The Luxury Tax - A Trojan Horse

[Ryan]

I am in total agreement with the players on the Luxury Tax, and if I were them I would strike to avoid it. I give credit to the union for recognizing the trojan horse that it is, and soundly rejecting it. The owners have devoted much lip service to the fact that the NFL and NBA have hard caps, and that the basbeall owners are asking only for a piddly little tax. However, in practice the luxury tax will be reduce the players' "take" more than either of the caps that exist in the NFL or NBA.

Why? First, the salary caps in the other leagues rest on the foundation that the players will receive a fixed percentage of total league revenue in payroll. With the salary cap amount dependent on revenue levels, the cap keeps labor spending from becoming a destructive force to the financial health of the league. But as the league harvests new revenue sources, the players salaries rise. Both parties -- management and labor -- benefit from the growth of the league.

The luxury tax threshold, however, is tied to a fixed number, rather than a percentage. In practice, it will be impossible for teams to spend more than a pittance above the fixed tax threshold. So even if the league harvests new revenue sources, the total payroll cannot significantly increase. New revenues will beneft only the owners, as they take a higher percentage of league revenues in profits.

Second, the luxury tax will have only a minor effect on competitive balance when compared to revenue sharing. If the owners truly wanted to make a deal that would improve the long-term health of the game, avoid a strike, and restore competitive balance, they would take the luxury tax off the table and push for a major increase in revenue sharing.

Revenue sharing attacks the root of the competitive balance issue: owners with higher revenues spend more on payroll; owners with lower revenues spend less on payroll in hopes of achieving the same profit margin as the teams with more revenue. Of course, this seems obvious.

But this basic understanding makes it also obvious why revenue sharing is so preferable to a luxury tax. Whereas the luxury tax only sideswipes the root cause of competitive imbalance by limiting salary growth without significant sharing of revenues, revenue sharing actually goes right to the heart of the matter. When revenues are evened out, you then done something about the actual root cause of the issue. Salaries can continue to increase in line with league revenues, but the spending will not be so concentrated on a handful of players and teams.

The luxury tax is a trick the owners are playing under the guise of benefiting "fans". They believe -- correctly -- that a long-term deal with a luxury tax will lock in annual margin rate increases, and instantly increase franchise values.

But if they truly wanted to make a deal, they would scrap the tax in favor of a revenue sharing plan that would guarantee players a fixed percentage of revenues in salary. As competitive balance restores the health of the game in cities like Kansas City, Milwaukee, and even Cleveland, both the owners and players would share in the astronomical benefits.

- Ryan

[hmrsf]

Great 1st post Ryan! Welcome! Welcome! Shoot over to ice breakers and tell us about you. Happy posting!

[SmedIndy]

Welcome aboard Ryan! This will definitely stir up some discussion.

[qtlaw]

Ryan, welcome. Well put. I had not realized that the luxury tax would be fixed without adjustment. Hopefully Fehr/Orza are intelligent enough to have yearly/periodic increases in the tax. In the NBA, the case of Matt Harpring was explored by someone on ESPN.com who showed that even though he was looking for a $3M/yr deal, with the luxury tax it would actually cost about $9M because it would be $3M for salary, $3M tax, and $3M in foregone revenue sharing. That's a huge hit for a marginal player with a marginal salary. I definitely see that happening to the utility players in MLB (Trot Nixon, Orlando Palmiero, Luis Sojo types) if the tax comes into play.

[rcartman28]

Originally posted by Ryan

The luxury tax is a trick the owners are playing under the guise of benefiting "fans". They believe -- correctly -- that a long-term deal with a luxury tax will lock in annual margin rate increases, and instantly increase franchise values.

But if they truly wanted to make a deal, they would scrap the tax in favor of a revenue sharing plan that would guarantee players a fixed percentage of revenues in salary. As competitive balance restores the health of the game in cities like Kansas City, Milwaukee, and even Cleveland, both the owners and players would share in the astronomical benefits.

- Ryan

Great post. I think that a 50% luxury tax would basically result in a de facto salary cap. The problem with a revenue sharing plan guaranteeing players a fixed percentage would be that owners would, as they have always done, find ways to make the "revenues" appear to be much less than they really are.

[KCBOOMER]

Of course the luxury tax will be setup with escalators if the Union were to agree to it. Fehr & Orza didn't just fall off the turnip truck.

The luxury tax is a goofy way of having a salary cap. Baseball more than any other sport has been plagued by a lack of one. It is a practical impossibility for the owners to police themselves on this issue. For some reason they cannot understand that they should only spend money that the team generates rather than reaching into their own wallets (Tom HIcks is the most recent example of this).

In an ideal world the owners would go into a strong revenue sharing with the players guaranteed a minimum, very healthy, percentage. Couple this with a club not being allowed to spend more than its income and you'd be set. You would also have to have an income oversight group that would monitor this to prevent abuses.

100% percent revenue sharing is probably not achievable but they need to do something along this line. The biggest abuses would be someone figuring away to hide their cable TV revenue. As an example the Yankees could creating a holding company that owns them and a shell company. They could sell their cable rights to the shell company for 1$. The shell would in turn resell the cable rights to whomever for $50M per year, or whatever the amount. On paper the Yanks only make a $1 but the holding company picked up $50M.

The Union wants no drag on salaries which is absurd. There are always drags on salary somewhere. Their policy is geared toward the superstar. They have done a very poor job looking out for entry level or minimum wage players. The entire players union would be better served if there was an emphasis on the group rather than the individual.

[qtlaw]

I disagree with your conclusion that the union has done a poor job looking out for the "marginal" player. Currently, there is no salary cap, no restrictions on salaries, and more importantly, arbitration eligibility after 3-4 years. Free agency coupled with arbitration eligibility has fueled the increase in salaries for all, superstars and marginal players alike. If nothing else, the NFL and NBA models show that a salary cap, in whatever form, hurts the lower-tier and middle-tier players more than the superstars. The superstars continue to get unbelievable salaries. $90M for Shawn Marion? The most extreme example of the salary cap is in the NFL where with a hard salary cap even the veteran minimums have made keeping those players prohibitive, leaving 5-10 yr vets unsigned. In the NBA, middle and lower tier players remain unsigned because of the luxury tax. The current structure of MLB benefits the marginal players immensely and that is what the union is fighting for.

[Ryan]

Originally posted by KCBOOMER
Of course the luxury tax will be setup with escalators if the Union were to agree to it. Fehr & Orza didn't just fall off the turnip truck.

For the luxury tax to include escalators based on league revenue, the owners would have to open the books to the union. If they have been adamant about one thing -- to Congress, MLBPA, Forbes Magazine, and everbody else -- it's that that they will NEVER open their books for anyone.

As such, the only escalators being discussed are hard numbers. For instance, owners made the "concession" of increasing the luxury tax threshold by $2M. Any annual increases would be based on hard dollar increments like this, not the percentages of revenue needed to make it fair.

So while the increments might make sense in August of 2003, the players inevitably will get a raw deal as the owners harvest new sources of revenue.

For example, what if the players had signed a 10-year luxury tax agreement in 1984? Maybe the threshold might have made sense then. But then, the owners discovered a little thing called Cable TV. The players whould have been hosed.

Similarly, what if MLB starts a foreign league like NFL Europe, starts an HDTV baseball network a la the NBA, finds a way to charge $15 for hotdogs, or explores the countless other opportunites for new revenue? The players get nothing.

No, Fehr and Orza didn't just fall off the turnip truck, which is why they won't buy into a luxury tax that does anything more than save face for the owners when it comes time to sign a new deal. Nor should they. Until the owners are ready to take some responsibility for competitive balance, I don't blame the players for giving them the middle finger. If you had to sit across the table and listen to hypocritical Bud-babble, I think you would to.

- Ryan

[Allard]

Originally posted by KCBOOMER

The Union wants no drag on salaries which is absurd. There are always drags on salary somewhere. Their policy is geared toward the superstar. They have done a very poor job looking out for entry level or minimum wage players. The entire players union would be better served if there was an emphasis on the group rather than the individual.

Are you really from KC? Are you not forced to watch Neifi Perez loaf around every night for 4 mil a year? Who says the union doesn't look out for the little guys. His salary is 5 times higher, but A-Rod is more than 5 times better than Perez, so you could claim that the union has done more for Perez than A-Rod.

Anybody know if the luxury tax money is earmarked for player salaries? I would rather see KC not get the revenue sharing money, because they'll just go get another Roberto Hernandez with it. Right now they are crying poor, and bringing up more and more of the young guys. Keep crying poor, I say.

How about a foolish tax that makes teams contribute to the pool for making dumb signings that make the world a better place for other bad players?

To me, the biggest problem with the idea of a luxury tax is when it is implemented. A luxury tax, in practice is not a bad idea - it's merely another form of revenue sharing (a good thing) - however, because of the timing of the luxury tax payments, it turns into a owner windfall. No owner budgets their yearly expenditures as if they will get a $10 million cash infusion at the end of the year - owners budget their spending on the money the team will generate. Thus, when the payment comes in, you've got some extra spending cash.

Boom's idea is a good one - come up with checks and balances to make sure the luxury money is distributed and used on baseball. Simply pretending that the current system will correct itself, and that over time, all teams have the same shot at success is just ridiculous, but it was the original stance of the players.

No, the field has never been fair - and no, it never will be. Using this as an excuse to not try and make a sport more competitive, however, is ridiculous.

[JamesI]

Originally posted by Allard

How about a foolish tax that makes teams contribute to the pool for making dumb signings that make the world a better place for other bad players?

I like it! Make the tax 300% of the stupid contract value.

[hmrsf]

Originally posted by Ryan


For the luxury tax to include escalators based on league revenue, the owners would have to open the books to the union. If they have been adamant about one thing -- to Congress, MLBPA, Forbes Magazine, and everbody else -- it's that that they will NEVER open their books for anyone.



- Ryan

Bingo.

[SmedIndy]

Originally posted by CpUltravox
No, the field has never been fair - and no, it never will be. Using this as an excuse to not try and make a sport more competitive, however, is ridiculous.

They don't want competitive balance. They want to maximize profits. Which isn't a bad thing at all, but to shroud it all in "big market" vs. "small market" and "these teams can't compete" is wrong and ill-advised. Mainly because two of the "teams that can't compete" are Minnesota and Oakland.

Can somebody please explain how the players get hosed on this deal? Perhaps I am missing something, but the major league minimum is considerably more than most regular guys (including me) make - I am having a difficult time relating.

[SmedIndy]

Originally posted by taoleary
Can somebody please explain how the players get hosed on this deal? Perhaps I am missing something, but the major league minimum is considerably more than most regular guys (including me) make - I am having a difficult time relating.

Yes, but you don't want someone telling you what your absolute maximum salary can be in your given profession, do you?

I can't relate at the money they throw at Sandra Bullock or Eninem, either, but you accept that and move along. And no one caps their earnings.