On Columbus, Pt. 1

4 Aug

Stay Puff

In November of ’09, David Staples of the Edmonton Journal wrote a four-part series on the downtown arena, with a specific focus on the “success” of arena projects in Columbus and Los Angeles. The pieces were mostly puff, full of anecdotal evidence from two of the only cities in North America where downtown redevelopment centered around sports facilities have been deemed even a moderate economic success (when asked on Twitter why he hadn’t visited any other cities besides these two, Staples said that he went to the two places mentioned in the Arena Feasibility Committee Report. If only the Katz Group’s PR work was always that easy). But in the first article in the series, Staples also referenced a paper about Nationwide Arena in Columbus, written by Brad Humphreys and Xia Feng. Humphreys is a professor of economics at the University of Alberta, and is renowned for his work in sports economics, particularly the economic effects of new stadiums and arenas. Many of his papers are in the resources section on this site. The Columbus paper was the type of hard analysis that isn’t present in most media stories about the economics of sports arenas, and because it did an increase in residential property values around Nationwide Arena, Staples went back to the well with it repeatedly throughout his series. Unfortunately, he overstated the results in Humphreys’ paper, and glossed over some important facts. These include:

1) The paper was neither new nor revelatory. It had been publicly available since 2008. In fact, Humphreys referred to the paper in an interview I did with him back in February of 2008, and it was debated in the comments then whether the higher property value argument had any merit (more on this later).

2) The paper was a working paper. It had not been subject to the peer review process, an essential step in the validation of any academic work. Professor Humphreys’ methodology and conclusions have not been screened and looked over by the people who understand these issues best: his colleagues.

3) The paper did conclude that residential property values were higher in proximity to Nationwide Arena, but it also included a great big, giant caveat that they could not determine how much of that was due to the arena and how much was due to the fact that the arena was downtown.

4) The paper did not take into account the 75-100% property tax abatement provided by the City of Columbus to encourage people to live downtown (Nationwide Arena received a 99% tax abatement).

5) A similar study Humphreys cites in his paper found no effect on property values from the new football stadium in Dallas.

6) A simple calculation shows that even if the increase in property values was a result of the new arena, it was not enough to offset the cost of the facilities.

Staples also referenced a study by the John Glenn School of Public Affairs at (The) Ohio State University, which reported that property values in the Columbus arena district had shot up by 267% in ten years. Scott Hennig at the Canadian Taxpayers Federation has already scrutinized the findings, but I’ll add that Staples failed to mention that the study was paid for by the Columbus Blue Jackets and the owners of the arena district, Nationwide Realty Investors. Not really a surprise, then, that the result of the study saw the arena district as having a positive economic effect on the region.

It Doesn’t Really Matter

In one of the accompanying pieces, Staples wrote a line that immediately stood out to me and some fellow arena news watchers:

“The increased property values in Columbus can be translated into increased taxes for the city, Humphreys says.”

The reason it stood out for us was that it was an issue that had come up in the interview I did with Professor Humphreys in February of 2008. In the comments, there was a question raised about whether or not it was the case in Alberta that an increase in property values would mean more tax revenue for a city. The general consensus was that an increase in property values doesn’t lead to more tax revenue for the City of Edmonton. It just means that the distribution of taxes between properties will change. I asked Scott Hennig of the Canadian Taxpayers Federation to explain why an increase in property values doesn’t lead to any extra money for the City of Edmonton. This is his response:

1) If a certain area magically becomes more desirable and property values go up, it should have an equal reduction in another area, based solely on the fact that unless the incomes of the people change, the ability to purchase property stays the same. If this wasn’t the case, every house in Edmonton would be the size and price of Katz’s. I get this might not be immediately clear, but there’s a reason why not every house in Edmonton is a mansion or a little shack. The distribution of income across the population is not even, and therefore their desire and ability to purchase homes isn’t the same. There is only a certain percentage of the population that will want and be able to purchase housing at say the $700,000 level. If the supply of $700,000 houses go up, while the demand stays the same, those houses will either sit empty or be decreased in price. Or if everyone who lives in Riverbend moves to an arena district, it’s likely that the houses in Riverbend will have to be decreased in price to find buyers. Therefore, there should be no change in overall property value in the city.

2) Even if I’m incorrect about #1 and there is an overall increase in the market value of property in the City of Edmonton (more rich people move in than any other income level), the way that property taxes are set and collected would prevent an increase in revenue. Unlike the federal and provincial governments, who set their tax rate first and then just collect whatever money comes in (and if incomes do increase, or employment goes up they collect more money than expected) the city decides first how much money they want to collect, check what the assessment is, and then they set the tax rate. So, if they decide they are going to collect an extra $40 million, they just divide that by the total assessment and set the mill rate. That combination of the rate and the assessment will dictate your portion of that $40 million. So, those people with a higher assessment will pay more than those with a lower assessment. In the end, the city doesn’t collect any more money, just some people pay more than they did before, and some people pay less.  Or in reality, some people see an even larger tax hike than they expected, while others see a slightly lower tax hike than they expected.

This really doesn’t change much for businesses.  I just use houses as an example that most people can wrap their head around.  But the same goes for businesses.

You can’t, therefore, make an argument that the City should invest tax dollars into an arena because it will get more money back from an increase in property taxes. It won’t, because an increase in property values in one part of the city leads to a decrease in property values in another party of the city, and because the City of Edmonton doesn’t collect property taxes in the same way as Columbus, Los Angeles, or any other American city.

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13 Responses to “On Columbus, Pt. 1”

  1. JohnQPublic August 7, 2010 at 1:33 pm #

    It still simply comes down to a city is a corporation competing for people and business. If you don’t have ammenities, lifestyle and opportunity, you are a losing business (i.e. withering city).

    You are in the game, or you are not. A big Grande Prarie/ Red Deer … or, something more. Everything else is a smoke show and contrarian politics.

    Just ask Winnipeg and Quebec why they want NHL teams back and have or are willing to build new arenas? Look at the drop in population growth in Alberta during the down turn – the lifestyle didn’t keep them here. Edmonton needs provide a lifestyle that keeps people here or we’ll be a dying city after the Oilsands boom is over.

  2. David S August 6, 2010 at 11:25 am #

    I guess you could say that the city shouldn’t invest tax dollars in anything because the net result would be 0. Hello Calmar!

    @Other John – “There is no 2 office tower of new tenants waiting to move into Edmonton YET”. You assume the net in-migration to Edmonton will be 0 over the next few years. You also assume no factors might increase that net in-migration.

    On the issue of CRL revenue streams, Katz obviously can’t guarantee tenancy of major players until he gets a build commitment. No major player will commit to a hypothetical when he has other tangible projects in front of him. And please Andy, do you not think the land value of the proposed district would not increase over its current level? Have you seen where they want to build? Duh.

    You guys are pretty quick to diss anything that might resemble urban development when taxpayers might have to contribute to their own city. I’ve got news for you, its already taking place – i.e. AGA.

    I’m waiting for the next website in this series – “WhyExpo.ca”

    • Chad D August 8, 2010 at 10:00 am #

      I don’t think that people are dissing taxpayers money ever being spent on development. It’s just that this is a terrible way to spend it.

      No net economic benefit, the City gets no share of the revenue, and THERE IS ALREADY AN ARENA.

      • David S August 11, 2010 at 12:04 am #

        The city will get revenue – the additional taxes from the new district development – in perpetuity (or close to it).

        And yes, there is already an arena. They’re going to have to spend about $200M to fix it up. That’s pretty much in line with what they’ll end up spending downtown, where a whole new district will be the outcome on top of a new arena. Your choice.

        The thing is, money WILL be spent. Its just a matter of where it’ll do the most good.

      • Chad D August 11, 2010 at 6:34 am #

        The tax argument is a shell game and there’s no guarantees attached that this will cover costs.

        Also, the number of $200 million for a Rexall renovation is for a pie-in-the-sky renovation for a bigger concourse around the current building. Bottom line is, there’s nothing really wrong with the current rink — Oilers ownership referred to it as “state of the art” at the end of the 1990s, so it can’t be that far gone.

        And the larger point is that these estimates don’t matter. As long as the City has a decent rink, there’s no need to drop hundreds of millions of debt into making a new one. Katz is free to build his own, of course.

    • Chad D August 8, 2010 at 10:00 am #

      Also, thanks for brining up AGA. Cost overruns were ridiculous. All the more reason to be wary of estimated costs.

      • Andy Grabia August 8, 2010 at 11:25 am #

        The AGA argument is horrible. We’re talking about two very different projects here, one for a non-profit, and the other for a for-profit private business. It’s like comparing apples and chocolate bars.

    • Andy Grabia August 10, 2010 at 10:20 am #

      I guess you could say that the city shouldn’t invest tax dollars in anything because the net result would be 0. Hello Calmar!

      I honestly don’t know where you are going with this, David.

      I’ve got news for you, its already taking place – i.e. AGA.

      How much money is the owner of the AGA worth?

      I’m waiting for the next website in this series – “WhyExpo.ca”

      I’m busy with this site, but I’d gladly visit that one.

  3. Stu August 4, 2010 at 11:34 pm #

    The problem with Mr. Henning’s answers are that he assumes a closed system in point #1. If there is strong in-migration and construction is not overbuilt(and I’m not saying that an arena will bring in people) then there is no reason for property values to decrease in response to an increase in one part of town. In fact most property values should raise. I concede that this will then lead to affordability issues which can cause emigration.

    As for point #2 – If you take Mr. Hennings assumption in #1 as true then an extra burden of taxation is transferred to those living in the ‘desirable’ area around the arena for tax increases. They will incur more of a ‘penalty’ than the average citizen. So if the arbitrary desicion to tax the city as a whole is done the arena area folks actually pay a larger percentage of the total taxation.

    Of course it’s 11:30pm and I’m full of beer and wings so I welcome any discussion on my grasp of economics.

    • The Other John August 5, 2010 at 8:30 pm #

      Great. Article Andy keep up the great work

      Stu

      The complete answer to Andy, Sott Hennig and anyone against this project is if the Edmonton pie (and many of the new residents in Edmonton settle downtown) gets bigger. But not even the strongest proponents of this project have tried to go there. Yup, you are right. If as a result of this project grows the city by 45,000 people and most of them move downtown……we get a net increase in revenue raised.

      That is not gonna happen because of the new arena.

      Although if Mr Katz had new tenants to fill the suggested 2 office towers ….those net 5000 new jobs might raise the population enough to result in 30 or 40,000 new residents.

      Course if Mr Katz had 2 office towers of new tenants, he would be fully prepared to guarantee the City’s take from a CRL because there would be little or no risk to the City. He is not prepared to do that because there is very real risk to the taxpayers. Because……..pssst …….there is no 2 office tower of new tenants waiting to move into Edmonton

    • Scott Hennig August 9, 2010 at 8:40 am #

      Hi Stu,

      I don’t assume a closed system, in so much as there would not be in-migration, but you are correct that I do assume the income distribution of the additional population would be similar to the current distribution. (ie. there wouldn’t be a bunch of millionaires moving in and no poor people).

      I also don’t assume a significant influx of population that you could correlate to a new arena. Nor a significant increase in tourism correlated to the new arena.

      If the income distribution stays the same, the distribution of housing prices should also stay the same (ie. millionaires want million dollar houses not $150,000 townhouses).

      You are partially correct about #2, but in addition to accepting my assumption of a similar income distribution, we also assume property values do increase (which Andy has pointed out is not a given).

      Regardless, let’s keep in mind that everyone’s property tax would be going up to pay for the arena, so in reality we’re only talking about how large of a tax hike, not that some would pay more and some would pay less taxes.(eg. they would see their taxes hiked 8% while everyone else saw theirs hiked 7%).

Trackbacks/Pingbacks

  1. They’re The Same Face « Why Downtown? - October 29, 2010

    […] so frustrating is that I wrote two posts about Columbus in August, and one of those posts dealt quite specifically with the […]

  2. On Columbus, Pt. 2 « Why Downtown? - August 9, 2010

    […] are two other things to keep in mind in all of this discussion about Columbus. The first is that the arena district that Staples writes about, and that the Katz […]

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