Friday, June 29, 2012

The Tax Tilt

The Financial Post published an  article and accompanying graphic today that shows the difference between the take-home salaries of NHL players in every market, at the 2-million, 4-million and 7-million-dollar base salary levels. The story is all about how teams with tax-friendlier climates have an extra tool in the box when it comes to attracting and retaining good players. That, logically, would seem to translate to a better chance for teams in low-tax cities to win. The logic behind the article is slightly flawed, when you consider that Edmonton and Calgary offer players the best tax deal in Canada and neither one has been much of a Cup threat for some years now. Florida, Tampa, Nashville and Dallas have a total of two championships between them in the last 15 years, and they top the list of low-tax cities. What is interesting, however, is the Canadiens' rank on the list.

While it's nothing new to discover that income taxes in Quebec are steep, seeing it there in black and white is pretty stark. The Canadiens sit dead last in the amount players take home in every salary category. The comparison between the after-tax pay of Canadiens versus that of Panthers or Stars prove the Habs have a very significant hurdle to overcome in stocking their lineup. The chart shows a 4-million-dollar player is left with $2,464,189 after taxes in Florida, while in Montreal, he'd make only $2,086,763. The 400-thousand dollar difference there might not seem like a big deal to those of us who can only imagine making that kind of money, but when you consider a player's limited earning time and the significant health risks he takes by playing the game, then giving up nearly a fifth of his take-home pay is a problem. Even though it probably wouldn't impact his current lifestyle that much, it could seriously affect his future.

The Canadiens contribute quite a bit to league coffers. They, and the other six Canadian teams provide more than 30% of the total of NHL earned revenue. They're why the salary cap rises every year. Yet, while they're paying into the league kitty, they're getting punished at home because they're limited to the same base amount for player salaries as the rest of the league, regardless of the chunk that disappears in taxes. This isn't something a smart owner like Geoff Molson should accept.

Recent luxury tax increases in Ontario mean Ottawa's and Toronto's players will also be paying tax at a rate just slightly better than that in Montreal. These are powerful teams, and it isn't right that they should support weaker teams financially, while accepting the handicap of higher taxes. They have a chance to use their power to level the field for themselves and other teams saddled with high tax rates. Now, while negotiations for a new collective agreement are underway, there should be discussion about increasing the salary cap allowance to compensate for taxes.

Here's the idea: using the cities with the lowest tax rates as a base, teams whose players must pay more in income tax should be allowed to spend above the cap by the amount of the difference. So, if a player in Florida gets to keep 2.4-million of his 4-million cap hit, while a player in Montreal gets only 2-million, the Habs should be allowed to cover the extra tax on the player's behalf without being penalized on the cap.

Right now, if the Canadiens want to court a high-end free agent, they need to overpay him by up to a million dollars or so, just to compete on the tax front. That extra money counts against the cap, which reduces the amount left to spend on other players, who also must be overpaid to stay in Montreal. That, over time, can significantly impact the quality of roster the Habs can ice. Take the case of Mike Cammalleri as an example. When Bob Gainey signed him, he was probably worth about $5.5 million on the free agent market. Gainey had to pay him $6-million to convince him to come to Montreal. If, however, Gainey had been allowed to pay some of Cammalleri's tax in a legal tax bonus that didn't count against the cap, he might have been able to get him for the market value and use the extra half-million for another player.

If the NHL wants to have true parity, the biggest hurdle it must knock down is the difference taxes make in real salary under the current cap. A player should be able to choose a city based on location, competitiveness and philosophy rather than how much of his contract he'll be able to keep in one city versus another.

All that said, Molson and the other owners in high-tax jurisdictions probably won't argue the point during the collective agreement negotiations. There are too many low-tax owners who like being able to use take-home pay as a draw in attracting players, for the minority to win that battle. It's a shame, though. The Canadiens have a lot to offer, but they probably lose more players than they attract because of the money difference. It's hard to argue otherwise when you see that difference laid out in black and white.


Anonymous said...

You mention 'limited earning time'; so a guy's pulling in $4 million per year and I should feel concern for him because he can only earn $4 million for like 10 years? I'd love to only have to work for 10 years, let alone take in $2 mill after taxes. Instead, I suppose I'll have to work for 45 years at a pitiful salary, while dealing with health issues like stress, which can lead to heart and other major health issues, from trying to fund a mortgage, parents needing care in their old age; dealing with my own declining hips and knees and heart; and likely having no state pension ('league coffers') worth mentioning (that I've also paid into for 45 years), so I have to live in a smaller home, with none of the travel I dreamed of, and while I watch my spouse fade away because we can't afford the 'right' doctor. Yep, I feel abject horror at the poor lives these guys live. There ought to be a way to help them...

J.T. said...

Dear Anon: The point of this post wasn't to compare your poor life to those of NHL players. It was to compare the salaries of NHL players to other NHL players and point out how some cities have an advantage in signing and retaining players because they keep more of their money in their pockets. Since you want to compare this idea to your own life, let's say the garbage man in Tampa makes 15-thousand dollars a year. So do you. But, you live in Montreal where your taxes are higher. Therefore, you will only keep 12-thousand of your salary, while the garbage man in Tampa keeps 14-thousand of his. Where would you rather pick up the trash? Right.

I understand your anger and jealousy at the money NHL players make. Most normal people do, because it's completely ridiculous that ordinary mortals should be singled out and rewarded with such cushy lives when others have to slave away for peanuts, just because they can put a little black piece of rubber in the back of a net. However, we pay for the privilege of watching them do that, so we naturally want them to do it more often than the guys on the other side. If they do, we're willing to give them millions of dollars. My point is, why pay them more millions than the fans of other teams pay, just because our government taxes them higher than others?

P.S. Sorry about your pitiful salary.

zaskar said...

Hi J.T.

Interesting post and I agree with your conclusion that Molson and other owners in highly taxed markets won't directly address the issue in the ongoing negotiations for a new CBA. However, I do believe the issue could be raised in a more subtle yet indirect way. Owners such as Molson could choose to make up the difference in lost earnings by offering endorsement deals to their star players. I believe this is not permitted in the current CBA but look for it or something similar in the new CBA as the rich clubs try to gain advantage by finding ways to spend over the cap. This type of arrangement would not require league management - like the salary cap - and could be done on a case-by-case basis.


Shawn said...

As usual - another great article

Anonymous said...

There are a number of reasons why the NHL won't address the tax issue.

1) Taxes are an issue, but only for players with leverage. In demand UFAs and RFAs within a year or 2 of UFA status can demand more to make up for the higher tax load.

UFAs scrambling for a job like Campoli, RFAs, and players on entry level contracts don't have the leverage to get the higher salary to offset the higher taxes.

2. Most of the low-tax jurisdiction teams can't afford to spend to the cap while many of the high tax teams can. This financial advantage covers the extra salary needed to offset the tax disadvantage.

3. Teams can offer security like no trade clauses and longer term instead of a higher salary to offset the tax difference. Montreal does this routinely.

4. It would cost the high tax teams money in two ways - they would be spending more than the cap and by opening the tax door the NHLPA would likely try to get the benefit for all of its members.

5. There are a number of logistical issues that would need to be addressed like what happens when tax rates change and what would happen to a player's salary when he was traded from a high tax team to a low tax team and vice-versa.

This is further complicated by the residency rules that determine in what jurisdiction someone pays taxes. For example, when Gill was traded he left his family behind for a couple of months. That could mean he would be subject to Quebec taxes for those months.

6. The ability to get endorsement income is better for players on most of the high tax teams than on the low tax teams.

7. Players can only demand a higher salary to offset the higher taxes if a low tax team is a serious contender for their services. If the only teams interested are all high tax teams then the player has lost the negotiating advantage.


J.T. said...

@zaskar: Good point.

@Shawn: Thanks!

@DB: You make some interesting points here. However, in your point five, you mention changes in a player's salary if he were to be traded. My thought is simply that the team rather than the player would cover the cost of excess tax, so the player would basically get the same salary no matter where he went. And, in your point three, I don't see longer term deals and no-trade clauses as equalizers. If a team has to hand them out to make up for the tax hit, it runs a higher risk of ending up with expensive, burdensome contracts it can't move. Also, endorsements are just bonuses for certain star players and should have nothing to do with the basic salary he makes from the team.

Lots of food for discussion there!

Anonymous said...

Thanks for the article and graph. It is interesting to see how much provincial taxes make a city uncompetitive in those salary ranges. (That's what we're talking of right? Municipal taxes wouldn't be included - there's a nightmare in itself.)

So Edmonton and Calgary are right up there with the sunshine states while LA, San Jose, and Anaheim are right down there with the other "Tax you for my feel good idea." provinces.

All to say that you can't establish a baseline and then even it out. That is impossible. You can't ask someone in Edmonton to pay a Montreal player's taxes and if you ask the owners to do it the provinces will just tax them even more.

Myself I kind of like the idea of players saying "Thank you" and donating money to hospital wings and other charities so the taxman doesn't take it and build bridges and overpasses that collapse with his friend in the waste business. But I'm strange that way.

Steve said...

taxes are really low in Afghanistan.
But I agree there should be some kind of neutralizing mechanism. Like low tax teams have to pay a fine.

Anonymous said...

Taxes are one of many factors a free agent will consider in deciding where to sign. Some factors like team culture, team facilities and teammates are controlled by management. Others like taxes, culture of the city, endorsement opportunities, and the state of bridge repairs are not controlled by management.

If the player doesn't like some of the other factors then management can try to compensate for them by offering a higher salary, longer term, and no trade clauses.

The player can then decide whether management's offer is sufficient to over come the factors he doesn't like (Travis Moen just said that getting a fourth year was the key to him resigning).

Dictating how a team compensates a player for higher taxes assumes that this was a major factor in his decision and removes the ability of the player and the team to negotiate any compensation if it was.

Furthermore, your proposal would be extremely expensive as it would compensate all players for the tax difference. The Habs would have to pay about $14 M a year based on a $70 M payroll and the example you quoted (The Habs would have to pay an additional $800,000 - 20% of a $4 M salary - to give the player an extra $400,000 in after tax income. 20$ of $70 M is $14 M).

The only way the owners (Though I doubt that Molson would like to pay an extra $14 M a year) would agree to this is if it came out of the 57% of revenue the players get.

However, players on lower tax teams would object to this because the extra payments would effectively come out of their pockets - since total salaries are fixed at 57% of revenue any increased payments to some players automatically results in a higher escrow charge to all players.

One last point. Endorsement opportunites vary depending on how big a star the player is and the market he plays in. As a result, a city with good endorsement opportunities is a selling point to a team trying to sign a star UFA.


Louis said...

I'm told that here in crumbling Montreal the situation might not be as dire for the players as it is indicated by the Post's figures (presumably the official ones, as established by the federal and provincial income tax laws). How much do they actually pay off at the end of their fiscal year, once the agents and their accountants are done using every loophole available? Perhaps not that much, or so I'm told. And no one will openly brag about it: not the players, not the teams, not the provincial government, not the agents. And I suppose that it could be the case in many other officially high taxing locales.

This of course would only complicate the finding of the answer that you seek JT to such vexed question (sorry).


Anonymous said...

Thanks for the link to the Graph. I agree it would suck to make 400K less due to taxes. However, I don't think that taxes are such a main deciding factor as people make it seem. Not worth creating new rules anyway. Players seem to love to go to NYC and LA. The 300K that you would save in those cities over Montreal will simply be spent on Schools, Houses, and municipality taxes etc. I think a player paid 7 million in Montreal would end up with way more loose cash than in NY or LA.

In theory every GM would love to have that extra 2-3 mil by saving on taxes. However, the major markets are spending what ever they can to get to the cap floor to please their fan base. Last year Montreal could have buried Gomez and got 6mil more. However, they had nothing to go get with that much money.
Even if there wasn't a cap ceiling, a rich team like Montreal wouldn't be able to get all the "superstars". Even if they offered 1mil per player more that any other offers, they wont all sign here. Parise has it right when he told the media when asked what goes into choosing a team "EVERYTHING". Money, Housing, Schools for kids, temperature, job opportunity for trophy wife, travel schedule, franchise stability, terms... I think even the Jersey colors might have something to do with it.
Anyway JT, I like your posts, just thought i'dd give my opinion.