Proposing a Luxury Tax for the Next Collective Bargaining Agreement

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There are countless issues being negotiated between the National Hockey League (NHL) owners and the National Hockey League Players Association (NHLPA).  Many fans took personal offense to the first offer set forth by the owners to the NHLPA.  The offer was, without a doubt, extreme in many respects.  At the same time, should fans have expected anything less?

When was the last seamless collective bargaining negotiation between these two sides?

Many experts have advised fans not to worry about any of the current offers or rumored issues.  We have a few months to go before the “real offers” appear and the serious negotiations begin, they say.  In reality, the NHL and the NHLPA are no different than you and me—they work harder as deadlines approach.

NHL Commissioner Gary Bettman (cr: VancityAllie@flickr)

Of the contentious issues, and make no mistake there are many, one of the most interesting is the salary cap—more specifically, a possible resolution to the issues the salary cap presents.

The NHL salary cap is a hard salary cap, like that of their NFL brethren.  A team does not have the ability to exceed the salary cap as is possible in the National Basketball Association (NBA) (MLB does not have a salary cap).  The NHL fought tooth and nail for the current hard-cap system, so the league will almost assuredly not agree to any changes with regards to its function and effect.   Having said that, a variation of the current salary cap structure could resolve a number of the issues the NHL has faced since the lockout of the 2004-05 NHL season.

Revenue sharing has become a big talking point for NHL pundits.  The revenue sharing in the NHL is minimal as compared to the league’s NFL counterparts  (television money has a lot to do with this).  Many of the NHL’s teams are struggling to make ends meet and are all the while being required to meet the NHL salary cap floor–whether it is financially feasible or not.

A possible solution to the lack of revenue sharing would be the insertion of a luxury tax into the next NHL collective bargaining agreement.  Of course, this would require the NHL hardline owners to move off of the current hard-cap system.  While it is very unlikely, it is worth evaluating further before discarding such a possible solution.

With the help of the wonderful website (CBA FAQ) we can gain a greater understanding of the intricacies of the NBA luxury tax system.

In explaining the luxury tax system, the website begins by stating:

The luxury tax is a mechanism that helps control team spending. While it is commonly referred to as a “luxury tax,” the CBA simply calls it a “tax” or a “team payment.” It is paid by high spending teams — those with a team salary exceeding a predetermined tax level. These teams pay a penalty for each dollar their team salary (with a few exceptions, see below) exceeds the tax level.

Gary Bettman

(Kellen/Icon SMI)

The luxury tax is applicable if a team exceeds the top end of the salary cap (“salary cap ceiling”).  The salary cap in the NBA is determined in the same manner as the NHL salary cap is determined—based on a proportion of league related revenue.  Obviously the specific interpretation of basketball related revenue varies from sport to sport (hockey related revenue has its own detailed definition).  As NHL fans may know, determining what constitutes hockey related revenue is also an issue on the table at these collective bargaining negotiations—but this article can only be so long.

In any event, if a team exceeds the salary cap ceiling in the NBA, that team has to pay a tax.  This tax varies, as explained by Larry Coon of CBA FAQ:

The amount of tax a team pays depends on the season, the team salary as of the team’s last regular season game, and whether the team is a “repeat offender”:

  • For 2011-12 and 2012-13, teams pay $1 for every $1 their team salary exceeds the tax level. There is no repeater rate.
  • For 2013-14 teams pay an incremental rate based on their team salary. There is no repeater rate.
  • For 2014-15 teams pay an incremental rate based on their team salary. They pay the repeater rate if they also were taxpayers in all of the previous three seasons.
  • For 2015-16 and all subsequent seasons, teams pay an incremental rate based on their team salary. They pay the repeater rate if they were taxpayers in at least three of the four previous seasons.

This may not be the easiest concept to understand, so here is the example provided by CBA FAQ that explains this concept more clearly:

For example:

  • A team with a team salary $12 million over the tax level in 2011-12 pays a tax of $12 million.
  • A team with a team salary $12 million over the tax level in 2013-14 pays a tax of $21.25 million (the incremental maximum of $7.5 million for $0 to $4,999,999, plus the incremental maximum of $8.75 million for $5 million to $9,999,999, plus $2 million times the incremental rate of $2.50 for $10 million to $14,999,999).
  • A team with a team salary $4 million over the tax level in 2015-16 pays a tax of $10 million ($4 million times the repeater rate of $2.50 for $0 to $4,999,999) if they also were taxpayers in three of the previous four seasons, or pays a tax of $6 million ($4 million times the non-repeater rate of $1.50 for $0 to $4,999,999) if they were not taxpayers in at least three of the previous four seasons.

As one can tell, it is a significant financial punishment to exceed the NBA salary cap ceiling.  Fans of the Phoenix Suns have long-complained that their owner, Robert Sarver, was never willing to exceed the luxury tax threshold to add the final piece to the Suns star-studded teams built around Steve Nash. Other owners, such as James Dolan in New York (also owner of the New York Rangers) have proven willing to pay the tax in order to add talent (or maybe just add players—adding talented players has not exactly been the Knicks forte over the past fifteen years or so).

The key for the luxury tax system and how it would be helpful in the current NHL landscape is how the luxury tax funds, meaning the tax paid by teams exceeding the salary cap limit (exceptions excluded), the non-tax paying organizations.

Coon explains precisely how this money is apportioned:

  • Up to 50% of the tax money may be given to non-taxpaying teams. Note that there is no requirement that any of the tax money be distributed to teams in this manner.
  • Any tax money not distributed to teams will be used for “league purposes.” In other words, at least 50% of the tax revenue will be used for league purposes each season.

“League purposes” essentially means for any purpose the league decides, including distributing the money back to teams. The league decided that in 2011-12, 100% of the tax revenue will be used as a funding source for the league’s revenue sharing program (see question number 24). Starting in 2012-13, 50% of the tax revenue will be used as a funding source for the revenue sharing program, and the remaining 50% will be distributed to non-taxpaying teams in equal shares.

To understand the consequence of crossing the tax line, consider a team just below the tax line that suffers injuries and needs to sign a replacement player. This team would pay the player’s salary, pay tax on the amount by which they are now above the tax line, and forfeit any tax distribution they otherwise may have received.

Think about that.  The top spending teams are exceeding the ceiling of the cap to improve their chances of succeeding but are also doing so because the organization is likely earning the revenue to support such a cost, as well as considering the revenue benefits down the road of adding a player worthy of exceeding the cap.

The tax, if you become a consistent luxury tax paying organization, soon becomes too punitive to continue to pay year-after-year.  So, the risk is lessened that some teams will make so much money that they will blindly spend $200.00 million per year.

All the while, the non-tax paying teams are benefiting financially from such a decision.

So long as the owners allot these funds in the appropriate manner, fans from every team see some benefit from such a system.

Sure it is not foolproof–no system really is.  Nonetheless, it helps redistribute the wealth around the league.  Further, such revenue sharing ought not lead to less guaranteed revenue sharing between owners.  Instead, it should be meant to augment the guaranteed revenue sharing and spread wealthy among the owners in a more proportionate manner.

The NHL has the ability to use the NBA’s luxury tax system to become more like their NFL brethren.  Unfortunately, history says, the NHL owners will give nothing back to the players in this negotiation.  Taking is their forte; giving, not so much.

3 Comments

  1. Pingback: Proposing a Luxury Tax for the Next Collective Bargaining Agreement | Hockey Complete | News, Lifestyle & Ice Culture | Scoop.it

  2. The NBA is a crap league. The same teams are competitive every year and the same teams are also rans every year, largely due to the luxury tax. Same with baseball. A luxury tax does nothing for competitive balance. The NHL and NFL got it right with a hard cap. Keep it that way.

    • It depends on the scale of the luxury tax. Hard to compare to baseball because there is not actually a salary cap and the threshold is so high.

      In the NBA the same teams are competitive more so because the game lends itself to superstar players dominating games.

      I think a proper luxury tax could improve competitive balance especially in a league like the NHL with very rich teams and teams on the brink of bankruptcy.

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