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Formula One: Economic Fantasy and Fiscal Myth

The following post is a guest contribution by Citizen Richard of Audits in the Public Interest.

In late spring of 2010, Austin residents woke to the grand news their city had been selected as the host city for Formula One racing in the United States.  Amidst the hype, and not immediately noticed, was the price tag hanging off the back of their new community award: an invoice in the amount of $250,000,000 to Formula One World Championship, Ltd, for the sanctioning fee.

A 25 followed by seven zeros is one quarter of a billion dollars and this was not all: the City of Austin would be on the hook for another $40,000,000.  The incentive, from the Texas Major Events Trust Fund (METF), would supposedly be paid from increased retail taxes.  The METF is administered by the Comptroller of Public Accounts, Susan Combs.

An extensive review by Audits in the Public Interest reveals a different picture about Formula One.

  • F1 has had a troubled history in the United States.  The last site to host F1, Indianapolis, ceased in 2007 when negotiations over the sanctioning fee broke off at $10MM.  This begs the question, Why is Texas offering two and one half times that amount?
  • The law for the Major Events Trust Fund requires a “highly competitive selection process.”  Subsequently, the Comptroller of Public Accounts, simply by rule, redefined highly competitive to mean “a site selection which has historically considered sites outside of Texas on a competitive basis and intends to do so in the future.”  In other words, no requirement for a current competition and therefore no competitive limit on the incentive award.
  • The Texas Comptroller of Public Accounts (CPA), in conjunction with the Governor’s Office, made the award and accepted the site without consulting Austin or Travis County.  This reversed the normal order requiring an application from local officials (Sen. Kirk Watson, Fact Sheet: Formula 1 and Senate Bill 1515).
  • The Comptroller undertakes little or no critical review of projections presented by the sporting industry about events such as F1: therefore, the METF is largely a blank check for host committees.
  • Over 10 years, F1 will receive as incentive 100% of its projections about the economic activity created by an F1 race.  This is not just activity at the track, but across the entire market area designated by the Comptroller.  Over ten years, the award writes a check to F1 for all the economic activity from a race, its bounty across an entire economy.
  • Regarding post event audits to verify whether events generate the taxes consultants say, Robert Wood, Program Manager at the Comptroller stated, “We don’t have the resources to check.”  Once again, the award is utterly in the hands of the original industry projections.  The award is not performance based.
  • Senate Bill 1515, authored by Austin Senator Kirk Watson during the 2009 legislative session, limits the incentive to “increases in tax revenues that will come from the event.”  However, the Comptroller did not adjust her award for tax revenues attributable to existing economic activity.  Austin’s  tourism and hospitality sector is on average 60-70% utilized throughout the year.  The $25MM per year pays F1 for economic activity it displaces.
  • Academic economists who study major sporting events, their hosting costs and tax benefits, have consistently found these events to be a net loss to the hosting community.
  • Not-with-standing the aforementioned studies, and giving some credit to the benefits and projections put forth by Formula One, Audits in the Public Interest places the correct award per year in the range of $5,000,000 rather than $25,000,000 as planned by the CPA.

These matters were presented in testimony before the Texas Senate Finance Committee on February 16, 2011.  Audits in the Public Interest has serious reservations about the manner in which the Comptroller of Public Accounts administers the Texas Major Events Trust Fund.