Chapter 12 Taxes, Antitrust, and Competition Policy

1
Chapter 12Taxes, Antitrust, and Competition
Policy

• To Accompany
• Sports Economics 2ED
• Rodney Fort
• (PrenticeHall, 2006)

Anyone who quotes profits of a baseball club is
missing the point. Under generally accepted
accounting principles, I can turn a 4 million
profit into a 2 million loss, and I can get
every national accounting firm to agree with
me. Paul Beeston, Toronto Blue Jays Vice
President.
2
Overview

• Sports team owners enjoy special tax and
  antitrust advantages not enjoyed by other
  industries.
• Owners and players enjoy the benefits of this
  special status while fans and taxpayers pay the
  costs.
• The rational actor model helps explain why owners
  enjoy these benefits.
• It is unlikely that this special status will be
  revoked.
• Competition policy can play an important role in
  fixing market power problems in pro sports.

3
Introduction

• Nevertheless the apparent irrationality of even
  the worst sports investment is largely explained
  by the effects of the full utilization of the
  available tax benefits.
• - Economist Benjamin Okner (1974).

4
The Special Tax Status of Owners

• At purchase, the new owner organizes the team as
  a pass-through firm.
• Results
• The player roster depreciation is in effect.
• Millions of dollars in savings are passed through
  to the owners 1040 Form.
• But there is more!
• If owner keeps the team after the roster
  depreciation runs out
• Reorganize as a standard corporation, pay the
  lower corporate tax rate, never pay back the tax
  shelter (OK once under IRS ruling).

5
The Special Tax Status of Owners

• Omnibus Tax Act, 2004 Now, can count 100 of
  purchase price toward depreciation over 15 years.
• Working through arithmetic in the book, value to
  owners increases as per this graph NOR lt 16.4
  mil. generate a gain to that owner.

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Capital Gains Advantages

• What if the owner sells after the roster
  depreciation runs out?
• Sell the team at a price that includes the value
  of the roster depreciation to the next owner.
• For other firms, there is a risk that the IRS
  would rule that excess depreciation was taken.
  Penalties and the excess must be paid back at the
  higher individual tax rate.
• No excess depreciation ruling ever in pro
  sports! And there is more

7
Impact on Capital Gains Per Se

• If the team is sold at higher than the price
  paid, capital gains tax is due. But
• If the capital gains tax is less than the
  personal tax rate, a lower tax bill is due and
  paid on capital gains despite the fact that the
  owner enjoyed the tax shelter on the 1040 Form.
• Some of the shelter would have been paid at the
  higher personal tax rate without the shelter!

8
Special Antitrust Status

• The antitrust laws dictate that firms cannot
  exercise or extend their market power without
  regulation. The Federal Trade Commission
  monitors compliance and the Department of Justice
  prosecutes offenders.
• Pro sports leagues are not held to the same
  standard as other industries under the law.
• Example Owners acting together as a league to
  determine team location and moves.

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Players and Antitrust

• In the modern free agent context of pro sports,
  antitrust still matters.
• Players sacrifice individual rights to sue under
  the antitrust laws when unions represent them.
• The Curt Flood Act (1998)
• As in all other leagues, MLB players now can sue
  if owners stymie collective bargaining using
  tactics illegal under the antitrust laws.
• Decertification still remains a tool to allow
  players to sue individually under the antitrust
  laws.

10
Franchise Moves and Antitrust

• The antitrust laws have been used against leagues
  to allow teams freer movement between locations
  (the Raiders case).
• Congress has held repeated hearings on the issue
  of league power over team location. But never
  intervened directly to reduce that power.

11
Broadcasting and Antitrust

• Recall Chapter 5 Nothing requires leagues to
  negotiate the broadcast agreements of their
  member owners. But they do, presumably to the
  benefit of owners.
• Originally, this practice was held as an
  antitrust violation by the Department of Justice.
• Congress reversed this ruling by passing the
  Sports Broadcasting Act of 1961 that made it
  explicitly legal.

12
Mergers and Antitrust

• Mergers typically have been carefully reviewed by
  the Federal Trade Commission and often denied.
• Just the opposite has occurred in pro sports.
  Either no intervention or outright facilitation.
• Occasionally with the blessings and help of
  Congress
• Formal exemption of the AFL-NFL merger in 1966.

13
Special Status Impacts

• Special tax and antitrust status impacts the
  welfare of
• Fans and taxpayers.
• Media providers.
• Owners and players.
• Team sale prices.
• Lets look at each one.

14
Impacts Fans and Taxpayers

• Special antitrust status reduces antitrust
  scrutiny and facilitates market power on the part
  of team owners and leagues. Fans pay in terms of
  higher prices and less sports output to enjoy.
• All of the value of increases in fan willingness
  to pay accrue to the current group of team
  owners.
• Special tax status, with tax breaks for some
  (owners), the bill for the rest of the taxpayers,
  for a given level of spending, increases.
• Primarily property taxes and depreciation-driven
  shelters.

15
Impacts Media Providers

• Media providers must negotiate with the league
  rather than with individual owners. This reduces
  their bargaining position and raises prices.
• A portion of this higher price is passed on to
  advertisers, but not all and media providers
  enjoy lower profits as a result.

16
Impacts Owners and Players

• Owners and players are the clear beneficiaries.
  After all, owners enjoy the benefits of enhanced
  market power. Players earn a portion of that
  through collective bargaining.
• Lets look at owners, first. The result is
  easiest to spot in the value of the asset they
  hold.
• Team Sale Prices

17
Impacts Team Sale Prices

• Sale prices are high. In each league, the
  majority of teams sell for more than
• NFL- 370 million
• MLB- 210 million
• NBA- 207 million
• NHL- 148 million
• But even more insightful, their values have risen
  at rates greater than the rate of return on a
  diversified portfolio. Rates of return

18
Impacts Players

• Since special antitrust status facilitates market
  power for owners, players are worth more to
  owners than in the absence of special status.
  Higher pay as seen here WMP gt W0.

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Rational Actor Politics Explanation

• Take special antitrust status as an example (same
  goes for tax status) Owners and politically
  powerful supporters influence the electoral
  chances of those choosing antitrust policy
  (Congress). They continue to enjoy special
  status due to rational ignorance on the part of
  the rest of their geographical constituency.

20
Competition Policy

• Competition policy concerns market power problems
  and what can be done about them.
• By description in the text, the problem
  ultimately is the result of the choices made by
  politicians who must face reelection
• In order to take full advantage of their chances,
  the rational actor model predicts politicians
  will concentrate benefits on politically potent
  groups and disperse the costs over the rest of
  the voters.
• Since current special status reflects
  politicians doing the best they can for
  themselves, the chances for change are not great.

21
Altering Special Status

• As with the stadium mess, special tax and
  antitrust status is a political outcome. And it
  will take altered politics to change the outcome!
• Those interested in altering the outcome must
  become a political force to be reckoned with.
• Hurdles
• Education.
• Free riding behavior.
• Carry out successful lobbying.
• But suppose that tide were to change. What
  tools are open for regulation of sports owners
  and leagues?

22
Competition Policy Tools Regulation

• Federal agency regulation
• In some industries, in the name of the public
  interest, the federal government intervenes.
  Analysts of this type of regulation find it a
  mixed blessing at best (students might want to
  take a class on regulation and industrial
  organization to draw conclusions!)
• Public-utility style regulation
• Since local taxpayers typically subsidize the
  activity, just as they do in many locations with
  water and power, public-utility style regulation
  might bring owner behavior more in line with fan
  welfare.
• Outright government ownership (fan ownership)
• The public also own outright their water and
  power production facilities. Perhaps a similar
  approach in sports would produce a better result
  from the perspective of taxpayers.

23
Competition Policy Tools Antitrust

• Breaking up the sports leagues
• Suppose leagues were returned to their
  pre-merger status competing leagues. What
  would we expect? With the reduction in market
  power
• More sports at lower price.
• TV contract prices would fall.
• Competitive balance would be enhanced.
• Highly likely that player salaries would fall.
• No cause for labor-management conflict.
• The end of free agent franchises.
• Some reduced quality in larger markets.

24
Summary

• Sports team owners enjoy special tax and
  antitrust advantages not enjoyed by other
  industries.
• Owners and players enjoy the benefits of this
  special status while fans and taxpayers pay the
  costs.
• The rational actor model helps explain why owners
  enjoy these benefits.
• It is unlikely that this special status will be
  revoked.
• Competition policy can play an important role in
  fixing market power problems in pro sports.