Luxury tax can curb spending

Originally Published: October 13, 2004
By E.J. Hradek | ESPN The Magazine

While I don't always agree with NHL commissioner Gary Bettman, I'll be the first to admit he's a bright guy. That's what makes it all the more confusing that he and NHLPA executive director Bob Goodenow (another smart fellow) can't get together to create a new CBA without placing the game in peril.

Really, it just can't be that hard for these guys to find a compromise and come to an agreement. Actually, it's a little embarrassing.

Always looking to help a professional sport in need, I've come up with a compromise solution to this mess -- or at least a starting point from which the sides can begin talking.

I culled information from league and union sources, and leaned on former Calgary Flames GM Craig Button, who spoke on the subject prior to being hired as a pro scout by the Maple Leafs on Sept. 20.

So, take a look and let me know what you think. After all, as fans, you've got a pretty big interest in this as well.

(All figures in U.S. dollars.)

Term
The life of this proposal would be five years with a one-year phase-in plan. The remaining four years would be fixed.

Luxury Tax
This solution includes a luxury tax system with a high-water threshold at $34 million per team, including salary and all bonuses (except for performance bonuses that will be capped at $4 million per club). However, each club will be allowed an exemption. That exception won't be counted against the team's payroll, but the club can't pay their exemption a salary and bonus that exceeds 20 percent of the team's total payroll or a maximum of $6 million. If a team's payroll were $28.7 million, for example, then its exemption would be $5.75 million.

A club can use up to three players within the exemption. For example, a club that has reached $34 million in team payroll and bonuses can sign one additional player to a $6 million contract or use it to pay two or three additional players.

During the first year of the new deal, there will be a phase-in period during which clubs will be taxed 25 cents for every dollar over $34 million. It might be painful, but it has to be done.

In years two through five of the deal, clubs will be taxed 50 cents on every dollar over the threshold, up to $38,999,999. If a club's payroll is equal to or above $39 million, they will pay $1 for every dollar over that amount. For example, in 2007-08, if a team's payroll were $43 million, that club would pay a league tax of $6.5 million. That tax money would be redistributed to all clubs under the high-end tax threshold.

As part of this luxury tax proposal, there will be a low-end threshold on team payroll set at $27.2 million. Clubs failing to reach that payroll level will not be eligible to receive money from the league's revenue sharing program (see below). All clubs under the league's high-end threshold (even if they failed to meet the minimum payroll standard) would be eligible to participate in the funds accumulated in the tax pool.

Under this plan, when a big-market team wants to make a business decision based on a broader corporate philosophy (think Cablevision/New York Rangers); they can still do so, but not without paying a penalty tax.

Salary rollback
To help clubs get in line with the new system, this proposal contains a 7.5-percent across-the-board rollback in current salaries, 2.5 percent more than the players' offer. Because of the substantial changes to the system, a larger percentage rollback is required.

Revenue sharing
If the NHL wants to grow and find stronger footing on the landscape of professional sports, the owners must be more willing to share their revenues. In the early 1960s, former NFL commissioner Pete Rozelle saw the system's advantages well before television dollars began rolling in. The NFL became a powerful league because its owners were willing to follow Rozelle's plan.

In this proposal, which is radically different from their current plan, each NHL club must contribute the following to a central pool:

  • 40 percent of regular-season gate revenue
  • 10 percent of regular-season local broadcast revenue
  • 10 percent regular-season local cable revenue
  • 10 percent of regular-season local radio and new media revenue
  • 25 percent of in-arena revenue (luxury suites, concessions, etc.)

    That central pool also will include the following national revenue:

  • 100 percent of the league's national television revenue
  • 40 percent of the league's national sponsorship revenue
  • 100 of the league's preseason and special games revenue (All-Star game, skills competition, Heritage Classic, etc.)

    The central fund would then be divided by 30 (or less if all 30 teams did not meet the low-end threshold) and equal shares would be redistributed to each club. Using current league numbers, this system would result in an approximate $25.9 million pay out to each club. Again, if a club fails to meet the payroll minimum threshold of $27.2 million, they will not be eligible for their share of the revenue pie. This will force those small market clubs to spend at least the minimum on salary and not pocket shared revenue.

    Each club will still retain the following:

  • 60 percent of regular-season gate receipts and 100 percent of their playoff gate receipts
  • 90 percent of regular-season local broadcast revenue and 100 percent of their playoff local broadcast revenue
  • 90 percent of regular-season cable television revenue and 100 percent of their playoff cable TV revenue
  • 90 percent of regular-season radio and new media revenue and 100 percent of their playoff radio and new media revenue
  • 75 percent of regular-season in-arena revenue and 100 percent of their playoff in-arena revenue

    The system will limit the financial advantage of big-market teams while giving smaller market clubs a better chance to compete. All clubs will have a financial incentive to grow their local revenues.

    Entry-level contracts
    In all labor disputes in pro sports, the rookies are the first to get thrown under the bus. It will be no different here.

    This proposal rolls back the rookie salary cap from $3.72 million to $1.8 million (base salary) on a three-year term. All rookie contracts would be capped at $500,000 for the first season, $600,000 for the second and $700,000 for the third. Entry-level signing bonus are restricted to 50 percent of the base salary of any particular year. During a three-year contract, a signing bonus would max out at $900,000. Performance-based bonuses would also be capped at $900,000 over the life of a three-year contract.

    Under the old system, rookie stars like the Thrashers' Ilya Kovalchuk or the Wild's Marian Gaborik could earn upwards of $10 million over the life of a three-year deal. In this system, they could earn no more than $3.6 million in the same term.

    All entry-level contracts will include a mandatory two-way clause, with a minor-league annual salary limit of $60,000 for the term of the deal.

    Entry-level players between the ages of 18 and 23 will be locked into three-year deals. Entry-level players between ages 23 and 25 will receive two-year deals. Those rookies who sign at age 25 or older will be limited to one-year contracts.

    Because of these limitations, an entry-level player on a two-year deal could earn no more than $2.2M, while a older rookie playing under a one-year contract would max out at $1M.

    Salary arbitration
    The current arbitration system needs one twist: the clubs must have the right to take a player to arbitration. Currently, it's a one-way street that has enabled the players to push salaries to higher and higher levels.

    In this plan, when the clubs have the option of taking a player to arbitration, they can seek to push salaries (and thus comparables) back down. Also, it would enable a club to get a deal with a star player without having to factor in the market pressure.

    In the summer of 2002, young stars Jose Theodore and Jarome Iginla opted against filing for arbitration because they knew they could get more lucrative deals due to market pressure. Under this proposal, those clubs would have been able to file for arbitration to get those players signed at more reasonable rates.

    Entry-level players won't have arbitration rights for their first five pro seasons. However, skaters with 150 games played and goalies with 105 games between the pipes will gain rights. Once a player reaches age 26, he gains arbitration rights regardless of the number of games he has participated in.

    Qualifying offers
    In the last CBA, the league agreed to a qualifying system where clubs were obligated to offer a 10 percent raise to keep the rights to players who were making less than the league average salary. This qualifying procedure has helped salaries rise.

    In this plan, the clubs need only offer a player 100 percent of his previous season's base salary to maintain his rights. And, because of the change in the arbitration system, the individual clubs would be able to take a player to an arbitrator to seek a reduction in salary.

    Free agency
    Believe it or not, it's wise to lower the age for unrestricted free agency from 31 to 29, but not for the reasons you might think.

    Yes, many high-end players would hit the open market earlier than they do under the previous system, but with more players on the market, the laws of supply and demand dictate that the average salaries for these UFAs would go down. Whether the owners understand it or not, they're better off when there's a large number of free agents available in the marketplace.

    As part of the phase-in policy, the age for unrestricted free agency would go down incrementally during the life of the five-year term. It would remain the same (age 31) for the first year. In years two and three, the age would be reduced to 30. Finally, in year four, the age would be lowered to 29.

    In regard to Group V (unrestricted) free agents, there must be an adjustment with respect to league average salary determination because of the salary rollback. This would have to be negotiated.

    As for Group II (restricted) free agents, this plan suggests that a club seeking to sign a player to an offer sheet would risk losing a player off their roster as compensation. The club that could lose the player would be able to choose a player or gain a predetermined number of first-round draft picks (depending upon the financial terms of the contract) from the other club. The teams would retain the right to match any offer sheet presented to one of their players.

    Waivers
    Under this plan, skaters would require waivers after playing 210 NHL games. Goaltenders would need to clear waivers after playing 150 NHL games. All players would require waivers if they have played four professional seasons, commencing after the first season they play 11 games or more, or reach the age of 26.

    Roster
    The clubs will retain an active roster of 23 players. However, under this plan, a team would dress just 17 skaters and two goalies.

    This change comes as an effort to eliminate unnecessary players. Team management, coaches and players would have to think a bit more about how they're going to play. That would improve the quality of the product.

    Schedule
    It is definitely time to reduce the current 82-game schedule, which is simply too taxing for the players to compete consistently at a high level. This plan features a 70-game slate, where teams play division rivals seven times and other conference foes three times. The remaining 12 games will be played against non-conference opponents on a rotating basis.

    The reduction of the schedule by approximately one-seventh will cause the loss of some revenue. However, it also rolls back costs to a certain degree. At worst, it seems to be a wash.

    New contracts will be negotiated based on the 70-game schedule.

    EJ Hradek covers hockey for ESPN The Magazine. E-mail him at ej.hradek@espn3.com. Also, click here to send EJ a question for possible use on ESPNEWS.

    E.J. Hradek

    Senior Writer, ESPN The Magazine
    E.J. Hradek is a senior writer at ESPN The Magazine, joining the staff prior to its launch in 1998. He began covering hockey as a writer/editor for Hockey Illustrated in 1989.
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