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January 7, 2003

The Daily Prospectus

Depreciation Madness

by Derek Zumsteg

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Of the many, many dumb things in the United States tax code, there's a provision that allows teams to write off the salaries of players when they acquire the team on a limited schedule as depreciation. It's an easy, fun way for them to show massive losses while they make tons and tons of delicious cash money. The write-off lasts five years, and then you sell the team for its increased value and find something else to do, like buy an arena football team, or make a nuisance of yourself in another sport.

Here's the general view of how long teams have been owned by one owner:

5 years and less (1998-2002): 8 (ANA, BOS, CIN, FLA, KC, LAD, TEX, TOR)

6 to 10 years (1993-1997): 7 (AZ, BAL, OAK, PIT, SD, STL, TAM)

1980s-1992: 11 (CHI-A, CHI-N, CLE, COL, DET, HOU, MIN, NY-N, PHI, SEA, SFG)

1970s: 3 (ATL, MIL, NYY)

(does not count the un-owned Expos, or Mets going from dual-owner to single-owner last year)

Longest running ownership? Commissioner-for-Life Bud Selig has owned the Brewers since 1970.

Current candidates for sale include:

  • Angels, bought in 2000, now that they've ensured the team will stick around in Anaheim.

     

  • Athletics, bought in 1995, are owned by owners without a whole lot of scratch. It's almost Billy Beane's fault the team isn't already in the hands of a better-backed group: as long as the team's successful and making money on a shoestring, the owners don't have an incentive to sell.

     

  • Dodgers, bought in 1998, are suddenly the object of sale rumors as News Corp, having established Fox Sports Los Angeles, has run out the tax break and wants to use the money elsewhere. Also, I don't think they ever really figured out how to run the team.

     

  • Expos, screwed over repeatedly. Not a lot to say here.

     

  • Padres, bought in 1995, by a now fiscally hurting owner. If he got a great deal now, stadium on the way, I think he'd take it, but otherwise he'll probably sweat it out until the money starts rolling in and he can flip it as a much more lucrative package in 2005.

     

  • Twins, bought in 1984, though I think it's likely with the new revenue sharing deal Carl Pohlad is even more likely to stick it out and suck the sweet, sweet blood of other teams.

     

  • I also expect we're going to see Tom Hicks explore selling the Rangers soon.

But there's your pattern - only one franchise currently known to be up for sale was in the same hands for more than seven years. It makes sense: there's a huge financial incentive to buy a team, and then when that incentive is gone, why hang around? Charge someone else, who has a brand new huge financial incentive to get in on the action.

This has a lot to do with what many people think is wrong with baseball.

If an ownership group buys into a troubled franchise like the Expos, they have a couple options:

 

  • Build the team. Invest in players, in draft picks, in quality instruction and scouting. Invest in marketing, in a stadium if you can. You risk a ton of money in the short-term, but over the long-term you can become a cash-generating machine and double your franchise value when it's time to sell much farther down the road.

     

  • Whistle a happy tune and spend nothing. Write off the costs, collect your revenue sharing money, make easy money and flip the team to the next guy when the tax exemption is done. Optionally, try and get a new stadium built and blame the Yankees for your troubles.

When you give people an incentive to act in one way, they will act in that way unless there are greater incentives to do something different. Not all of baseball's problems are internal, but you see here how baseball doubles up on a problem to give owners even greater incentive to do nothing. Because of the way our tax system works, owners have an incentive to own teams for short periods of time, and the revenue-sharing ensures that being cheap is profitable. When they know they intend to only own a team for a while, there is no reason to make long-term investments - even if those investments could result in huge returns - when it would bring in no additional money in the time you own the team.

We lose two ways: this spurious tax write-off means in some small way we pony up more of the tax revenue for the benefit of the obscenely wealthy, and fans of bad teams have little reason to believe their lot in life will improve under new ownership.

Derek Zumsteg is an author of Baseball Prospectus. You can contact him by clicking here.

Related Content:  Incentive

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