Melvin L. Burstein
Executive Vice President and General Counsel
and Arthur J. Rolnick
Senior Vice President and Director of Research
Federal Reserve Bank of Minneapolis

This paper is based on the Federal Reserve Bank of Minneapolis' 1994 Annual Report essay.

To find a solution to NFL franchises hopscotching around the country, the Antitrust Subcommittee of the Senate Judiciary Committee held hearings late last year to consider granting the NFL a limited antitrust exemption so it could prevent teams from moving. Talk about the fox watching the hen house! The leagues of all major sports blatantly aid and abet team owners in extorting public funds for new facilities under the threat of moving to a city that is eager to hand out public funds. This is not surprising because the league, as well as the team owner, benefits from a new facility. This is all done under the guise of economic necessity.
If Congress is concerned about sports fans it should prohibit the city and state funding that supports team moves. Team owners as well as the leagues would be forced to rely upon the economics of fan support rather than public subsidies.
But make no mistake, it's not just sports teams that demand public money from cities and states. The state and local funds spent competing for sports franchises, though conspicuous, probably represent only a fraction of the billions of dollars spent by the more than 8,000 state and local economic development agencies competing to retain and attract businesses through the use of preferential taxes and subsidies. Businesses know they can get public funding by threatening to move, forcing state and local governments into competition for businesses that has become economic warfare.
While states spend billions of dollars to retain and attract businesses, state and local governments struggle to provide such public goods as schools and libraries, public health and safety, and the roads, bridges and parks that are critical to the success of any community. The city of Cleveland, while it struggled to keep the Browns from moving to Baltimore, is illustrative: It announced the closing of 11 schools in 1995 for lack of funding, yet it offered to spend $175 million of public money to fix the Browns' stadium to ward off Baltimore's successful offer to attract the Browns.
Something is wrong with this picture. Rather than concern itself about cities losing "their" sports franchises, Congress should worry about state and local governments that have forgotten that their business is public, not private, goods and the funding of professional sports and all other private businesses should be left to the marketplace. Congress should stop the use of preferential taxes and subsidies by state and local governments to compete with one another to attract and retain businesses.
Not all competition among state and local governments is bad. Competition for businesses through general tax and spending policies, that is, policies that apply to all businesses, is beneficial. Such competition helps state and local governments to provide the amount of public goods for which their citizens are willing to pay. But when competition takes the form of preferential treatment for specific businesses, it misallocates private resources and causes state and local governments to provide too few public goods.
When businesses are enticed to relocate, there appears to be no net loss to the overall economy; but on closer examination we can see that this is not just a zero-sum game. There will be fewer public goods produced in the overall economy because, in the aggregate, states will have less revenue. In addition to this loss of public goods, the overall economy becomes less efficient because output will be lost as businesses are enticed to move from their best locations. Moreover, it is assumed that states have the information to understand the businesses they are courting. In practice, states have much less than perfect information. Assuming all states are so handicapped, they will on average end up with fewer jobs and tax revenues than they had anticipated.
How can this war among state and local governments be brought to an end? The states won't, on their own, stop using subsidies and preferential taxes to attract and retain businesses. As long as a single state engages in this practice, others will feel compelled to compete. Only Congress, under the Commerce Clause of the Constitution, has the power to enact legislation to prohibit the states from using subsidies and preferential taxes to compete with one another for businesses. Congress could enforce such a prohibition in a variety of ways. To name a few, it could tax real and imputed income from public subsidies, deny tax-exempt status to any public debt used to compete for businesses (there is already a limitation on the tax-exempt status of certain kinds of state and local public debt) and impound federal funds payable to a state engaging in such competition.
Competition among states for specific businesses is commonplace and growing more costly. Competition for sports franchises is a drop in a big bucket of public money spent to subsidize businesses. When we observe this competition in the context of state and local governments already short of funds for basic infrastructure such as roads, schools, public health and safety, facing further cuts in federal spending, it should be clear why it is time for Congress to act. If Congress prevented cities and states from funding private businesses such as sports franchises, team owners such as Art Modell would rely upon the economics of fan support rather than public subsidy.

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