Tax Reform May Have Brought Unexpected Problems For Sports Teams
Hypothetical: Let’s say your business owns a car, a Hyundai Sonata, let’s say. If the company decided to trade that car for another vehicle like a Mercedes-Benz, it could be required to pay a capital gains tax; that is, a tax on the difference between the values of the two vehicles.
That same tax may apply to professional baseball teams when they trade players. But there is a pretty big issue with this: how does one determine a particular player’s value?
“There is no fair-market value of a baseball player. There isn’t,” Daniel R. Halem, the chief legal officer of Major League Baseball, told The New York Times.
Yet, baseball teams are going to have to figure it out.
The 2017 federal tax law offset the loss of revenue from sources like the income tax by charging higher capital gains taxes on manufacturers who swap assets. That law expanded valuations to professional baseball teams who trade players, explains Jim Tankersly.
The law changed a corner of the tax code that mostly applies to farmers, manufacturers and other businesses that until recently could swap certain assets like trucks and machinery tax-free. But by adding a single word to the newly written tax code — “real” — the law now allows only real estate swaps to qualify for that special treatment.
“I don’t really know what our clubs are going to do to address the issue," Halem told the Times. "We haven’t fully figured it out yet. This is a change we hope was inadvertent, and we’re going to lobby hard to get it corrected.”
Last year, the Houston Astros acquired top-rated pitcher Justin Verlander in a trade, and signed him for a large-sum contract. He made $28 million last year alone. However, the players for whom he was traded only earned minor-league salaries. Would the Astros have to pay taxes on the difference between the traded players? Or would both teams have to pay taxes on the trade?
Complicating matters further is that teams value players differently, and one player might help a certain team far more than another team. A struggling club with a surplus of starting pitchers might trade one to a playoff contender in desperate need of one, in exchange for position players who could improve a struggling lineup. In that case, both teams could, reasonably, be considered to have gained value in the trade, and thus would owe taxes on it.
If professional sports teams are required to pay capital gains taxes on trades, it will likely have an effect on how they exchange players and make contracts. It could mean less money in those contracts to even out the coming trade costs. But wait, there's a major downside to that, even as spectators dispute the value of a player.
When the money for a star declines, performance as a team also declines, according to a Harvard Business Review analysis.
[W]hen we looked more closely at performance, we found that teams actually perform better (that is, they have a higher winning percentage) when there is a match between pay and performance. In essence, a team could have a high dispersion in pay between players, but if the pay corresponds with their performance, the negative aspects of inequality go away, at least in the form of a team’s winning percentage.
The capital gains tax that may be levied on baseball teams could incentivize owners to pay star players less than they otherwise would have. But then the whole team suffers.
What do you think of charging a tax on the value of a traded player?