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Tax Change Delivers A Blow To Professional Sports

Mar 21, 2018
Originally published on March 22, 2018 10:27 am

A single four-letter word — added to a provision of the tax code — has professional sports leagues scrambling, as teams face what could be millions of dollars in new taxes.

"Real."

The revision changed a section of the tax code that applies to "like-kind exchanges." Under the old law, farmers, manufacturers and other businesses could swap certain "property" assets — such as trucks and machinery — without immediately paying taxes on the difference in value.

The 2017 tax overhaul inserted the word "real" before "property." With that, the provision now applies only to real estate swaps.

That means teams could be looking at tax bills in the millions for trading player contracts. Major League Baseball is already lobbying Washington to carve out an exception.

Jim Tankersley, who reported on the issue this week for The New York Times, explains what the change could mean for teams, and how leagues are responding.

This interview has been lightly edited for clarity.


Interview Highlights

What the provision is, and how it changed

The provision mostly applies to farmers and fleet owners, people who own machinery. What it allows you to do is, if you trade property ... you don't pay taxes on the value you gain in that trade, until you sell the truck. ...

This provision has been narrowed now, so that it only applies to real estate. And that excludes trucks and farm animals ... and baseball players.

This is a $31 billion savings over 10 years, according to the Joint Committee on Taxation.

On why lawmakers narrowed the tax break

There were a lot of provisions like this in the tax bill. Lawmakers call these changes "base-broadening," but what that really means is: they're raising some taxes to capture new federal revenue, in order to pay for the tax rates they cut. Lawmakers needed more money to pay for those rates, and the way they found that money was to close loopholes like the one that was in this provision.

On how this affects sports trading

Right now, based on a ruling from the '60s, when teams trade players, [the players] are treated like a "like-kind exchange." ... A player contract is like a truck.

But now, because they're not real estate, these players have to be traded in a way that there might be taxable values.

What that means is, teams have to figure out how much a player is worth to them in dollar figures, and how much the player they might be giving away is worth. And if they're getting more back than they gave, they've got to pay taxes on that — capital gains taxes.

So the question is: How do you value [each player]? Is he 'how many extra wins he brings to your team'? Is he 'how many extra wins he brings for how much money he costs'? Or is he some special formula of 'how much he would bring to you value-wise' that is different from one team to the other, because your team might have three second basemen and my team has none?

On the size of the tax hit

The Houston Astros won the World Series last year. And on the way to winning the World Series, they traded for a pitcher named Justin Verlander from the Detroit Tigers. Some experts I talked to estimate that the value the Astros got back in that trade was probably about $10 million above what they had given up. So in that case, $10 million value, 15 percent capital gains tax — that's $1.5 million that the Astros would have give to the government. And the Astros have made several other trades like that over the last few years. That adds up.

On sports leagues lobbying Congress

Major League Baseball says they're already at work on it. I would not be surprised if the other leagues are close behind. ...

One reason Congress might not [go along with what major sports leagues want] is because of Washington partisan politics. Democrats don't seem likely to give Republicans any fixes on this law that [the GOP] passed without Democratic votes, so you could see a stalemate going forward on this. A reason to think that sports lobbyists might actually get Congress to cave is that Congress always caves to sports leagues. Baseball has an antitrust exemption. ....

It's a real possibility that [Congress could just pass] the 'Make Sports Trades Great Again' Act of 2018 on a voice vote, because nobody wants to be the one who stopped their local team from making the trade it needed to win a championship.

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AILSA CHANG, HOST:

There were a lot of big changes in the new tax law, but adding one single word to a little-known provision of the tax code did not appear to be one of those big changes. Now that one four-letter word has professional sports leagues like Major League Baseball and the NBA on their heels as their teams suddenly find themselves facing what could be millions of dollars in new taxes. Jim Tankersley of The New York Times wrote about this development this week, and he joins me in the studio. Welcome.

JIM TANKERSLEY: Thanks so much for having me.

CHANG: So as you wrote, this change in the tax code is all about one single word, the word real...

TANKERSLEY: Real.

CHANG: ...Which was inserted into what's called the like-kind provision. Am I right?

TANKERSLEY: Yeah, exactly.

CHANG: So can you just start us off by explaining what is that provision, and how did it change under the new tax code?

TANKERSLEY: Sure. The provision mostly applies to farmers and fleet owners, people who own machinery. And what it allows you to do is that if you trade property - like, I have a truck; you have a truck; we trade because each of the trucks works better for the other one of us - then you don't pay taxes on the value you gain in that trade.

CHANG: Oh, even if your truck is better than my truck.

TANKERSLEY: Exactly.

CHANG: Oh.

TANKERSLEY: Until you sell the truck. And so this provision has been narrowed now, so it only applies to real estate. And that excludes trucks and farm animals and baseball players. So this is a $31 billion savings over the next 10 years according to the Joint Committee on Taxation.

CHANG: OK, so let's get to how this change in the law affects professional sports teams that want to trade players. Explain.

TANKERSLEY: OK. So right now, based on a ruling from the '60s, when teams trade players, they're treated like a like-kind exchange just like the fleets we were talking about.

CHANG: A player's like a truck.

TANKERSLEY: A player contract is like a truck. But now, because they're not real estate, these players now have to be traded in a way that there might be taxable values. So what that means is teams have to figure out how much a player is worth to them in dollar figures and how much the player they might be giving away is worth. And then if they're getting more back than they gave, they've got to pay taxes on it - capital gains taxes.

CHANG: Oh, well, why can't they just base the value of a player on the value of the player's contract?

TANKERSLEY: Well, that's a great question. That could be one way to value a player. But that's probably not a good way. For example, if I had a second baseman who makes $20 million a year but he's injured and won't play all year, he's not actually worth $20 million to me if I acquire him. He's worth nothing. So the question is, how do you value him? Is he how many extra wins he brings to your team, or is he some special formula of how much he would bring to you value-wise that is different from one team to the other because your team might have 3 second basemen and mine has none?

CHANG: So how much higher of a tax bill are we talking for player trades? Like, could you give me a ballpark figure, no pun intended? Well, actually, yeah, maybe pun intended (laughter).

TANKERSLEY: Pun intended - OK, so it depends on the trade and how you value it.

CHANG: OK.

TANKERSLEY: But let's look at - for example, last year, the Houston Astros won the World Series last year. And on the way to win the World Series, they traded for a pitcher named Justin Verlander from the Detroit Tigers. Some experts I talked to estimate that the value the Astros got back in that trade was probably about $10 million above what they'd given up.

CHANG: OK.

TANKERSLEY: So in that case, $10 million value, 15 percent capital gains tax...

CHANG: Right.

TANKERSLEY: ...That's $1 1/2 million...

CHANG: Ouch.

TANKERSLEY: ...of the Astros that would go to the government, yeah. And the Astros have made several other trades like that over the last few years, so that adds up.

CHANG: Could you see teams in the future, if they are obligated to pay these huge taxes, end up not going through with trades simply because they want to avoid taxes?

TANKERSLEY: It's possible. It's really possible. Nobody knows that yet. I've talked to a bunch of general managers off the record about this, and they're all very in the dark about how it's going to play out. But, yeah, it's possible that this could have a chilling effect on trading in the sports leagues.

CHANG: So I imagine sports teams right now are lobbying Congress to try to change the law, grant them some sort of exception. Do you see that already underway?

TANKERSLEY: They are. Major League Baseball says they're already at work on it. I would be surprised if the other leagues are not close behind.

CHANG: I mean, do you think Congress or the IRS will end up caving to that pressure and granting some exception?

TANKERSLEY: Well, one reason they might not is because of partisan politics in Washington. Democrats don't seem likely to give Republicans any fixes on this law that they passed without Democratic votes. And so you could just see a stalemate going forward on this. But a reason to think that they might actually get Congress to cave is that Congress always caves to sports leagues.

CHANG: Really?

TANKERSLEY: Yeah. Baseball has an antitrust exemption. It's a real possibility that they could just say, you know, the Make Sports Trades Great Again Act of 2018 passes on a voice vote because nobody wants to be the one who stopped their local team from making the trade it needed to win a championship.

CHANG: (Laughter) Jim Tankersley reports on taxes and economics for The New York Times. Thanks very much for coming in today.

TANKERSLEY: Thanks for having me.

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