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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.