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How Fair Is the Salary Cap?


BigTed3
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Darren Dreger did an interview talking about John Tavares and he spoke about the tax situation in Quebec and Canada and how that was a major deterrent for JT to come here. Dreger was recently on record as saying that he thinks Tavares will go back to the Islanders next year but that he believes (for no particular reason) that JT in his heart wants to play for the Habs. Yet now he's come back and said he feel the indications are even stronger that Tavares stays with the Isles, with one reason being the significant difference in taxes if he were to come to Canada. Dreger adds that he sees Tavares really wanting to come to a Canadian city and be part of a franchise with great history like the Habs, but that that probably doesn't offset the tax situation.

And so we come to an issue that has come up before: how fair is the cap? The cap limits what teams can spend (in American dollars). But this disadvantages Canadian team significantly. First, Canadian teams have to pay their players in US money but their income is in Canadian dollars, so whenever the Canadian dollar drops in value, teams take a hit. There is far less stability than for US teams paying their players in the same dollars as their revenues. And more importantly, Canadian teams that face high income taxes simply cannot compete with provinces/states with lower taxes. We saw this with Radulov, who opted for the same contract from Dallas as Montreal but one where he takes home significantly more money after taxes. And now we're perhaps seeing this influence players like Stamkos and Tavares, who might have considered cities like Toronto and Montreal if it weren't for the tax factor.

With the cap, these teams can make good revenues but can't turn this into better payouts for the players they want to sign. To offset the tax differences without a cap in place, the Habs could theoretically offer a higher dollar amount so that the take-home pay would be the same. But under a cap, they can't do that. Individual players salaries' are limited by being a percentage of the cap and that's that. So does the cap even the playing field? In essence, no. It actually gives an unfair advantage to teams playing in lower income tax areas. Without a doubt, Geoff Molson needs to take a hard stance on this and have the cap adjusted for taxes and take home pay. Until that happens, the Habs will continue to be at a competitive disadvantage.

 

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It would seem to me that if the Canadian owners could get together and bring it up at the owners/GM's meetings that they "might" be able to do something about the inequities in salaries. Perhaps a cap that is higher in Canada might work. 

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Canadian teams can start by suggesting an end to revenue sharing. Or: pick a date (say July 1st) Canadian teams salary caps increase according to the difference between the US and Canadian dollar. If the US dollar is worth $1.20 Canadian the salary caps for Canadian teams can increase 20% but the cap floor must also increase 20%.

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Hard caps don't work in leagues like the NHL. A hard cap with a luxury tax could theoretically work, but only if it was also paired with measuring the cap in net USD.

The reality is that the Canadian teams, despite contributing so much to the league's bottom line, don't matter as much to its strategic vision. I'm not going to pass judgment on that (for a change :P), but it is the way it is.

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4 hours ago, habs_93 said:

Hard caps don't work in leagues like the NHL. A hard cap with a luxury tax could theoretically work, but only if it was also paired with measuring the cap in net USD.

The reality is that the Canadian teams, despite contributing so much to the league's bottom line, don't matter as much to its strategic vision. I'm not going to pass judgment on that (for a change :P), but it is the way it is.

I'd be fine with a luxury tax to some degree, but it should be something which allows teams to remain competitive with their contract offers. The hard cap allows no room for that.

Look at Radulov. Texas has no state income tax, so the marginal tax rate on high income earners (which NHL players are) is 39%. In Quebec, I believe it's in the range of 56% now and in Ontario in the range of 53.5%. That means that if Dallas offers Radulov 6M a year, Montreal has to offer Radulov over 7M a year to generate the same take-home pay for the player.

Look at Stamkos, who re-signed with Tampa in a state where there's also no state income tax. They also pay a 39% marginal tax rate. So if Tampa offers Stamkos 10M a season, Montreal would have to offer close to 12M to "match" (never mind beat) the offer. Now run that over 7-8 years and a star player could be leaving around 15M in lifetime earnings on the table by opting for Montreal or Toronto or Ottawa instead of a team in Texas or Florida.

Subban got traded to Nashville, and he's now pocketing about 800k more a season to do the same job on the same contract. And when we come to Tavares, who reportedly wants about 12M a season, that'll take around 13M a season for the Habs to match the New York tax rates.

Problem number 1 is the fact the tax rates are not comparable, especially when you get up to 15%+ discrepancies, so owners in Canada and California and Minnesota need to pay more to create equal working compensation. And problem number 2 is the hard cap, which prevents teams from generating equal pay, even if they can afford it.

As you said, the cap needs to be corrected for currency and net pay. My suggestion would be that on June 20 every year, when the playoffs are over but before the draft and free agency happen, the league sits down and establishes cap correction factors for each team for the coming season. Players continue to have their own salaries and contracts as before, but if taxes in Quebec produce a lower net income relative to other provinces and states, then the Habs' cap for the year is corrected for that... so Montreal might have a cap of 94M USD and Toronto a cap of 92M USD and the Rangers a cap of 86M USD and the Panthers a cap of 80M USD and so on... that's pretty much the only way to maintain a fair competitive balance in a hard-cap system. Otherwise, it significantly penalizes the teams located in higher-taxed areas, mainly the Canadian teams.

As I said, it's embarrassing and concerning to some degree that Canadian owners haven't stepped up to complain about this. If anything, failure to complain suggests they prefer to curb their costs rather than ice competitive rosters.

 

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19 hours ago, BigTed3 said:

Darren Dreger did an interview talking about John Tavares and he spoke about the tax situation in Quebec and Canada and how that was a major deterrent for JT to come here. Dreger was recently on record as saying that he thinks Tavares will go back to the Islanders next year but that he believes (for no particular reason) that JT in his heart wants to play for the Habs. Yet now he's come back and said he feel the indications are even stronger that Tavares stays with the Isles, with one reason being the significant difference in taxes if he were to come to Canada. Dreger adds that he sees Tavares really wanting to come to a Canadian city and be part of a franchise with great history like the Habs, but that that probably doesn't offset the tax situation.

And so we come to an issue that has come up before: how fair is the cap? The cap limits what teams can spend (in American dollars). But this disadvantages Canadian team significantly. First, Canadian teams have to pay their players in US money but their income is in Canadian dollars, so whenever the Canadian dollar drops in value, teams take a hit. There is far less stability than for US teams paying their players in the same dollars as their revenues. And more importantly, Canadian teams that face high income taxes simply cannot compete with provinces/states with lower taxes. We saw this with Radulov, who opted for the same contract from Dallas as Montreal but one where he takes home significantly more money after taxes. And now we're perhaps seeing this influence players like Stamkos and Tavares, who might have considered cities like Toronto and Montreal if it weren't for the tax factor.

With the cap, these teams can make good revenues but can't turn this into better payouts for the players they want to sign. To offset the tax differences without a cap in place, the Habs could theoretically offer a higher dollar amount so that the take-home pay would be the same. But under a cap, they can't do that. Individual players salaries' are limited by being a percentage of the cap and that's that. So does the cap even the playing field? In essence, no. It actually gives an unfair advantage to teams playing in lower income tax areas. Without a doubt, Geoff Molson needs to take a hard stance on this and have the cap adjusted for taxes and take home pay. Until that happens, the Habs will continue to be at a competitive disadvantage.

 

Its tough because on the one hand, teams like Montreal, Toronto, Vancouver etc would be fine with a higher cap, smaller market Canadian teams would have even more trouble.  Im not sure what the answer is but as habs_93 eluded to, the Canadian teams do not seem to be of much concern to the league so i doubt much will change. 
 

1 hour ago, habs1952 said:

Do players still pay income tax in their native countries? I don't think it's quite as rosy as it's made out to be. Sure would be nice to have a tax lawyer here on the forum.

Canadian-born players who play in the states pay taxes only in the states.
American-born players playing in Canada have to file in america also (one of only 2 countries in teh world that requires you to file in your home even if your income comes from abroad) but usually our taxes are higher anyway, so they dont have to pay extra american taxes.  If we were lower then they would have to pay the difference to uncle sam. 

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  • 3 weeks later...

The essence of the cap was to create fairness and with that they created another area of inequality.  If the NHL was serious about giving every team an even playing field with concern to signing players under a hard cap then they would definitely look at adjusting the cap, or allowing a "tax makeup" signing bonus that doesn't go against the cap.  

Either that, or for every % of tax difference you adjust the nets of the opposing team by that % :);)

 

 

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2 minutes ago, FanFromAB said:

The essence of the cap was to create fairness and with that they created another area of inequality.  If the NHL was serious about giving every team an even playing field with concern to signing players under a hard cap then they would definitely look at adjusting the cap, or allowing a "tax makeup" signing bonus that doesn't go against the cap.  

Either that, or for every % of tax difference you adjust the nets of the opposing team by that % :);)

 

 

I like your thinking. :)

 

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Pierre LeBrun stating in the intermission tonight that Nick Bonino told him his choice as a UFA last summer was down to Nashville and Montreal and that the Habs in fact offered him a bigger contract. However, when he factored in the difference in taxes, he would make more with Nashville, so he opted for the Preds. Further proof that teams in higher taxed areas cannot compete on a fair level. Similar story with Radulov to some degree. Molson and the other owners who are poisoned by this disparity need to step up and complain or we will never get a fair shake in a cap world.

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1 hour ago, BigTed3 said:

Pierre LeBrun stating in the intermission tonight that Nick Bonino told him his choice as a UFA last summer was down to Nashville and Montreal and that the Habs in fact offered him a bigger contract. However, when he factored in the difference in taxes, he would make more with Nashville, so he opted for the Preds. Further proof that teams in higher taxed areas cannot compete on a fair level. Similar story with Radulov to some degree. Molson and the other owners who are poisoned by this disparity need to step up and complain or we will never get a fair shake in a cap world.

Molson has no hockey sense and doesn't care about our sense of pride for the Stanley Cup IMO. He totally relies on MB who's job is too hard in the first place.

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  • 2 months later...

I think the tax situation is a bit overstated in Montreal... its not like Ontario (or anywhere in Canada), New York, California, are much better. We're pretty much in the same boat. BUT Its clear that Texas, Florida, have a HUGE advantage over us. Tampa would not be able to have the team it has without the tax situation. I believe the team in Vegas and the one in Seattle will have the same benefit. I do believe something needs to be done about this. Some kind of tax on players from teams with low taxes that goes into some revenue sharing pot or something. It doesn't have to be perfectly equal but it's gotta be closer. 

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2 hours ago, habsisme said:

I think the tax situation is a bit overstated in Montreal... its not like Ontario (or anywhere in Canada), New York, California, are much better. We're pretty much in the same boat. BUT Its clear that Texas, Florida, have a HUGE advantage over us. Tampa would not be able to have the team it has without the tax situation. I believe the team in Vegas and the one in Seattle will have the same benefit. I do believe something needs to be done about this. Some kind of tax on players from teams with low taxes that goes into some revenue sharing pot or something. It doesn't have to be perfectly equal but it's gotta be closer. 

We had a good discussion on this in the State of the Habs and that's about right. If you compare the worst-case (Montreal) to the best-case (teams you mentioned) the difference after accounting for trades, ELCs, players desperate to find a spot, etc (where taxes likely make little to no difference due to lack of choice) you're probably looking at the "no-tax" teams being able to afford an extra solid second liner or so (assuming taxes are actually having a tangible difference in most contract negotiations). So not nothing, but not exactly baseball level "unfairness".

I obviously wouldn't complain about any changes that helped Montreal, but trying to come up with reasonable rules here is going to be so messy it won't happen. We can come up some ballpark estimates of income tax comparisons, but in reality tax codes are thousands upon thousands of pages long. And teams won't be happy to stop at income taxes - other costs like cost of living (housing, energy, etc), sales taxes, property taxes, etc will all start coming up. Then small market teams will want more revenue sharing - is it fair just because your city is smaller and your owner is unwilling to lose money you can't spend to the cap? Non hockey markets might want some benefit for not being able to offer as good endorsement opportunities. And of course Winnipeg and Detroit will want the "bad city reputation" benefit. Although at least Montreal can always claim the "most players don't speak French" benefit, and all Canadian teams can  claim the "media is crazy" benefit. 

I'm obviously being a bit facetious and accounting for tangible financials is more doable than the intangibles - although it's still really, really hard to do remotely fairly. I just think it's a big can of worms the NHL is never going to open.

 

 

 

 

 

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