Accountability Absent in Baseball Amid Tax Cuts
Last December, the President signed the Tax Cuts and Jobs Act into law. According to at least half of DC, the bill was the largest major update to US tax law since the Reagan era.
By now, you’re likely aware that the new tax code included a tax break for the nation’s wealthiest earners, increased the standard deduction, and lowered the corporate tax rate, reshuffling how the federal government collects its revenue. The national fallout from the at-times-hand-written bill is still being evaluated, but the impact on baseball is starting to show up.
The NY Post recently uncovered a provision that could have a big impact on MLB Trades, and others have pointed out that the new tax law could increase the importance of tax considerations in free agency. Though it doesn’t take an economics degree to recognize that the new tax brackets will benefit multi-millionaire athletes and club owners, the broader impacts on how teams operate is more interesting, and more complex.
Baseball is full of butterfly effects: small moments or decisions that ultimately play a major role in far-off future events. For instance, the Padres recent signing of Eric Hosmer will likely impact second baseman Carlos Asuaje’s playing time, despite the fact that neither Hosmer nor the guy he’ll be taking over for at first base (Wil Myers) play second. Something as large as the Tax Cuts and Jobs Act will surely ripple throughout the game.
In a recent post, Max Frankel outlined a possible outcome of the $50M payout that each team will get for the partial sale of MLB Advanced Media. That tongue-in-cheek scenario saw prices for upper deck seats fall as a result of the “rock-solid tenant of trickle down economics.” More realistically though, how is baseball going to change under the new tax regime?
Background
First things first: neither MLB nor any of its teams operate as a non-profit, and are therefore considered for-profit companies subject to the same tax code that was recently lowered.
Even more broadly, it’s important to understand that MLB serves as a central office but each of its teams is entitled to operate independently. MLB Commissioner Rob Manfred believes this distinction is important, and it’s particularly relevant for accountability in many things, including a team’s decision to:
- Compete for a World Series Championship or tank
- Lower ticket prices or raise them
- Extend a fan-favorite for a lengthy extension or not
- Invest in their farm system or not
Also of relevance from the outset is how players and other employees factor into this. MLB players and other employees (like the travel secretary) work for the individual team. The relationship between MLB and the MLB Players Association is rocky at the moment thanks to a recently negotiated Collective Bargaining Agreement (CBA) that seems to be disincentivizing investment in talented players, and may be carving away the players’ share of operating revenue, too. However, MLB has no real authority to mandate a team act in a certain way; they do not control payroll at all, whether that’s player payroll or in the operations departments.
Learning from other Industries
After the passage of the new tax code, many of the nation’s largest companies announced bonuses and stock buyback plans- two very different approaches to dealing with the new revenue the companies will have thanks to lower corporate rates. Companies like Chipotle, Home Depot, CVS, and Southwest Airlines delivered bonuses of up to $1,000 to all of their employees. However, the few hundred or so corporations that announced bonuses account for less than 1% of all the companies in America impacted by the law. A much larger share announced stock buybacks, which benefit stockholders, investors, and existing owners, and not salaried employees.
Like baseball, the electric utility industry is in the midst of figuring out what to do about the new tax code. Like MLB teams, electric utilities can be independent for-profit companies, but they are regulated to earn a controlled profit. It’s a little different, but the important part here is that there is a level of accountability even for profit-making corporations.
This construct recognizes the intrinsic monopoly of electricity delivery in order to ensure a fair rate for those of us who want power. Utilities and their regulators across the country are handling the tax code in different ways, but because of the regulated nature of the business are largely being held accountable to return their windfall to their customers:
- NorthWestern Energy in Montana plans to return $15 million to $20 million annually and $321 million in reduced deferred tax liability.
- ComEd in Illinois wants to pass through $200 million to its customers, equaling $2 to $3 on their monthly bills.
- Alliant Energy’s Interstate Power and Light in Iowa said it plans to distribute $16.3 million to customers as soon as possible.
While consuming baseball isn’t a basic right the same way that having access to power is, but, as teams increasingly rely on public funds to build new profit-center stadiums, the expectation of fair treatment to their customers should be similar.
Putting it in Today’s Baseball Landscape
If baseball were to follow the energy industry example, their new profit would be reinvested to their employees. But fans, the paying customers, aren’t so interested in, say, Janice, the traveling secretary, who likely deserves a raise. No, fans would rather see the windfall in a tangible fashion, whether that be through lower ticket prices, or an investment in a certain player.
One factor that limits teams’ willingness or ability to invest in the on-field product is the Competitive Balance tax. The Competitive Balance tax is a threshold above which a team must pay a certain percentage of their payroll as a ‘tax’ to smaller-market teams in a revenue sharing fashion. Baseball’s tax threshold for 2018 is set at $197 Million, and the rates through 2021 max out at $210M. Teams are acting in their own interest to avoid the Competitive Balance Tax (CBT). In particular, teams are looking to reset the calculation of their Competitive Balance tax by getting under the threshold for one year.
But the machinations of calculating a CBT will be subject for labor negotiators in future years. What’s done is done on that front.
The CBT isn’t a hard salary cap, though. Teams are free to spend above it and simply pay the tax. Given the millions of dollars MLB teams make every year and the billions of dollars in most owners’ bank accounts, shouldn’t fans (of at least big market teams) reasonably expect teams to eclipse the tax most years? Isn’t this especially true now that the new tax structure benefits owners greatly but doesn’t give all that much at all to the guy with a $10 beer in the upper deck? While the MLBPA may not have the legal grounds to grieve over owners’ slightly-fatter-thanks-to-the-Trump-economy pockets, the public certainly is entitled to hold billionaire accountants… accountable.
The questions and themes raised here are much larger than one man can tackle, but the conversation of where MLB, as a collective, plans to invest their new income in 2018 needs to be had. The industry generated something like $9B in 2016. If we assume simple accounting (HA!), then the 35% tax rate means the industry paid something like $3.15B in taxes that year. With a 21% tax rate, the amount that gets paid out is $1.89B, the difference of which represents $1.26B that could be reinvested in players or ticket price decreases annually. That’s $42M in player salary for every team.
Maybe we can drive that point home a bit more: $1,260,000,000 equates to $17 per ticket sold. Those $24 outfield seats at Nats Park are suddenly $7. And the Marlins suddenly give you $5 instead of charging $12 for their Home Run Porch.
Be sure – the Players Association is aware of the change and will attempt to hold the owners responsible. They’re capable of the same math that follows: if we translate the 40% savings (from the new tax regime, which moved corporate tax rate from 35% to 21%) directly to the Competitive Balance Tax, the new 2018 threshold becomes $275M rather than $197M. That’s potentially $78M per team, or another $2.3B, in pre-CBT salary. The Yankees and Dodgers would surely spend up to their new limit. Jake Arrieta and the other free agents would be much more likely to earn what they believe to be a fair salary.
Franchises are making more than ever thanks to the success of the game and new tax rules. Going forward, we can be sure the players union will try to hold owners accountable for the way they spend their money relative to the CBT and revenue sharing. Fans, players, and other employees should do the same.
