NHL Tax Issue Overriding Stanley Cup Final Hype
My explanation on the difference between United States political parties’ views on income tax rates boils down to this: Democrats insist that they do not affect the nation’s economy while Republicans believe that they are the ONLY thing that matters.
A similar debate is brewing on social media over whether NHL teams playing in states without an income tax have an unfair advantage. Instead of parsing stats in advance of the upcoming Stanley Cup Final rematch between Florida and Edmonton, the most common metrics posted are 18.75% and 62.75%--as in, the six of the league’s 32 teams (18.75%) that play in markets without a state income tax have combined to earn 62.75% of the Conference Finals berths since 2020. In the last nine years, there has been only one Final matchup between two teams from states/provinces bearing income taxes (Blues/Bruins in 2019).
Of course, the analysis is WAY more complicated than these outcomes suggest. Obviously, if you play for an owner willing to spend to win as opposed to a cheapskate and boast a General Manager who drafts and trades shrewdly to put players in a Head Coach’s system that develops them to their potential, that will usually be enough to make any team a contender. And, in reverse, unforeseen occurrences like injuries and goaltending going into the tank can derail even the best laid plans, as Devils fans can attest.
Of the six teams in no-tax states—Florida, Tampa Bay, Vegas, Nashville, Dallas, and Seattle—all but the Kraken play in warmer weather, which can also be a factor when a free agent evaluates his employment options.
So, it’s not JUST the tax rates that are driving the NHL’s bus. However, it would be incorrect to state that they aren’t having any impact at all on the league's competitive balance, and the issue is more relevant to hockey than it is to the three more widely-viewed major sports leagues.
That’s because the NHL, which generates the least revenue by far, has a Collective Bargaining Agreement that calls for the strictest salary cap rules. Major League Baseball has never even had a cap, which is why the payrolls of the league’s top five teams equate to those of its bottom 14 spenders. The NFL, with its prorated bonuses and void years on contracts, and the NBA, with its “Bird rights”, each have a cap in name only.
The only chicanery available to an NHL club is to put a player on long-term injured reserve so it can go over the cap to replace him. In such a case, the injured player would then be done for the regular season, but he can return for the playoffs without the team needing to scramble to get back under the cap. Savvy GMs of all stripes do this so they can execute trades that give their teams a boost to make a playoff run.
To step back a minute, professional athletes owe taxes to every domicile where they perform, with the limited exception of states that have reciprocity agreements. For example, Flyers players don’t have to pay New Jersey taxes for games at Prudential Center. So, we’re typically accounting for the difference on the half of a player’s club compensation for home games. Those that play in Canada are paid in U.S. Dollars, so the gripe there relates solely to how the owners have difficulty staying on a budget when the currency conversion rate goes south, not any player’s loss of income from moving north of the border.
Does this imbalance in take-home pay affect players’ decision-making? It’s probably a case-by-case basis. When you look at Florida’s salary cap, I don’t see much of a market discount for when stars Alexsander Barkov and Matthew Tkachuk extended their contracts in 2022. They were the two highest AAVs signed that year.
On the other hand, it does appear that wing Sam Reinhart, coming off a season where he scored 57 goals and then 10 more in the playoffs, including the game-winner in Game 7 of the Stanley Cup Final to beat the Oilers, took quite a haircut a year ago by inking a new 8-year deal for a relatively mere $69 million. The $8.625 million AAV was more than $3 million below what Vancouver and Toronto had to pay for Elias Pettersson and William Nylander, respectively. The Devils re-signed Timo Meier at an $8.8 million AAV the prior offseason and got 28 and 26 goals for their trouble. You’d think Reinhart could have commanded more.
You could probably find more examples of both sides when you review the Lightning’s cap table for the period of three consecutive Stanley Cup Final runs from 2020-2022. Some top guys earned market value when their contracts came up for renewal; others accepted home team discounts, maybe because they calculated the tax savings.
The overriding question then is: What should the NHL do, if anything, to fix this potential disparity in competitive balance? Would it be fair to give the Rangers, for instance, a salary cap adjustment when their rather unique intangible assets have historically helped them emerge victorious in biddings for star players, not to mention how they have benefitted from the idiotic U.S. college rule that grants Drafted players free agency status if they choose not to sign by their senior season? The City’s exorbitant tax rates didn’t dissuade goalie Igor Shesterkin from forgoing free agency, and the accompanying $11.5 million AAV on the extension didn’t seem vastly inappropriate for a player with his record to that point. The Kings and Ducks, playing in sunny Southern California, also have inherent advantages that they could capitalize on if they are managed well despite the tax inequity.
The Athletic investigated this matter in September and got NHL Deputy Commissioner Bill Daly and a host of players to admit that the state tax issue isn’t a social media-fed hoax. Anecdotal evidence exists.
The true test will be what happens when/if Edmonton superstar Connor McDavid hits free agency after next season. The outrage will be on full blast if he goes south to a no-tax state on a below-market offer. Unfortunately, there still won’t be an easy solution that would pass the Board of Governors and the NHL Players Association.
I guess if you’re growing tired of all the sour grapes, stay off social media and just watch the games.