. For this reason, most economists advocate that spending by local residents be excluded from any economic impact estimates.

   Even including only out-of-region visitors in impact studies may still result in inflated estimates if a large portion of the non-local fans at a game are "casual visitors," that is, out-oftown guests who go to a sporting event but are visiting the host city for reasons other than the sporting event itself. For example, a college professor at an academic conference may buy a ticket to a local game, and therefore the ticket would be counted as a direct economic...