Updated Luxury Tax Proposal

If you missed my initial idea for a luxury tax model in the NHL, you can find it here if you’d like to read it.  As more information about the NHLPA’s proposal and what the NHL is prioritizing has come out, I’ve noticed a few flaws in my plan and wanted to address them now.  Once again, if anyone from the NHL or NHLPA is reading this, feel free to use these ideas in the new CBA at no charge.  Well, maybe tickets, airfare, and hotel for the Winter Classic would be nice.  But other than that, as long as there’s hockey on October 11th we’re good.

Rather than setting a midpoint based on the agreed upon split of HRR (for this purpose we’re assuming the owners and PA agree to a 50/50 split of the current definition of HRR), setting a soft cap/luxury tax line at 52% of HRR has the same effect.  Since a hard cap isn’t going away, setting the hard cap number at 62% would create a wide enough gap to allow teams to go over the soft cap enough to raise significant revenue from a luxury tax.  Staggering the tax rate at 75% and 100% would also encourage mid-market teams like Minnesota and San Jose to not dramatically slash salaries to get below the 52% number.  0-3% (55%) would be taxed at 75% and anything above 55% to the 62% hard cap would be taxed at 100%.  Finally, the salary floor would be set at 35% of HRR.  This allows teams in rebuilding mode to keep player costs low until the team becomes more competitive and team revenues (in theory) increase.  Additionally, a part of the NHL’s revenue sharing plan wanted accountability to make sure teams spent money on their team instead of just pocketing the extra revenue so the big market teams would push for a salary floor more than the players would.

In return for accepting a dramatically lower share of HRR, the PA would see the elimination (or at the very least, a drastic reduction) of escrow.  This is the controversial part of this plan.  However, under this system most teams would end up spending somewhere between 45-55% with any outliers on the high side being cancelled out by outliers on the low side.  For every Toronto, there will be a NYI.

Based on the most recent estimates of $3.3 billion in HRR for this coming season, this luxury tax system would result in the following:

  • A $38.5 million cap floor
  • A $57.2 million luxury tax threshold
  • A $60.5 million limit for a 75% luxury tax, above $60.5 million is a 100% tax
  • A $68.2 million hard cap

Under this system, a team that spent to the $68.2 million hard cap would end up paying $10.175 million in luxury tax.  Considering the revenue generated by teams like Toronto, Detroit, and Philadelphia, this is a small price to pay to generate a competitive advantage.  Based on the current cap payrolls, this tax would generate roughly $91.5 million for revenue sharing.  After Montreal and New York sign their RFA defensemen, and Detroit signs/acquires any defenseman with a pulse, this number could easily approach or exceed $100 million.  A lower cap floor, a better system for determining which teams receive revenue sharing, and the PA’s suggested growth fund would result in this system creating enough shared revenue to support all 30 NHL franchises and grow their values.

Based on the team payroll data at CapGeek.com only two teams (Boston & Minnesota) would be above the $68.2MM hard cap and both teams have fairly obvious amnesty candidates (Thomas & Heatley, respectively).  I’m assuming an amnesty clause will be included in the new CBA, partly because it makes a lot of sense and partly because it has been widely speculated by many people much closer to the situation than I am.

Under this plan, the revenue generated from the luxury tax would be appropriated to teams in need based on rules and formulas put in place by both the NHL and NHLPA.  By having specific guidelines mapped out, teams would no longer be guessing if they’ll receive revenue sharing and how much they’ll receive.  Additionally, a $100-150 million “growth fund,” as suggested by the PA, would be put in place and funded by the owners and players. The money would be doled at out the discretion of the Commissioner’s Office with the primary purpose being to address unexpected financial issues like the one the NJ Devils faced this past season and to supplement any deficiencies in the luxury tax revenue sharing.

The primary flaw in the PA’s proposal was their revenue sharing plan didn’t benefit the big market teams that control both the Board of Governors and the NHL’s negotiating team.  Under this system, big market teams can utilize their natural market advantage to assemble a more competitive team.  Low revenue teams aren’t forced to spend beyond their means to meet an arbitrary floor and will receive predictable revenue sharing to cover hockey related expenses.  Teams like Dallas, NYI, Anaheim won’t be precluded from revenue sharing just because of their market size.  Players are guaranteed a fixed percentage of HRR without having to pay into escrow.  It creates a sustainable system that addresses the actual causes of financial issues teams are currently facing rather than placing a temporary band aid on the situation.

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