Market Power

Musings by an academic economist on the power of markets and the power over markets.

Wednesday, November 03, 2004

Sports and Taxes

So the voters in Arlington, Tx. have passed the referendum to provide public funds for the construction of a new stadium for the Cowboys. They passed a new hotel tax and a car rental tax to pay off the bonds that will be sold to finance Arlington’s share of the construction. Kansas City, Mo. Voters passed a similar referendum to enact a car rental tax last August to build a replacement arena for Kemper Arena. See here. Arlington will start collection of these taxes on April 1st (April Fools, visitors. We raised your taxes).

These are politically popular ways of financing stadium construction – pass taxes that don’t fall on locals. Very few locals drive rental cars and probably even fewer get hotel rooms locally, so the burden falls on out-of-towners. Or does it?

A tax raises the price that consumers pay for goods, giving them an incentive to shop around for alternatives. There are lots of good substitutes available for hotels and rental cars in Arlington (e.g. in Fort Worth) and for rental cars in Kansas City (e.g. in Overland Park, Lenexa, and Lee’s Summit). So hotels and rental car dealers in Arlington will lose some customers. And then there’s the multiplier effect.

But taxes also lower the price that sellers get to keep after selling their good. There are some special circumstances that allow businesses to push a tax entirely onto their customers. One way is if customers are completely unresponsive to the price – they always buy the same amount no matter the price. Because of the availability of substitutes, this can’t be true in Arlington or KC.

The other way is if sellers are willing to sell at only one price, an unlikely occurrence. In general, customers end up bearing part of the tax burden and the sellers bear the other part. However, if a lot of good substitutes are available, the greater the burden borne by the sellers. This is likely the case for both Arlington and KC.