Think of this as a supplement to today’s article. The current revenue sharing system isn’t the easiest thing to understand, but I’ll try to break it down as simply as I can.
There is a “straight” pool and a “fixed” pool. The straight pool is actually pretty simple: each team’s “net local revenue” (total local revenue minus stadium expenses) is taxed at 31%. So if your team makes $110 million from ticket sales, television, merchandise, and the like, and they spend $10 million operating their stadium, their net local revenue is $100 million. They would then have to pay $31 million into a league-wide pool.
Once every team pays their share, the pool is divided equally amongst the thirty teams. So let’s say each team gets back $50 million; the team that paid $31 million would come out as a payee, collecting $19 million net. A team that put $90 million into the original pool would be a payer, as they would have come out behind by $40 million.
Then there’s the fixed pool, which is a bit more complex, so stay with me. Essentially, MLB takes a portion of its national revenue, and distributes it unevenly amongst the teams, with small market teams getting more and large market teams getting less. What percentage each team gets is determined at the start of the CBA period, based on their previous revenue figures — this can only change if a team moves into a new stadium, or shows significant and sustained growth. Hence the name “fixed” pool.
To determine how much money gets distributed by this fixed pool, MLB figures out how much total money would be distributed, if there was only a 48% straight pool. They then use that figure and subtract what was actually distributed using the 31% straight pool; the difference is what is paid out through the fixed pool.
This is why 48% is the effective rate of revenue sharing, and the only one that teams really care about.
Thanks, Shawn. Very helpful. Would it be too much to ask that "market" be striken from these explanations? I had thought that they once used payroll to determine distributions, but it appears from your explanation that they now use local revenues for this purpose. Anyway, I'm pretty sure that it's not the actual market size you're referring to.
Shaun: Sorry to be obtuse, but can you give us concrete examples for teams? For example, do the Marlins get enough in revenue sharing to make money regardless of whether or not they sell any tickets? How much do the Giants and A's get in revenue sharing?
I'm less interested in how much the Evil Empires pay out, because it clearly isn't enough, and more interested in how much the teams that can't afford every Alex, Tex and Derek receive.
It's tough to say, since baseball has kept the team-by-team numbers under lock and key the past few years. Needless to say, the Marlins get a substantial amount, but it wouldn't be enough to cover all of their operations without any additional revenue.
Shawn, any idea as to what the marginal tax rate is on the lowest revenue teams? I've heard it cited as an explanation for why low revenue teams don't invest the revenue sharing money. The argument is something like that if they invest the revenue sharing money in good players thus increasing revenue (although that's a little bit dubious given the lack of success the Rays are having drawing fans this year), they both have to pay a 31% straight marginal tax on revenue, but they also have a marginal tax from the reduced payouts they receive in revenue sharing that adds up to close to a 100% marginal tax rate.
It's been a while since I looked at this, so Shawn may know more, but: I believe the payouts don't reduce until they kick over the line from "low revenue" to "high revenue." So as long as a team doesn't hit that "benefits cliff," their marginal tax rate is still just 31%.
The marginal tax rate on new revenue is always 31% -- the straight pool treats everyone the same. The EFFECTIVE marginal tax rate (i.e. including what the team loses in payouts when they increase their own local revenue) is really different from team to team, but I don't think there are any teams that are near 100%, as there were during the previous CBA.
On another note, whether a team is a "payer" or a "payee" simply depends on how it all works out. If the top teams grow faster than the smaller teams (which has happened in this CBA-period), less teams will be payers, but each will be paying more.
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Thanks, Shawn. Very helpful. Would it be too much to ask that "market" be striken from these explanations? I had thought that they once used payroll to determine distributions, but it appears from your explanation that they now use local revenues for this purpose. Anyway, I'm pretty sure that it's not the actual market size you're referring to.