Salary Caps, Luxury Taxes, and Revenus Sharing

Salary Caps, Luxury Taxes, and Revenue Sharing

Professional sports, as enjoyable as they may be, are plagued with constant disagreements over money. Money, not necessarily in terms the exchange between players and management, but over how money should be distributed throughout the teams. In this disagreement there is talk about revenue sharing, luxury taxes, and salary caps, which all tie into the issue of competitive balance. To come to a conclusion on this issue both sides need to be investigated.

Salary cap, luxury taxes, and revenue sharing are all schemes designed to promote competitive balance, different sports apply different schemes in order to do so. A salary cap as it is defined by the NFL is the maximum amount each club may pay or provide to a player on the club’s roster during the course of a league year (NFLCBA). A salary cap is used in the National Football League (NFL), and a luxury tax is used in Major League Baseball (MLB). A luxury tax is a tax paid by an MLB club determined by how much a club goes over a set amount of money each year. That amount is set by the collective bargaining agreement and agreed upon the by the players association, owners, and commissioner (MLBCBA). Revenue sharing, as it is an issue in the NFL, is the even distribution of revenue to all clubs (Marburger). These three terms create a lot of chaos among league officials, owners, players, and even fans, but all supposedly are to help create a better competitive balance in each league.

Revenue sharing is a hot topic among baseball’s elite- the commissioner’s office and team officials. “There's an argument that both teams playing in a baseball game should share equally in the revenues generated by that game, as each is half the attraction” (Sheehan Jan).This argument is looked upon angrily by the MLB Players Association, as keeping only a percentage of your revenue would greatly drag down salaries. The MLBPA has a say in the amount of revenue sharing that the owners can implement, because it affects wages, and because of that, it is in the collective bargaining(Sheehan Jan). Former president and chief operating officer of the MLB Paul Beeston offers this perspective on revenue sharing, saying that, “All teams need to have a chance to win,” but at the same time asked the question “Why should teams apologize for being more successful?”(Seib). That question posed by Beeston is also asked by teams greatly effected by revenue sharing, but more so by the luxury tax.

The luxury tax system is a contested issue in the MLB, but not by all teams. The luxury tax system affects the higher spending teams such as the New York Yankees and the Boston Red Sox. An argument against the luxury tax is that it does not bring smaller market teams closer to large market teams. “This form of revenue-sharing delivers about $8 million annually to the lowest-revenue teams, not enough to pull them much closer to their prosperous brethren.”(Seib). Teams like the Yankees, whose 2006 payroll was $194,663,079, and whose 2005 payroll was $208,306,817, are millions above the rest. The next closest team in both years was the Boston Red Sox, whose payroll was $74,563,255 less in 2006 and $84,801,692 less in 2005. The differences in those payrolls are greater than the total payrolls of sixteen teams in 2006, and 19 teams in 2005(Brown). These large market teams are successful because of their seemingly infinite payroll, but now even that comes with a price, put there by the luxury tax. The point at which teams are obligated to pay the luxury tax stands at $136.5 million; it has increased over the past few years; in 2003 it was $117 million. The luxury tax takes a percentage of the money spent over those amounts; in 2003 the amount was 17.5% percent, and in 2005 it was 22.5%. These percentages increase for second and third time offenders of the luxury cap and they pay an increased percentage, which in 2006 was 30%. It is not the amount that sets off the argument; it is that there is a tax on the payroll at all. As stated previously, the luxury tax system will not bring the small market team’s close enough to the large market teams, and therefore, competitive balance is not restored. The decision on what to do about the luxury tax system will have a large effect on every team in the MLB; officials need to decide what about the game is most important to them, competitive balance and the fan, or money.

The NFL, unlike the MLB, has a salary cap in place, and it is currently set at $102 million for the year 2006 (Lackner). The salary cap for the NFL is determined by the defined gross revenue of each team, which includes television contracts, ticket sales, and NFL merchandise sales. This amount, which is the sum of all thirty-two teams defined gross revenue, is then put through a complex calculation with the outcome being the salary cap. The salary cap makes life