A Better Alternative to the Current Revenue Sharing?

[square634]

I was reading my Business of Sports textbook again, and I stumbled across an article by Richard Sheehan discussing how to improve the revenue sharing system in MLB so that the business is still economically viable (still produces incentive to create revenue) but also more fair and stable.

According to Sheehan, the four things that must be considered in a good tax system are:

"(1) Profits are healthy but are unevenly distributed. Implication: some revenue sharing is necessary, and a tax must fall more heavily on profitable franchises,

(2) Owners have different goals; some focus more on wins and others on profits. Implication: two types of taxes are necessary, one on those seeking victory and another on those seeking profits.

(3) Taxing revenue will make owners reluctant to take steps to "grow" revenues coming into the league. Implication: avoid taxing revenues; where possible, tax [marginal] costs instead.

(4) Taxes should allow markets to operate without introducing additional distortions. Implication: when players' salaries are determined in a competitive market,there is no need to separately tax this component of costs."

So, what is the solution? Sheehan proposes two separate taxes. One is a sort of luxury tax on the marginal cost of running the franchise over some set value. That way, owners would still seek to increase revenue for the sport (through TV deals, etc.) but would also have incentive to cut costs. The second tax would be a tax on too many losses. This way, owners who try to only make profits have economic incentive to try to do things the right way and field a winning team. The reason for this second tax is also because competitive games and division races are good for the sport in a business sense.

So, what do you all think of this idea? Obviously, it will probably never be instituted, but I think it is a brilliant idea. It has also made me think about how this type of plan may have affected the Orioles over the past 10 years.

[scOtt]

I think the tax on losses could be good or bad. Two examples:

Kansas City - They are the epitome of a franchise in it for profit. They spend just enough to tease their fans out to the ballpark, like signing Meche last winter. KC is a good baseball town, and their attendance vs. payroll is a money-making machine. Taxing their losses is exactly the kick in the butt they need.

Tampa Bay - TB has always had some very good talent in some areas. Very very poor talent in others. To me they have just been mismanaged from day one. The list is endless... Boggs, Piniella, Greg Vaughan. Big moves, but not thought out. Not what the club really needed. Add to this the embarrassing fan support. This is an inept franchise in a BAD ML city. But they seem to be trying... Taxing their losses is just kicking a team when they're down. Making it even more difficult to operate in an already bad market.

[square634]

I think the tax on losses could be good or bad. Two examples:

Kansas City - They are the epitome of a franchise in it for profit. They spend just enough to tease their fans out to the ballpark, like signing Meche last winter. KC is a good baseball town, and their attendance vs. payroll is a money-making machine. Taxing their losses is exactly the kick in the butt they need.

Tampa Bay - TB has always had some very good talent in some areas. Very very poor talent in others. To me they have just been mismanaged from day one. The list is endless... Boggs, Piniella, Greg Vaughan. Big moves, but not thought out. Not what the club really needed. Add to this the embarrassing fan support. This is an inept franchise in a BAD ML city. But they seem to be trying... Taxing their losses is just kicking a team when they're down. Making it even more difficult to operate in an already bad market.

My guess is the tax on losses for TB would be far outweighed by the revenue they would receive from other teams because their costs are so low. Overall I think they would gain a net positive in revenue.

[scOtt]

My guess is the tax on losses for TB would be far outweighed by the revenue they would receive because from other teams because their costs are so low. Overall I think they would gain a net positive in revenue.

I don't know the business side of it so well. If this system could, in fact, distinguish between the two examples I listed, then I'm all for it.

In general, I think the idea of taxing losses is brilliant. The thought never occurred to me. Attacks competitive imbalance from both ends.

[square634]

In general, I think the idea of taxing losses is brilliant. The thought never occurred to me. Attacks competitive imbalance from both ends.

Yeah, I never thought of it either, I also think it is brilliant. Just as it applies to the Orioles, it might have caused Angelos to either run the team the right way or possibly sell the team.

[scOtt]

Yeah, I never thought of it either, I also think it is brilliant. Just as it applies to the Orioles, it might have caused Angelos to either run the team the right way or possibly sell the team.

I did consider the Balmer angle. I wondered how PA would react. Probably not in the most smart way... he'd'a probably thrown a lot of money at FAs. Not the best solution for our particular case, but it at least would have been something.

[Migrant Redbird]

It's all too complicated. Forget about a luxury tax. Simply reduce a team's roster size by 1 player for each 10 percent increment that its payroll is above a certain threshold -- say 125 percent of the ML average -- and see how well the Yankees can play with 9 All Stars on the field but a short bullpen and bench. You want a $200M payroll, you can have it, but you'll have to get by with a 20 player roster instead of 25. Find the point that gives you the best competitive balance.

[BaltimoreTerp]

A lot of the really though-out salary-cap plans I've heard have also called for a salary floor for minimum spending, which I guess is similar.

[square634]

It's all too complicated. Forget about a luxury tax. Simply reduce a team's roster size by 1 player for each 10 percent increment that its payroll is above a certain threshold -- say 125 percent of the ML average -- and see how well the Yankees can play with 9 All Stars on the field but a short bullpen and bench. You want a $200M payroll, you can have it, but you'll have to get by with a 20 player roster instead of 25. Find the point that gives you the best competitive balance.

That wouldn't reduce the incentive to field a very cheap 25 man roster to increase profit.

[twoBshorty]

Taxing losses is a very interesting idea, but it would definitely need a lot of modifications and tweaking. Penalizing Pittsburgh for consistent, pre-meditated suckitude is one thing, but penalizing the Blue Jays because they thought they put together a good team and players just didn't perform is problematic. It would have to be some kind of system that instituted an increasingly heavy losses tax based on how many years in a row you'd fallen below a certain level, or something like that, just to prevent teams from being unfairly penalized by one year of poor decisions or bad luck.

And I don't understand why there is no salary floor. The luxury tax creates a disincentive to spend more than a certain amount, and revenue sharing creates a pool for boosting other teams' payrolls. Yet there's no disincentive not to spend that money on the field? It's only being regulated (and not well) from one end, and that's not fair. I'm not a fan of bloated payrolls, but right now, John Henry and George Steinbrenner are effectively funding Jeffrey Loria's personal lifestyle, and that's ridiculous. If that's the way things are going to work, they should just dump revenue sharing entirely and let Henry and Steinbrenner buy their own Lamborghinis and Gulfstream jets. At least they earned the money. Maybe some kind of system where the revenue sharing money is collected, but you have to agree to certain conditions to get access to it, and if you don't meet those conditions, it's given back to the teams that put it in? The federal government attaches strings to grant money, why not MLB?

[square634]

Taxing losses is a very interesting idea, but it would definitely need a lot of modifications and tweaking. Penalizing Pittsburgh for consistent, pre-meditated suckitude is one thing, but penalizing the Blue Jays because they thought they put together a good team and players just didn't perform is problematic. It would have to be some kind of system that instituted an increasingly heavy losses tax based on how many years in a row you'd fallen below a certain level, or something like that, just to prevent teams from being unfairly penalized by one year of poor decisions or bad luck.

And I don't understand why there is no salary floor. The luxury tax creates a disincentive to spend more than a certain amount, and revenue sharing creates a pool for boosting other teams' payrolls. Yet there's no disincentive not to spend that money on the field? It's only being regulated (and not well) from one end, and that's not fair. I'm not a fan of bloated payrolls, but right now, John Henry and George Steinbrenner are effectively funding Jeffrey Loria's personal lifestyle, and that's ridiculous. If that's the way things are going to work, they should just dump revenue sharing entirely and let Henry and Steinbrenner buy their own Lamborghinis and Gulfstream jets. At least they earned the money. Maybe some kind of system where the revenue sharing money is collected, but you have to agree to certain conditions to get access to it, and if you don't meet those conditions, it's given back to the teams that put it in? The federal government attaches strings to grant money, why not MLB?

I don't really like the idea of a salary floor too much because it seems to me that would force some teams to sign older free agents to oversized contracts that they aren't worth. For example, the Devil Rays would have been basically forced to sign one of the overpriced starting pitchers like Gil Meche in this past market. And since players have a choice of where they play and may not accept any contract to play for the Devil Rays because of location, competitiveness, and/or other factors, I think it would unnecessarily handcuff teams. If you create incentives to win through taxes on losses (plus the increased TV money and gate receipts of a winning team) at the same time as supplying smaller market teams with sufficient revenue, then the competitive balance should occur by itself.

[BaltimoreTerp]

I don't really like the idea of a salary floor too much because it seems to me that would force some teams to sign older free agents to oversized contracts that they aren't worth. For example, the Devil Rays would have been basically forced to sign one of the overpriced starting pitchers like Gil Meche in this past market. And since players have a choice of where they play and may not accept any contract to play for the Devil Rays because of location, competitiveness, and/or other factors, I think it would unnecessarily handcuff teams. If you create incentives to win through taxes on losses (plus the increased TV money and gate receipts of a winning team) at the same time as supplying smaller market teams with sufficient revenue, then the competitive balance should occur by itself.

The Bob Costas plan, which is the one I like, suggests using a five-year average for both the cap and the floor, so as long as it evens out over time, you are OK.

That way, a team like Tampa can go cheap, but then start paying the kids as they gain experience and also FAs as they improve.

[Migrant Redbird]

That wouldn't reduce the incentive to field a very cheap 25 man roster to increase profit.

No, but it would level the playing field for teams that were trying to be competitive, but lack the financial resources of the Yankees and the Red Sox. Some of those teams also have to kick into the revenue sharing pool, like the Cardinals in 2004 and 2005. One of the advantages to the Cardinals in building a new stadium in 2006 was that it stopped them from having to contribute revenue to some of their competitors like the Brewers.

[Edit: I should explain that -- while my plan is basically simpler than the salary caps in the NFL and NBA, and simpler than MLB's current revenue sharing/luxury tax system and some of the salary caps and spending floors proposed for baseball -- the implementation is hardly as simple as my basic outline above. I've discussed implementation details before in my posts on this forum; perhaps I'll have time later to do so again.

[DrungoHazewood]

I think this method is too complicated and it incentivizes cooking the books. Already teams try to shift as much to related-party corporations as possible (other companies under the same corporate umbrella such as TV stations, ticket scalping companies, etc) to avoid revenue sharing. This would exacerbate the practice. Already teams are absolutely unwilling to open their books up to the public, so we'd have no insight into this system. The league could be making stuff up, rigging the system, doing whatever it wanted and we'd never know.

I still think the only fair revenue sharing system is one based on market size. You get an independent entitity to figure out a team's market area and affluence, equate that to an average number of wins, and figure out a formula for redistributing some % of revenues to the teams that overperform. This is the best of all worlds - you incentivize winning, incentivize making money relative to your market, and you eliminate the possibility of cooking the books since all that matters is wins above the wins you "should" have based on your market.