Supporting the Arts is TAXing: The Difficulty of Establishing Effective Arts Funding Schemes in Creative Cities

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In the United States, the arts and culture industries are massive economic engines. In fact, the arts contribute $763.6 billion to the U.S. economy annually, which is more than both the agricultural and transportation industries. Furthermore, the arts drive job growth and promote cultural tourism in cities across the U.S. This data suggests that, across the nation, the arts contribute value to our communities and “play a meaningful role in our daily lives, including through the jobs we have, the products we purchase, and the experiences we share.”

Because the arts are so vital to some state economies, it is important to consider the policies and procedures regarding the funding of this sector. Funding for the arts is a complicated matter due to the breadth of subjects, organizations, and fundraising schemes that fall under the umbrella of the “arts.” From the complex Broadway musical industry with many moving parts to an individual artisan jewelry-making business to nonprofit arts education programs, organizations and artists may face very different operating problems and therefore require different funding schemes. As one commentator noted in an article for Americans for the Arts, “Local Arts Agencies are like snowflakes; no two are exactly alike. Each has its own strengths and challenges. Some are well funded Departments of Cultural Affairs. Some are small organizations with a shoe string budget. The rest fall somewhere in between. What this means is we have to fundraise to deliver our programs and services and partner as often as possible. Both require patience, flexibility, and an innovative mindset to extend our reach into the community.”

On a local level, some cities have enacted tax policies to fill the gaps in funding their arts organizations. In St. Paul, Minnesota, for example, the city enacted a Sales Tax Revitalization (STAR) Program in which the city applies 10% of total sales tax revenue to arts and cultural projects. While 80% of the funds go toward revitalization of the city’s cultural district, the other 20% are allocated to arts projects within the city’s limits. Arts organizations can apply to receive a portion of those funds through a grant application on the city’s website. The STAR program has been both successful and well-received in the community, awarding over $1 million in cultural grants to thirty-three organizations in St. Paul during 2018. Projects funded by the grants included a dance company showcase, an exhibition at the Minnesota Museum of American Art, and the Twin Cities Jazz Festival. The program has been so well-received by local arts organizations partially due to the procedures and policies that aid small- and mid-sized arts and nonprofit groups in securing funding. The eligibility rules were recently revamped to allow arts organizations to receive 80% of their grant upfront, so long as they provide a work plan to the city. This allows these organizations to pursue large projects without being solely responsible for the upfront costs and without having to wait for reimbursement. Furthermore, arts organizations can apply for the grants twice per year, allowing them to more fully develop their work plans and upcoming financial needs before submitting. Overall, the STAR program funding scheme looks to be a model for other mid-sized cities to support local artists and arts organizations in a feasible manner, while investing in projects that will improve the cultural offerings and revitalize their city for long-term economic prosperity.

Contrastingly, a tax scheme enacted to fund the arts in the city of Portland, Oregon did not garner such praise and success. In 2012, citizens of Portland voted to approve a flat $35 tax to fund arts, believing that the majority of their tax would go towards paying for arts teachers and culture-related nonprofits. While the city had good intentions in proposing this tax, implementation has proved troublesome. Over 9% of the tax dollars collected have been applied towards administrative costs, with an overwhelming portion spent on enforcement mechanisms such as demand letters for late fees and penalties. Further, while a 2013 change to the policy created an exemption for those whose taxable income is less than $1000, it appears that a far greater number than those exempt have refused to or are unable to pay the tax. This results in a smaller pool of funds than anticipated, leaving the city without adequate funding to pay the high administrative costs of enforcement or to carry out their arts-related objectives.

While Portland has met its central objective of funding arts teachers for elementary schools, it has fallen flat on its promises to local arts organizations. When those funds are disbursed to arts organizations, over 57% of the total grant dollars are spent on the city’s five largest nonprofits: Portland Art Museum, the Oregon Symphony, Oregon Ballet Theatre, Portland Opera, and Portland Center Stage. This large disparity in funding disbursement has left small arts organizations frustrated. However, Portland’s Regional Arts and Culture Council, the group responsible for distribution, has promised to take a deeper look at the organizations budget and uphold its commitment to underrepresented communities and more diverse arts organizations during the 2020 fiscal year. The Council’s willingness to revamp the disbursement model is a step in the right direction, but the question still remains as to how the city will address the continuing issue of nonpayment and administrative costs. Perhaps the funding scheme needs to be entirely reworked into a model similar to St. Paul’s STAR plan that will integrate fees into other taxes that do not require such an administrative headache.

One city that has recently enacted an imaginative approach to arts funding is Columbus, Ohio. In 2019, Columbus initiated a new model called the “ticket tax.” The “ticket tax” model charges a 5%  fee on any ticket over $10 at Nationwide Arena, the largest concert venue in the city and home to a National Hockey League Team. This approach aligns with the successful St. Paul STAR model of generating funds from a sales tax, rather than as a flat fee. The Columbus tax model may be more successful and well-received than the tax models imposed in both Portland and St. Paul as it only impacts those who are already investing in arts and cultural activities and does not unfairly burden those who do not have dispensable income to spend on such activities. Further, the fee accumulates so that those who consume most of the arts and culture will invest the largest share back into the city.

As the ticket tax just went into effect in late 2019, it will be some time before the city can adequately gauge both the public’s reception and the success of this innovative model. Additionally, questions still remain as to how the money will be dispersed among large arts organizations, small arts organizations, arts businesses, non-profits, and education. Columbus would do well to follow suit with St. Paul’s approach of splitting the funds between cultural district revitalization and grants for arts programming, while taking note of the specific procedures enacted in the revamped procedure to make the grants more accessible to small- and mid-sized organizations. Doing so will encourage economic growth through creative placemaking, while meeting the diverse needs of arts organizations.

When contemplating the funding schemes that will best suit the needs of their arts communities, local governments should take special care to consider certain factors, such as: revenue source, revenue designation, and tax-base fluctuation and growth. Revenue source is important, as cities try to tie revenue streams to expenditures in ways that their communities understand. For example, it is easy to understand the link between tourism fees charged by hotels and a city’s cultural offerings that tourists, in turn, enjoy. Specifically, in terms of Columbus’ ticket fee, the revenue source of a tax on a cultural amenity makes sense because the tax is returned to a fund that benefits the arts and culture in that city. Revenue designation refers to the mechanism by which voters explicitly determine the use of revenue collected. Columbus’ ticket tax is partially there by allocating the funds specifically for the arts, but could improve in terms of clarity in regards to the disbursement scheme. Finally, tax base fluctuation refers to how closely tax revenue streams are associated with market fluctuations. Since the ticket tax is attached to recreational events, it runs the risk of lacking effectiveness during recessions when people are less likely to have expendable income. However, by generating additional, more stable, sources of arts funding through property or hotel taxes, the city can effectively cushion itself against recession worries.Looking at the critical role that the arts play in both community culture and city economics, it is vital to formulate funding schemes that are amendable to taxpayers, are sustainable over the long-term, and that fairly distribute enough funding in appropriate ratios to arts organizations. Both the St. Paul STAR program and the Columbus ticket tax seem to be model funding systems with public approval that will advance the arts in these cities. If these programs succeed over a long period of time and in tumultuous recessions, then they may serve as effective examples for growing creative mid-sized cities to emulate in the future.

About the Author: Elleni Avila is a JD Candidate for the class of 2021 at Cornell Law School. She holds dual Bachelor of Arts degrees in Arts Management and Psychology from The Ohio State University. Prior to attending law school, Elleni dance competitively and professionally for 20 years. She is an avid fan of college football, musical theatre, and reality television.

Suggested Citation: Elleni Avila, Supporting the Arts is TAXing: The Difficulty of Establishing Effective Arts Funding Schemes in Creative Cities, Cornell J.L. & Pub. Pol’y, The Issue Spotter, (Mar. 30, 2020), https://live-journal-of-law-and-public-policy.pantheonsite.io/supporting-the-arts-is-taxing-the-difficulty-of-establishing-effective-arts-funding-schemes-in-creative-cities.