The Liabilities of an NBA Lockout

Are city taxes and revenues affected if professional sports teams cancel their season?
by | November 16, 2011

Retailers along Memphis' Beale Street want the Memphis Grizzlies to start shooting hoops -- now. But thanks to the National Basketball Association (NBA) lockout, businesses that usually see a boost in their revenues as a result of game traffic are seeing losses instead. With more game cancellations on the horizon, the city is fighting back. Its City Council is considering filing a lawsuit against the NBA to recoup lost revenue if the lockout develops into a full-season loss. "This hurts municipalities all across the country who've signed contracts to pay for their facilities," says Council Chairman Myron Lowery. Without seat tax revenue, Memphis may have to dip into its general revenues to repay the bonds that built FedExForum where the Grizzlies play.

Memphis isn't the only city that has been fingering its worry beads over the NBA lockout. In fact, Moody's, the credit-rating agency, announced in mid-October that the NBA lockout was a credit negative for small-market cities that rely on revenue generated by NBA home games. As the lockout drags on, cities are in danger of losing more revenue. But on the plus side, Moody's Valentina Clark notes that "these arenas host other sporting events and other events so there is other revenue coming in." Eleven of the 29 NBA arenas, for instance, are home to National Hockey League teams.

To get a feel for what lies ahead for city revenues if the basketball season -- or any professional sports season for that matter -- were canceled, I spoke with economics professor Brad Humphries at the University of Alberta and Arthur Fleisher, professor and chair of the Department of Economics at the Metropolitan State College of Denver. Here are highlights from that conversation:

Does a canceled NBA season effect sales tax revenues?

Brad Humphries (BH): There is no evidence that sales tax revenues are hurt. If money is not spent on the NBA team, it will be spent somewhere else in the local economy. These are entertainment dollars. Some of the economic activity associated with professional sports is spent in bars and restaurants near the arena. That activity would move somewhere else, to some other time and place in the local economy. The professional hockey season was lost in 2004-05. Economists who have looked at that have not found evidence that cities with NHL teams suffered. The aggregate activity measured by income per capita has not changed in the past.

Arthur Fleisher (AF): In the larger metro area, most economic studies show there is not really any negative effect because of substitution. You can argue that, in a city like Denver, if people don't come into the city to see the Nuggets they would stay in the suburbs and that may hurt Denver a little. Also, because of the poor economy in general, maybe someone who might spend $100 going to a Nuggets game would only spend $90 on other entertainment. There might be a small effect there. But there's a trade-off. If the basketball team isn't playing, the city isn't spending extra money on traffic control and police.

Are there other economic factors at play?

AF: The biggest "non-effect" is the substitution effect, as we're discussing. But you might argue that "crowding out" could have a positive effect. Let's say Denver has 90 percent occupancy hotels and most rental cars are rented when the Nuggets are here. If they aren't playing, that opens up space for other visitors. There might be more hotel space and rental cars for visitors who want to ski or do other things here. There might be a silver lining -- not for basketball fans, of course, but for non-basketball fans.

In light of Memphis' situation, should cities continue to help finance stadiums?

BH: If a city decides it is going to finance a sports facility, it should do so based on intangibles that the facility will create, say, world-class city status or city pride. A city should not do it based on the tangible economic impact the arena or stadium might have -- because it won't. There is almost no evidence that a professional sports team is an engine of economic growth in a metropolitan area.

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