Sunday, August 25, 2002
For Whom the Tax Tolls
By John Byczkowski
The Cincinnati Enquirer
With days remaining until a possible strike, negotiators for Major League Baseball owners and players this weekend are expected to tackle the most difficult issues.
Over the past 10 days, owners have made two new proposals to the players, agreeing to share less revenue and setting a structure for a “competitive balance tax” that would take money away from teams with the highest player payrolls.
The players consider those to be two legs of the same animal. Said Gene Orza, the chief negotiator for the players' union: “We've been saying all along that the issue is not revenue sharing or high taxes. It's transfers (how much money will be taken from the richest and highest-spending teams and given to the bottom teams).”
TAX & SPEND
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Players' and owners' views on payroll penaltiesTo curb growth in spending on player salaries in Major League Baseball, the players union and the owners have agreed to implement a payroll tax. The players call it a luxury tax, while the owners call it a competitive balance tax. Here are the two sides' proposals. For the purpose of the tax, the New York Yankees' payroll for 2002 is $171 million.
Owners: The tax would kick in for payrolls above $102 million, and that threshold may be adjusted for inflation in 2005 and 2006. For payroll above that threshold, teams would pay a 37.5 percent tax the first time they exceeded it, rising to 42.5 for the second time, 47.5 the third and 50 the fourth. The owners also propose a minimum payroll of $45 million.
Players: The tax would kick in for payrolls above $130 million in 2003, rising to $140 million in 2004 and $150 million in 2005. There would be no tax in 2006. Teams would pay a 15 percent tax the first year they exceeded the threshold, rising to 25 percent the second time and 30 percent the third time. The players oppose a minimum payroll.
Source: Doug Pappas, chairman of the “business of baseball” committee at the Society of America Baseball Research.
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That ultimately will determine how the players will share in baseball's rich pie, and that's the issue the players believe is worth striking for. Right now, they're not happy with the owners' proposals. On Saturday, the union offered a counter deal that angered the owners, who called the players' proposal “a move that went the wrong way.”
“The nature of (the owners') response to our original proposal was so inadequate,” Orza said. He compared the situation to two people haggling over the price of a house.
“You want to buy a house. You don't want to pay more than $300,000. I won't take less than $500,000. You say, "OK, I'll give you 330,' to which I say, "I'll lower my offer to 499;' now it's your turn.”
The players believe the owners' current “competitive balance tax” proposal penalizes too many teams. The owners want to tax teams with payrolls over $102 million, and that threshold would barely increase over the four years of the contract. If the tax were in effect this year, it would affect seven teams, with three more close by, the union said.
That's too many. The threshold for triggering the tax “is too low, and it's too static,” Orza said. The union previously has proposed a tax with a higher threshold that would affect mainly the New York Yankees, the team with the highest payroll.
What the two sides are fighting over are baseball's future revenues, which are sure to grow. From 1995 through 2001, Major League Baseball's revenues more than doubled to $3.6 billion, and average team payrolls doubled as well, to nearly $66 million. Driving revenue upward were two new teams, six new ballparks, higher ticket prices and a new television contract with Fox Broadcasting. Owners used those added millions to bid for star players, and today they say the sport is losing money.
Doug Pappas, chairman of the “business of baseball” committee at the Society for America Baseball Research, said that although it's highly unlikely revenues will double again over the next five years, they're sure to increase.
The picture is mixed: On the plus side, three new ballparks are under construction, in Cincinnati, San Diego and Philadelphia. A new national cable television contract with ESPN kicks in next year, quadrupling those revenues to $175million a year.
But the owners are talking about shutting down teams, rather than adding more. The broadcast television contract with Fox goes through 2006, so it won't generate dramatically more revenue over the next four years.
Still, Pappas said he expects overall baseball revenues to grow at least 40 percent.
The question is, into whose pockets will new revenues go: the players' or the owners'? That's what the luxury tax will help determine.
Things such as luxury taxes and salary caps “are designed to reduce the amount of money going to player salaries, and to affect competitive balance — to make sure the talent is spread more equally around the league,” said Bruce Johnson, a sports economist at Centre College in Danville, Ky.
If top-spending teams are discouraged from bidding for talent, then the cost for players falls, allowing less-wealthy teams to bid for them, he said.
Last week, union head Donald Fehr branded the current owner proposals on the tax and revenue sharing “a wholesale attack on the salary structure” of baseball. Rob Manfred, lead negotiator for the owners, called that characterization “baffling.”
Manfred said baseball hopes to put a “speed bump” in the path of the highest-spending teams. However much those teams are discouraged from spending, that “will be more than made up for by additional spending by the revenue-sharing recipients in an effort to raise their payrolls and be more competitive.”
Economists and others interviewed said the owners' current proposal on the luxury tax makes that far from certain. Johnson said it's possible that if the tax does make more teams competitive, then attendance and TV ratings will rise, and that means more money for both players and owners.
But “it's not automatic,” and it might take several years for that effect to develop. In the short term, a tax would mean less spending on payroll, unless low-spending teams are forced to spend on payroll the money they get from revenue sharing.
In the owners' proposal, a key problem is that the $102million threshold for triggering the tax barely changes during the life of the contract. That means that if baseball revenues rise as expected, the tax will discourage teams from spending that money on players.
“If (the threshold) doesn't adjust over time ... then more and more teams are going to pass the threshold, and depending on what happens to the tax rate, players will be less valuable to more and more teams,” said Rodney Fort, a sports economist at Washington State University. “That's a bad thing for the players.”
“The owners' proposals are clearly designed to achieve enough of a penalty that salaries will be rolled back,” said Jeffrey Kessler, a New York attorney who has helped design salary caps for the NFL and NBA. “The tax rate is too high, the threshold is too low, and the revenue sharing is too big. You add up all of those things, and you can see the combined effect it's going to have.”
Kessler said the system proposed by the owners clearly will discourage the top teams from spending money on players. Because the tax's trigger doesn't change, teams just below the threshold today — such as the Seattle Mariners — won't spend more either.
Fort said the tax would have to be very high to effectively change the way teams bid for players. Baseball had a luxury tax in its last contract, and the tax was so low that teams like the Yankees paid it and still spent millions to load up on the best talent.
“Don't anticipate that if the luxury tax is in place, that there's going to be much impact on competitive balance, unless the tax is close to 100 percent,” he said. “Unless the tax rate is large enough, you're probably not going to see much impact on competitive balance.”
Under the owners' proposal, the most a team would be taxed is 50 percent, and only if it surpasses the threshold for four years.
What's the perfect solution? No one can say. The owners' current proposal would affect seven teams, and that's too many for the players. The players' proposal would affect just the Yankees, and that's not acceptable to the owners.
Johnson said he believes an effective compromise can be done, but he doesn't know what it would look like. Fort said he believes the owners should forget a cumbersome luxury tax and concentrate on revenue sharing.
Manfred, the owners' negotiator, said, “We've made great strides in terms of structure. ... It's just a difference in numbers.”
Orza, the union's negotiator, said the owners have indicated the current tax proposal isn't a take-it-or-leave it offer. “There's play,” he said. “How much play is a question for negotiations.”
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For Whom the Tax Tolls
