Yankee Stadium: Empty Seats Are The Most Precious Of All
Why would the Yankees charge up to $2,500 for a seat amid the worst economic downturn since the 1930’s? And faced with scores of embarrassingly visible empty seats, why would they cut prices on less astronomically-prices seats while leaving the $2,500 price point intact? Wishful thinking undoubtedly played a role, but for the primary driver I suspect one need look no further than the tax code.
According to the Associated Press, the new Yankee Stadium features 146 front-row seats in the sections between the dugouts - these are the seats priced at $2,500 per game; twice as much as the seats right behind them in row 2. The stadium also features 56 private luxury suites. And therein lies the rub. Customers cannot deduct the full cost of luxury suites for tax purposes; they can only deduct as much as the cost of the highest-priced non-suite ticket.
Let’s use the $1,250 cost of second-row seats as a base. If the Yankees could sell all 146 front-row seats at that price, the revenue would be $182,500 per game, or $1.48 million over 81 regular season games. Let’s say they can only sell half of those 146 seats at $2,500 each; excluding concessions (a rounding error on the per-seat revenue yield at these levels) the pricing change is revenue neutral. The Yankees still take in $182,500 per game, or $1.48 million per season, on that block of seats.
But the impact on luxury suite pricing power is enormous. Let’s assume each suite seats 20 people, and Gigantor Corporation wants to buy one for the season. We’ll also assume that Gigantor has a corporate tax rate of 35% (although if it based in New York that may be a little light). Before the prices for front-row seats were doubled, Gigantor could deduct $1,250 per person in its suite - $25,000 per game, or just over $2 million over the full season. At Gigantor’s 35% tax rate, that means that the cost of the luxury suite for the season would reduce its tax bill by $700,000.
But by raising the price of its front-row seats to $2,500 (even though half of them remain unsold at that price), the Yankees have doubled the value of Gigantor’s deduction to $1.4 million. If all 56 luxury suites can hold 20 people, the aggregate increase in annual tax-deductibility from the otherwise revenue-neutral front row price hike is $39 million. Which is to say, it enables the Yankees to charge Gigantor and its other corporate suite customers an incremental $39 million per year, without increasing the after-tax cost to those customers. The actual figures could be materially different based on things like actual seating capacity of the private suites, or any additional constraints on tax deductibility of which I’m unaware, but conceptually, I think this pretty much answers the riddle.
Which leads to this prediction: when the economy improves, the prices of those 146 front row seats will rise first and fastest, and when the media starts running stories about overpriced $5,000 tickets going unsold, the Yankees will cry all the way to the bank.