Would you believe that Michael Jordan's most significant contribution to professional sports might be his impact on tax law?
It's not that big of a stretch, given the consequences of visiting athlete taxation, which began in 1991 after Jordan's Chicago Bulls defeated the Los Angeles Lakers in the NBA Finals. As Inside Hoops recalls, California voted to tax Jordan for the days he played in Los Angeles, prompting Illinois to pass a bill known as "Michael Jordan's Revenge," requiring payment from players from California and any other state that levied such taxes. This created a ripple effect, with those other states passing similar laws, ultimately leading to the mess we have today with visiting athletes and their taxes.
Tennessee's so-called jock tax takes the practice a step further by charging a flat rate to all home and visiting players regardless of income. Enacted in 2009, this law subjects National Basketball Association and National Hockey League players to a rate of $2,500 a game, not to exceed $7,500 a year. The money generated goes to the arena managers for the NBA's Memphis Grizzlies and the NHL's Nashville Predators, who happen to be those teams' respective owners, for the sole purpose of stadium operations.
On its face, the idea of charging athletes a seemingly nominal fee to fund the arenas where they make all their money seems like a fine idea, especially if the alternative is taxing local residents. I doubt a family making less than $44,000 a year -- Tennessee's median household income, according to the latest census -- would look kindly upon being charged a fee to essentially subsidize Zach Randolph's workplace. After all, what's $7,500 to a guy who's making $17.8 million this year?
The problem is that not all athletes, or athlete salaries, are created equal. Tennessee's jock tax hits Randolph, the Grizzlies' highest-paid player, just as hard as it hits those making the NBA's minimum wage. Again, it's hard to feel sorry for someone making close to $500,000 a year to play a game, but as the New York Times' Mary Pilon notes, Tennessee's law means that some on the lower end of their league's pay scale could end up paying more in total taxes than they earned for that particular game. If all states enacted similar policies, a player could see his entire salary whittled away by each of the states to which his team travels.
Furthermore, the tax bizarrely targets specific athletes -- NBA and NHL players -- while exempting the National Football League and minor league baseball teams. That football players who pass through Nashville to take on the Tennessee Titans are excused from the jock tax is emblematic of just how much power the NFL yields: The league reportedly made an agreement with the legislature before the tax bill was drafted and could have even penalized the state if it had subjected its players to the tax. (The implications of the NFL's broad tax exemption and ludicrous status as a nonprofit organization are a discussion for another day.)
So whose responsibility should it be to subsidize stadium operations? While the Grizzlies' FedEx Forum and the Predators' Bridgestone Arena are publicly owned, both facilities are managed by their respective teams, which receive the revenue for operations under the jock tax law. It stands to reason, then, that the obligation to pay for stadium upkeep would fall to the teams' owners, who reap financial gains from gate receipts and concessions -- the millionaires vs. billionaires debate. According to Forbes, however, the Grizzlies made $96 million in revenue last year, but suffered a net loss of $12.5 million in operating income. Similarly, the Predators generated $71 million but lost $800,000.
To avoid greater loss to these small-market teams and avoid placing an undue and uneven burden on players, the NHL has agreed to pay its players' jock tax under the new collective bargaining agreement, a solution those in the hockey world hope is temporary. The NHL Players' Association is suing Tennessee for the taxes levied from the law's enactment in 2009 to the end of the 2012-13 season, before the new CBA was enforced. With the league's backing, the NHLPA is also lobbying the Tennessee General Assembly to repeal the policy.
For now, the NBA, which generated an estimated $1.7 billion more than the NHL last year, should follow suit and cover its players' taxes. It could be considered part of revenue sharing, with all 30 owners splitting the cost of the taxes levied to players on every team that passes through Memphis. The Grizzlies are already the largest beneficiary of the newly enacted revenue-sharing agreement.
Beyond issues of fairness, I wonder whether the jock tax is actually worth it. According to Pilon, the revenue from the jock tax amounts to about $3.6 million a year -- less than a half-percent of the state's total tax revenue. Why bother? Remember that 2009 was the height of the recession, and Tennessee was hit especially hard, with higher unemployment than the national average. Because the state levies no personal income tax (it does tax dividends and interest), the majority of its tax revenue is generated by sales tax, which steadily declined as middle-class earners and the jobless cut back on spending. Millionaire athletes were a prime target for politicians who needed to give the appearance that they were trying to balance the budget without raising taxes ahead of midterm elections. As former state senator and income-tax proponent Robert Rochelle said, candidates for the 2010 governor's race promised "to solve all your problems without new taxes." Instead, a new tax was enforced, one that wouldn't affect the average voter or any significant fiscal gain, but would render professional sports stars as unsympathetic casualties.