|Wednesday, August 14
Updated: August 16, 9:30 PM ET
Owners' luxury tax no guarantee of competitive balance
By Darren Rovell
Baseball labor lawyer Rob Manfred still calls the proposed luxury tax on team payrolls a "competitive balance tax" -- a phrase a players union official once said must have been the brainchild of a public relations firm. But there's little evidence that a luxury tax will have any effect on the sport's competitive disparity.
The luxury tax is the biggest obstacle to both sides reaching a new Collective Bargaining Agreement and avoiding a damaging strike. Manfred also calls the tax "payroll regulation," a term that union officials believe is a pretty way of calling for a defacto salary cap, since the chance of the union agreeing to a hard cap hovers near zero percent.
"The goal of the luxury tax would be to have no one paying it at the end of the day," said Bob DuPuy, Major League Baseball's chief executive officer. "Ideally, it would compress the ratio from top to bottom teams so that winning would have more to do with personnel decisions and pure brain power than sheer economic advantage."
The union has countered management's opening offer of a 50 percent tax on payrolls (which would include the 40-man roster and benefits) above $100 million by offering increased revenue sharing or a tax on a higher payroll. But Manfred said Tuesday that management does not view the tax "as another mechanism that transfers money from one group of clubs to another group of clubs."
"It's possible it won't be perfect, but (the luxury tax has) got to help," DuPuy said. "We think it will reduce the Yankees' payroll and it will allow the Kansas Citys, Milwaukees and Torontos to climb back."
Convincing the union that the tax has more to do with competitive balance than holding down salaries is going to be a tough task.
The NBA is the only other league that uses a luxury tax and although it won't kick in until this year, the NBA Players Association contends the correlation between league-wide parity and the tax is erroneous.
"The notion that a luxury tax promotes competitive balance is demonstratively and absolutely false," said Dan Wasserman, spokesman for the NBPA. "There is abundant evidence that points to the fact that high team salaries don't translate into wins."
Last season, for example, the Portland Trail Blazers spent about $40 million more than the Los Angeles Lakers, and the New York Knicks spent about $30 million more than the New Jersey Nets. Yet the Lakers and the Nets faced each other in the NBA Finals.
The NBA's luxury tax threshold is determined at the end of the season based on gross revenues of the entire league, an idea that the Major League Baseball Players Association soundly rejected in the 1994 negotiations. A team that goes over the luxury tax threshold -- likely to be in the $50 million to $55 million range for the 2002-03 season -- has to pay a dollar-for-dollar tax for going over, but also forgoes the rebate that is shared among the teams that are below the limit and the escrow tax that is deducted from player's paychecks and re-distributed to teams. Last week, an arbitrator heard a grievance filed by the NBPA on the legality of the distribution of the escrow tax money.
"Fear of going over the tax threshold has definitely depressed salaries," Indiana Pacers general manager Donnie Walsh said. "But we've yet to see if there is going to be any effect on the ratio of taxed and non-taxed teams and their winning percentages. The flaw in the relationship (between competitive balance and the luxury tax) is the fact that you win with a large payroll only if you have the right combination of players."
But when the current Collective Bargaining Agreement was being negotiated, the NBA never labeled it a competitive balance tax.
"While competitive balance is always a concern, the discussion on our tax system focuses more on bringing salaries in line with revenues," NBA deputy commissioner Russ Granik said.
Baseball's justification for advocating a 50 percent tax on a fixed payroll amount is based on the 34 and 35 percent tax on high payroll teams from 1997 to 1999, a tax owners felt was ineffective (teams were taxed only on the payroll amount above the average of the fifth- and sixth-highest payrolls). Teams like the New York Yankees, Baltimore Orioles and the Los Angeles Dodgers continued to spend, just like the Blazers, Knicks and Dallas Mavericks continued to spend in the NBA.
The NBA is further complicated by the soft salary cap, but because of loopholes like veteran exceptions, which provide teams with ways of exceeding the cap, the NBA can be compared with Major League Baseball. Despite the luxury tax kicking in this season, the NBA still likely will see the largest disparity in payrolls in its history next season. The Trail Blazers could be the first NBA team to surpass $100 million in salary, while several teams will have to sign players to reach the $30.2 million minimum payroll requirement. The highest previous disparity, at the beginning of the season, was $56.9 million in the 2000-01 season.
Since the baseball players union objects to having a salary floor, there's no guarantee that money earned from the tax by the teams that don't surpass the threshold would be put back into the payroll. Management has suggested a payroll floor of $45 million, but that includes the 40-man roster and benefits. Only two teams, Montreal and Tampa Bay, fall below that figure now.
Risks of any revenue sharing program is that a team could keep its payroll costs to a league minimum and rely on shared revenues to earn a profit. If the union won't agree to a payroll floor, baseball officials could suggest that a minimum amount of the shared revenues be spent on payroll or player development.
"We wouldn't recommend it," DuPuy said. "But if a team wanted to dump money on their draft choices, we could give them the option of doing that."
Dallas Mavericks owner Mark Cuban said he believes baseball officials should make sure that luxury tax money is used to market teams. "Money can't just be put in an owner's pocket unless they have sold the majority of their tickets," Cuban said. "If they haven't, the funds should be distributed as cooperative marketing dollars used for funding sales and marketing efforts by the league."
In the case of teams with anemic ticket sales, Cuban said the league should be required to step in and operate the teams' sales and marketing efforts, using the tax money until the team reaches a benchmark in ticket sales or declares it doesn't want the money.
"The NFL has a hard cap, but if you ask 20 NFL experts who is going to win the Super Bowl this year, you might get 20 different answers," DuPuy said. "If you then asked 20 baseball experts who is going to represent the American League in the World Series, at least 90 percent of them would say the Yankees and the rest would say Seattle."
Darren Rovell, who covers sports business for ESPN.com, can be reached at email@example.com