Talk about a bad road team.
Tax on All Their Houses
As Congress struggled last week to come to agreement on budget legislation, sports owners and players were nervously monitoring the fate of a proposal that could have a dramatic effect on player salaries. Shortly before the Senate sent its budget to a Senate-House conference early this month, it added a provision to remove the corporate tax deductibility of the portion of an employee's salary that exceeds $1 million. The amendment, proposed by Senator Hank Brown (R., Colo.) and passed 99-0, would have its greatest impact on the sports and entertainment industries.
Currently a player's salary is entirely deductible. Figuring a 40% tax rate (the 35% corporate tax rate and an estimated 5% of state and local taxes), a salary of, say, $3 million costs a team only $1.8 million; by deducting the whole salary from its taxable income the team saves $1.2 million in taxes. If Brown's amendment goes through, only the first $1 million of that salary would be deductible. The team would save $400,000 in taxes, making its net cost $2.6 million and generating $800,000 in corporate tax revenue.
Based on today's salaries, the provision is projected to generate some $800 million in federal tax revenue, which would be earmarked for Social Security. But because contracts signed before Oct. 25 would be exempt from the law and because it is too early to say how sports and entertainment deal-makers would respond—one loophole, for instance, stipulates that the new rules would not apply to money paid out in incentive clauses—the actual revenue that would be generated is impossible to calculate. "The owners' rational response would be to lower salaries to the point that the payout is the same," says Robert Willens, a managing director of Lehman Brothers and one of the firm's top tax analysts. "Practically, who knows?"
Owners could slash player salaries or continue to bid against one another and absorb the tax burden themselves, an option that would further widen the gulf between the richer and poorer clubs. "The proposal came up so quickly, we haven't had time to figure it out," says Bud Selig, baseball's acting commissioner and the owner of the Milwaukee Brewers. "All I can say is that there will be a major impact."
Others on various sides of the issue have made early assessments. "It will really have an impact on what you can pay a player, maybe by half," says high-spending Dallas Cowboy owner Jerry Jones, who has doled out $67 million in player salaries this year. Adds Leigh Steinberg, who represents several million-dollar football players: "It's outrageous. Why should a franchise be discouraged from paying high salaries?"
Naturally both agents and owners are concerned with protecting their riches and show little sympathy for a sensible, well-intended proposal. Despite the Senate's unanimous endorsement, House Republicans could yet give in to sports and entertainment lobbyists and squelch the proposal. But with Congress struggling to conquer far more controversial issues, passing the provision would seem a no-brainer. And with voters not likely to sympathize with either rich owners or rich players, it would also be a good political move.
A Small Request
Calling the pastime degrading, France's State Council recently made dwarf tossing illegal. But 3'10", 97-pound Manuel Wackenheim, formerly one of the country's professional human projectiles, has refused to take the ruling sitting down. Wackenheim, 28, wrote the European Court of Human Rights asking it to contest the prohibition. "This spectacle is my life," Wackenheim wrote. "I want to be allowed to do what I want."