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August 27, 2002

Are The Owners Right?

What's Wrong With the Union's Proposal

by Ted Frank

The MLBPA's luxury tax proposal is bogus.

There, I said it. The press coverage of the labor dispute, which has been sorely lacking in its failure to question the revenue/loss numbers of the owners, has been just as lacking in its failure to identify that the MLBPA has made a luxury tax proposal that will collect absolutely zero luxury tax and do not a whit (nor an Ernie Whitt) to reduce salaries. As a result, the parties are much further apart than current reporting would lead you to believe.

The MLBPA proposal, as it currently stands, proposes a luxury tax over three years from 2003 to 2005. Some might complain that the MLBPA proposal kicks in at $125 million in 2003, rising to $145 million in 2005; the owners are asking for a luxury tax with a threshold at $107 million. (The Red Sox' April 2002 salary was $108 million; the Yankees $125 million; all other teams' April 2002 rosters would be unaffected by both thresholds.) The players' tax rate acts as a mild disincentive, while the owners' tax rate is sufficiently punitive to act as a cap. For example, if the cap was set at owners' proposed $107 million level with the players' 15% tax, it would cost the Yankees less than $3 million to keep their payroll at $125 million. A 35% tax, as the owners have it, would probably induce the Yankees to cut some salary, and would keep just about every other team from exceeding the threshold by very much.

But the real reason the MLBPA's luxury tax proposal is bogus has nothing to do with thresholds or tax rates. It has to do with the fact that the MLBPA's tax proposal has the tax disappear entirely for the 2006 season.

I've seen some foolish general managers in my day, but there isn't a single one dumb enough not to figure out in five minutes how to evade the cap entirely when it is in effect for three years, but not the fourth. Imagine you're the New York Yankees and want to sign Cliff Floyd, but don't want to incur the luxury tax in 2003. It's easy enough to approach Derek Jeter, Bernie Williams, and Jason Giambi and ask them to defer $5 million/year for three years in exchange for a $17 million balloon payment in 2006, when the tax does not apply. Bingo, $15 million in threshold space.

Ok, it's not quite that easy, because the payroll is calculated using average annual values of contracts. This only makes the evasion mechanism slightly more complicated: offer "bonuses" based on absurdly low thresholds of at bats or innings pitched. There's some risk the Yankees would renege on the player by benching him for 2006 rather than pay the balloon, but, realistically, the Yankees wouldn't dare.

When the MLBPA is proposing a luxury tax that not only phases in so high as to not actually affect any salaries, but also is so easy to evade, it is easy to understand why the owners are so furious at the players' proposal.

There's no reason this could not be settled quickly if both sides were just a bit more reasonable.

  1. Get the owners to yield just a little bit more on the luxury tax, from 107/107/107/111 to 107/110/113/117, or something similar indexed to the cost of living.

  2. The parties are next door to each other on revenue sharing, only about $225 million apart over 4 years. Split the baby.

  3. Players' fears of the effects of revenue sharing and a luxury tax on salary will be mollified if a portion of the revenue sharing were used to guarantee a minimum level of salary. Call the minimum level $2 billion in 2003 (slightly below the $2.023 billion paid in 2002), and index it to the national television revenues. If salaries dip below the minimum, cut checks to players to make up the difference, proportional to the number of wins their team had, their place in the standings, their years of experience, or their salaries. (For the reasons mentioned in my earlier piece, I strongly suspect that a cap that affects the Yankees will serve to raise salaries by encouraging mid-market teams to compete in the free agent market, rather than cede it to a Yankee team that could previously outbid its competition by tens of millions a year.)

  4. Any owner losses from #1 through #3 can be more than made up for if the players agree to internationalize the draft and "slot" bonuses paid to draftees, a la the NBA.

  5. Make the agreement eight years instead of four, so we don't have to go through this in 2006.

Could either side afford to reject such a proposal, if the other were to make it? I can't imagine how.

Ted Frank (thf2@yahoo.com) is an antitrust attorney in Washington, D.C. He is a regular reader of his brother's weblog, "Hooray for Captain Spaulding". He would take a pay cut to work for the Washington Expos and has references available on request.

Related Content:  Luxury Tax

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