Putting the Dodgers 2016 Tax Bill in Perspective

Before we throw our up our arms in angst and make reference to the Boston Tea Party opposing the Tea Act of 1773, we need some perspective. We can hold off on throwing our tea in the harbor, or in this day and age—refuse to renew our television and season ticket packages—let us examine comparative tax bills and rates across these United States of America and the world. We will begin with the most likely comparison and then move into some more surprising ones.

Dodgers Tax Bill ($31.8 million USD) Compared to other Major League Baseball Teams

Per Ronald Blum of the Associated Press in “Record 6 MLB teams to pay luxury tax”:

“A record six teams are paying baseball’s luxury tax this season, led by the Los Angeles Dodgers at $31.8 million and the New York Yankees at $27.4 million . . . Boston ($4.5 million), Detroit ($4 million), San Francisco ($3.4 million) and the World Series champion Chicago Cubs ($2.96 million) . . . were sent bills Friday by the commissioner’s office.

The Yankees are paying for the 14th straight year since the tax began, raising their total to $325 million. New York has said it hopes to get below the threshold by 2018.”

With so many contracts coming off the books, the Dodgers have made similar claims to bring down their payroll by 2018.

Blum adds:

“Los Angeles lowered its payroll from a record $291 million last year to just under $255 million, which topped the major leagues for the third straight year. For purposes of the tax, which uses average annual values and includes benefits, the Dodgers’ payroll was nearly $253 million.”

Baseball’s Tax Rate Compared to other Professional Sports Franchises and Leagues Tax Rates

Again, per Ronald Blum/AP:

“Los Angeles owes for the fourth consecutive year and like New York pays at a 50 percent rate on the amount above the $189 million threshold. The Dodgers paid a record $43 million for 2015, and their four-year total is $113 million.

Boston and San Francisco pay at a 30 percent rate as offenders for the second straight year, and Detroit and the Cubs — a first-time payer — are at 17.5 percent.”

In the National Basketball Association (NBA), per Ken Berger with CBSSports.com from June 30, 2016:

“The luxury tax, which the NBA strengthened in the 2011 CBA in an effort to make the cap harder, also is calculated based on revenue. Thus, the tax line vaults to $113 million this season and a projected $127 million next season, based on league estimates.

For up to $5 million above the tax threshold, teams are charged $1.50 per dollar. The tax penalties escalate from there in $5 million increments. For teams that have been in the tax for three of the past four seasons, the penalties are even stiffer.”

To put this in context, the 2016 NBA Champion Cleveland Cavaliers were sent a $54 million dollar luxury tax bill from the Commissioner’s office for a $130.4 million dollar team payroll. In addition, the “repeater tax” will add more to the tax bill going forward. Simply put, NBA teams pay a dollar for dollar+ tax rate (100-150%) for up to $5 million and an increasing amount thereafter. The NBA also taxes the entire payroll therefore driving up the tax bill. Remember, the Dodgers were sent a $31.8 million dollar tax bill for a $253 million dollar team payroll because they were only taxed 50% on the amount above the $189 million dollar luxury tax threshold.

In the National Football League (NFL), there is a hard cap of team payrolls so luxury taxes do not apply. However, the NFL recently switched from a 501(c)(6) tax designation to a traditional corporate structure. You can read more about that here and here.

In Spain’s La Liga, the highest Spanish fútbol league, Dermot Corrigan of ESPN FC reports that “Spain’s Hacienda tax authority has moved to clamp down on a practice where 15 percent of a player’s salary has been seen as image rights and taxed at the VAT (IVA) rate of 25 percent, not the highest income tax (IRPF) rate of 46 percent.” The tax rate seems to be in line with other leagues ranging from 15-50%, but the rate has had an effect on personnel and player decisions with the salary cap in place.

In the German Bundesliga, Germany’s highest league, “The Motley Fool” reports that “Of the 18 Bundesliga clubs, 13 finished with an after-tax profit (72%). Of the 18 Bundesliga 2 clubs, 11 reported an after-tax profit (61%).” This is roughly a 28-39% tax rate. It may be the lowest average tax rate of the professional sports leagues worldwide and no surprise as it has had a profoundly positive effect on the German economy.

If interested, you can learn more about salary ranks and ranges in the Premier League (United Kingdom), Serie A (Italy), Ligue 1 (France), in Major League Soccer (MLS), and across the globe here.

Dodgers Tax Rate (50%) Compared to the Corporate Tax Rate in America

The Dodgers 50% tax rate under the 2012-2016 Major League Baseball (MLB) Collectively Bargained Agreement (CBA) is a bit of a misnomer because the team’s tax is only on the amount above the $189 million dollar threshold and the 50% rate only kicks it for multiple violations of going above the threshold. In corporate America, taxes are roughly 39.1% every year on every dollar minus deductions. However, the Dodgers like the other 29 teams in Major League Baseball, are only competing again each other on the field in a closed market exempted from the anti-trust clause by the Supreme Court of the United States. Whereas, corporate America is competing worldwide in a relatively free and open market and subject to the anti-trust clause. A simple example of the wielding power of Major League Baseball is to try to start a competing professional baseball league in America and see how far that goes. Many have tried, failed, and/or been consumed by the all-powerful MLB.

What Can We Expect Going Forward?

We discussed the new CBA tax consequences and formula previously. You can read more here.

As a recap, per Ronald Blum/AP:

“The threshold increases to $195 million next year under the new labor contract, and tax rates go up, too. There will be additional surtaxes, raising the rate to as much as 95 percent for the amount above $235 million, with the increase to be phased in for 2017 at the midpoint between the old and new rules . . .

Starting next year, the tax rates will be 20 percent, 30 percent and 50 percent, with a 12 percent surtax on the amount $20 million to $40 million above the threshold. There will be an additional surtax of 42.5 percent on the amount more than $40 million over for first-time offenders and 45 percent for subsequent offenders.”

Taxation without representation? Not quite friends. The District of Columbia still owns that slogan.