Financial Crisis: How Baseball Could Suffer

We are living in a scary yet exciting time. With the current financial crisis raging on and Barack Obama waiting to take his place in the White House, many are hoping for a great deal of change in the following four years. But, the first change America is likely to witness is a tax hike that would increase the top federal income tax rate from 35% to just under 40%. This move would also give tax cuts to anyone making less than $200,000 a year, welcome relief for most Americans. Unfortunately, in a sport where the average salary is $2,820,000 a year and the minimum salary is $390,000, this tax increase is going to affect all players, as it only applies to households making more than $250,000 a year. As I mentioned in a previous post, we must keep in mind that baseball is still a business and the economy and these important economic decisions have a huge bearing on how much profit the players turn. Even though Major League Baseball's profit margins have grown the past few years, it is not immune to the effects of the current crisis. Although a tax hike might decrease player earnings slightly, the real difference will be made when teams stop offering unreasonably rich and long contracts to undeserving players. Many of the players that might complain about the new income tax should first question whether or not they even deserve the contract they have.

This situation has led some agents to speculate that the tax hike could be beaten, at least in part, if signing bonuses are paid before January 1. These signing bonuses are negotiated into contracts and the total sum, in the millions, is often paid in installments over the length of the contract. Agent Craig Landis said that early signing was "something we'll consider" and agent Paul Kinzer said, "I'm sure it will be kicked around". Even some GMs were open to the idea, with Tampa Bay's Andrew Friedman stating the idea was "not off the wall" and that they would "certainly be open-minded to it depending on what the rest of the terms of the deal are".While it may only affect this year's portion of their signing bonus, some of these players stand to lose a great deal of money, with the almost 5% tax hike amounting to over a million dollars to the highest paid players. Other agents, like Scott Boras, have simply considered asking for larger portions of the signing bonuses to be paid before January 1, 2009, thereby negating the first year of effects from the proposed tax hike. The problem here lies in the fact that players that are becoming free agents are not able to negotiate money with teams other than their own until November 14, the first official day of free-agency. This does not leave a great deal of time for players to sign by the start of January, especially considering the winter meetings, the true start of free agency and trade season does not begin till almost mid-December.

Manny Ramirez, Mark Teixeira and C.C. Sabathia are all likely to get multi-year deals that pay around (or well over in Sabathia's case) $100 million over the full course of the contract. That means that these players have the most to lose from this proposed tax hike. It is interesting, however, that these players are going to get such handsome contracts because Major League Baseball commissioner Bud Selig just warned teams of the current financial crisis and told teams "to operate in a fashion that is cognizant of [the] economy". Amidst all his concerns, MLB revenue was up to $6.5 billion last year alone. This is due to high fan attendance rates, TV rights and even stadium naming rights, such as the New York Mets' agreement with the Citi Group that pays the team $20 million a year for the next twenty years. These profits have led Boras to call this "one of the more aggressive markets for players", though GMs do not feel quite as confident as does. San Diego Padres GM Kevin Towers believes he saw the effect of the recession at the end of the season with attendance numbers down. That may just be because San Diego finished in last place in what is largely considered the weakest division in baseball, but it is true that consumers have less money to spend on leisure items, with tickets to a baseball game being just that. Towers still believes that the fans will come, however, as long as there is a winning team on the field.

Another way for teams that are building new stadiums to increase revenue from ticket sales is by opting for fewer seating areas and more luxury boxes. On Bloomberg.com, Danielle Sessa wrote an article discussing how the Mets, who will be moving into

their new stadium in 2009, have already sold all forty-nine luxury boxes, which go for as much as $500,000 a year. The Yankees, on the other hand, still have seven of their total forty-seven luxury boxes available. This is actually quite surprising and the Yankees are traditionally New York's team and may be the most popular (as well as most hated) team in baseball. Cost is not an issue, as the Yankees were able to sell all of their luxury boxes priced between $650,000 and $850,000 while the seven remaining were going at $600,000. Though, the Yankees remained unconcerned, unafraid that "the economic crisis will hamper its ability to sell them". Even when not selling out all of the season boxes, the expansion of these luxury suites should help make up for the losses that will be suffered by the teams if attendance numbers decline, something very likely as New York is one of the centers of the current financial crisis.

Thus, although baseball appears fairly immune to some of the economic issues facing America, it remains to be seen what type of effect these issues will have in the long run. It will be interesting to see if a recession will reduce the number of large, long-term deals offered to players, put a premium on young talent or affect attendance in such a way that teams lose money because of high payrolls. In my opinion, the first people to lose out will be the players. As long as there is money to be made in baseball, a majority of that will be going to the teams themselves. Thus, tax increases may be the first of many hindrances that now face a Major League Baseball player hoping to amass his millions. There will always be a premium on the rarest talents and that is understandable. The best players will always get the big contracts, even in these uncertain economic times. Thus it means the players that fill minor roles and exist in mediocrity within professional baseball will suffer the greatest as the tax hike is more noticeable to them than to those players making over $10 million a year and these players can no longer hope to get overpaid handsomely just because clubs were turning such high profits. In an ideal situation, having more competition for larger contracts will only motivate players to perform better and money saved on player contracts can go towards the team's infrastructure and improving the fan experience. All of this, of course, depends on the loyalty of Americans to the great game of baseball. Hopefully, America's love for baseball will overcome the tightening purse strings and rising ticket prices and participation our beloved past-time will not be an expense that has to be cut out of one's budget.