$45m caps and luxury taxes. Some thoughts

Discussion in 'The Business of Hockey' started by me2, Feb 20, 2005.

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  1. me2

    me2 Calling out the crap

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    Luxury taxes are better than nothing but aren't solutions. Take a look at the supposed $45m cap with a $1 for $1 tax from $40->45m.

    To a rich team like TO or NYR the $1 for $1 tax isn't remotely off putting. TO would factor it into their $50m in payroll spending at the start of the season and forget about it. To a low budget team like Edmonton or Tampa, the $1 for $1 tax would be a killer. For a team like Ottawa the tax could be the difference between staying together and having to trade players. A payroll tax of $1 for $1 is too stiff for poorer clubs and no incentive not to spend for the richest clubs. It disadvantages the poor while doing nothing to hinder the rich.

    But luxury tax is revenue sharing... Well it isn't very efficient revenue sharing is it. If the rich team rebuilds for a year there isn't any tax money. Players salaries are still set by past aribtrations and now there is just less tax money. The poor see no advantage over just being given revenue sharing, and plenty of disadvantage. If teams are going to provide revenue sharing it should be done with a consistent scheme (% of total revenues, scaled tax on total revenues, % of tickets or some other similar scheme). If the players want teams to spend to $45m to keep elite teams together then we should get rid of luxury tax.

    This prompts the question, how then to balance big spenders with less spenders under a cap, of say $45m. What is it that all NHL clubs have in equal abundance? What is that all NHL clubs need to be ultimately successful under a cap? I keep coming back to it, draft picks. The luxury tax should not be money, which teams have in uneven amounts, but rather draft picks, which all possess equally.

    Many of the owners want a $40m cap but agreed to stretch to $42.5m. The players might accept $45m and proposed a luxury tax over $40m. Here is what I think we should end up with

    $45m hard cap
    No $ luxury tax
    $40m-$42.5m costs a team its 2nd round pick
    $42.5m-$45m costs a team its 1st round pick (instead of its 2nd)
    Genuine revenue sharing from rich to poor based on % revenue.

    Only teams genuinely competing would risk losing their 1st round pick. At worst it acts like the owners $42.5m cap, at best like the players luxury tax plan and $45m cap.

    1. This removes idiotic overspenders with dud teams like the NYR from the players market. If you were Sather would you give up your 1st round pick 5 years straight for a team that can't make the play offs? I wouldn't!!! This is good for contending teams as there are more stars to go around and cheaper. This good for the NYRs fans as it means a proper rebuild.

    2. Detroits and TOs. Older teams propped up by deadline scavenging and UFAs. These teams have to choose whether signing Greg DeVries to a contract that put them into the $42.5m-45m range for 3 years is worth giving up the 3 1st rounders the move might cost. Maybe it is to them, maybe it isn't. It becomes harder and harder to prop up an aging team without draft picks to trade/develop. When the team is ready to decline it should not put onto a UFA drip. The threat of losing draft picks will encourage management to let it declines as it should.

    3. Tampa and Ottawas. Elite young teams that are maturing. Teams that are already packed with talent and still have talent coming through the pipeline. These are current and future contenders, who in a few years might be around $45m after the team matures. Assuming they can afford the financial slug of $45m losing their 1st round picks to keep the team together would seem like a reasonable option.

    4. Others, not affected except that salaries are kept under control as only genuine contenders risk their 1st round picks.
     
    Last edited: Feb 20, 2005
  2. not quite yoda

    not quite yoda Registered User

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    Yes well that's the problem. The point for the NHLPA of there being an option to spend that extra 2.5 or 5 million$ is that they actualy do. What's the point of having the option of spending that much if the penalty is so harsh that none would do it? Also the PA would want the money to be spent ASAP (before the season starts), not at the trade deadline.

    NHLPA would never go for it. And who gets this "1st rounder" in compensation? The lowest payroll team? That would create a race between the bottom to have the lowest payroll. Wouldn't fly.
     
  3. me2

    me2 Calling out the crap

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    And that is why the lowest income teams won't approve it.
    1. They don't want the richest teams setting the payscales by $2.5m across the league.

    2. They wouldn't want a luxury tax they couldn't afford to pay if there payrolls ever got that high.

    So what are the options? At this stage it looks like the NHL will stick with the $42.5m cap or what until next year for linkage.

    That is why I think this type of system (or a modification there of ie the pick penalty escalates over time) could be a good compromise.



    Nobody would get it. It just goes *poof* and disappears. The exact opposite of the way compensatory picks go *poof* and magically appear.
     
  4. not quite yoda

    not quite yoda Registered User

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    Well that's a little crazy
     
  5. me2

    me2 Calling out the crap

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    Why? Is the current compensatory pick system crazy? I don't think so. The prospects still get picked.
     
  6. not quite yoda

    not quite yoda Registered User

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    well it's different. compensatory picks don't exist at 1st. They get added on later. So it's no biggie if they go *pouf* and disapear. They are just "bonuses" in the 1st place.

    So if the big 6 all go up to 45 million$ as the PA would expect and want them to, then the 1st round would have 24 picks? and picks 25-30 are 2nd round picks? 1st round picks make more money on their entry level contracts. Maximum rookie salary + high bonus clauses. You think the Union would be happy about these 1st round picks for young players going *pouf*???

    NHLPA would never except it.
     
  7. me2

    me2 Calling out the crap

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    Yes, thats about it.

    The NHL-NHLPA could define it in terms of position ie 1-30 is 1st rnd, 31-60 is 2nd round,etc. Solves the bonuses/contract problem.
     
  8. not quite yoda

    not quite yoda Registered User

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    It will never happen. Just won't.

    *shrugs*
     
  9. me2

    me2 Calling out the crap

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    It should. Its a very tweakable system. If the players think an automatic 1st is too harsh they could argue for a sliding scale of punishment which takes into account how long a team have been over the cap. ie if its a 6 year CBA

    When calculating the penalty for going over $42.5m look at the last 6 seasons. If this violation is

    first: > no penalty
    2nd: 3rd rounder
    3rd: 2nd rounder
    4th-6th: 1st rounder.
     
  10. sundstrom

    sundstrom Registered User

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    the luxury tax could work with a $42.5 or $45M salary cap as long as the penalties were strong enough. let's say that $35M-$40M has a $1 for $1 tax, $40-$42M has a $2 for $1 tax and $42.5-$45 has a $3 for $1 tax. You'll still see the big 6 spend up to this level, but tax dollars (which would be significant) would go to all the teams under the $35M level. The lower end teams would be able to increase their payrolls because they'd be getting an extra $3-$5M a year in luxury tax dollars.

    And because of the cap, the big six couldn't offer high salaries to individuals because it would take up too high a percentage of their cap space. As salary levels dropped, you would see comperables for arbitration cases drop. You'd also see teams walk away from arbitration awards they weren't happy with because there would be many more free agents out there, creating a larger source of supply (players).

    There would still be a gap between Edmonton and the Rangers, but it would be about $10M. Which it should be considering the market factors. We're not talking Yankees vs. Devil Rays in terms of payroll disparities.
     
  11. me2

    me2 Calling out the crap

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    The problem comes back to mid to low level teams. Lets say after a few years of success Tampa can just afford $42m total for players. Now if you tax them $ for $ from $35m they can only afford $38m in payroll + $4m in tax, and would be forced to shed players. This isn't good for Tampa, they can't afford to pay $4m in tax and shed players. The tax is damaging the clubs its supposed to protect. On the other hand paying $10-15m in tax is nothing to the Rangers or TO if it means making a true cup run.
     
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