New MLB CBA should help spark new A’s stadium, but maybe not why you think

Of all the small changes in the new MLB collective bargaining agreement agreed on last week (which include the end of our long national World Series home-field nightmare), one that’s getting a bunch of attention is the decision to phase out the Oakland A’s exemption that’s allowed them to be the only team to collect revenue-sharing checks despite playing in a big market. The upshot, according to most sportswriters, is that this should turn up the heat on the A’s to build a new stadium:

Q. Sure, losing $35 million is one thing, but spending $800 million or likely much more to build a privately financed stadium is in a whole other category. Why does this force the A’s hands?

A. In absolute terms, it can’t. But the A’s want and need a new stadium and its revenue generating potential, so this is a strong push in this direction. Both executive vice president Billy Beane and general manager David Forst have talked about a future in which they can dial up the payroll to fit a new stadium.

That’s … not wrong, but wrongish. The implication here is that now that the A’s won’t be cashing annual revenue-sharing checks from the rest of the league no matter how crappy their balance sheet is, they’ll have to turn a profit some other way, so time to finally get cracking on that new stadium that’ll open up the money taps!

But that’s not how sports team owners think, or at least not how they should think if they’re remotely rational economic actors. (Which they probably aren’t entirely, but let’s overlook that for the moment.) If a new stadium is going to bring in more money than it costs to build, then you’re going to do it regardless of how much money you’re currently getting from other sources; and if a new stadium is going to be a money-loser, it’s not going to help you either way.

Where the new revenue-sharing rules can change the game is in how they effect marginal tax rates. Think about it this way: If you’re considering making an investment — moving to a new city, buying a car that allows you to commute to a new job, getting an advanced degree — and trying to figure out if the extra income it will allow you is worth it, the first thing you need to know is how much your net income will change after taxes, deductions, etc. So if you’ll be earning an extra $10,000 a year, but your bank balance will only change by $6,000, that’s a 40% marginal tax rate. (We can call it this regardless of whether it’s actual extra taxes you’re paying, or, say, credits you’re no longer eligible for.)

So back to the A’s. In past years, as an exempted “small market” team under MLB’s two-tier revenue sharing system, they’ve been subject to the leaguewide 34% tax on each new dollar earned, plus a 14% “performance factor” tax where both the size of the tax and the size of the benefit is based on how much money your team brings in (or fails to). (the effective marginal tax rate impact of this is largely the same regardless of whether you’re a high-revenue team or a low-revenue team, since either you’re paying out more and more into revenue sharing as your revenue rises, or you’re receiving less and less in checks, or both.) The new system eliminates the performance factor sliding-scale tax and replaces it with more flat tax — while the math is complicated, it won’t change things drastically in terms of how much of each new dollar the A’s get to keep.

What will have a significant effect is eliminating the huge penalty the A’s were previously going to face for building a new stadium. Before, a new stadium was going to make the team ineligible for any revenue-sharing checks at all, since it would kick them into the “big market” bracket; now, with the checks already shutting off, there’s no disincentive to go ahead and build. Getting rid of this penalty — a “benefit cliff,” in economic terms — should make building a new stadium a lot more alluring to the A’s owners, which is no doubt a big reason why MLB took this measure. (Though also probably because some owners were just sick of giving the A’s any money when they weren’t spending it — though that remains a problem with some other teams that remain designated “small market.”)

In other words, while losing that $35 million a year should be a huge incentive for building a new stadium, it’s not actually the loss of the money that matters, but rather taking away the threat of losing the money if they built a new stadium. MLB could just as easily have incentivized Lew Wolff and Co. by saying, “Hey, you’re small market either way, go ahead and replicate the Miami Marlins if you feel like it,” and it would have done largely the same thing.

If all that is too much math to swallow on a Monday morning — it’s almost too much for me — just hold on to the takeaway that the A’s might be building a new stadium soon with largely private money, though there’s still concerns they may try to make a grab for public land. Just also remember that revenue sharing works in mysterious ways, so what’s sauce for the A’s may not be sauce for, say, the Arizona Diamondbacks.


5 comments on “New MLB CBA should help spark new A’s stadium, but maybe not why you think

  1. One thing that I wish you had taken issue with is that the A’s do not “need” a new stadium. The O.co coliseum is perfectly fine, and fans end up closer to the action than they would at an “old timey” ballpark with suites.

    • Closer to the action? The Coliseum’s seats in the outfield are a mile above the the field and the seats along the baselines are separated from the action by twin foul territories the size of Texas.

  2. I’ve taken issue with that many times before: http://www.fieldofschemes.com/2013/09/19/5924/as-latest-sewage-woes-and-the-pros-and-cons-of-the-coliseum/

  3. My head hurts…
    Thanks for the link detailing how the system actually works.

    If I understand you correctly, the A’s will still lose their “$35m” in welfare payments, but may get to keep more of the revenue a new stadium will potentially generate?

    I get that they no longer have to “fear” losing those payments if they build a new stadium (it is, or at least may be, happening whether they build one or not). However, I’m not sure that makes it more likely as the paper seems to suggest… to personalize the argument a bit, if I am holding off on buying a new car because I don’t know if I am going to lose my job, and then I lose my job, that isn’t really an incentive…

    The only takeaway I have is that some of the nation’s most famous and wealthy capitalists appear to believe in communist plans to share money they haven’t earned… though I guess the whole publicly funded stadium was a bit of a giveaway on that front…

    Maybe it’s ok to redistribute a small portion of your own wealth if you get to add a few billion in public funds (or revenues created by the application of public funds, which is very much the same thing) into the mix as well???

  4. “If I understand you correctly, the A’s will still lose their “$35m” in welfare payments, but may get to keep more of the revenue a new stadium will potentially generate?”

    No. Previously, the A’s only would have lost their $35m in welfare payments if they built a new stadium. Now they’ll lose them regardless, so if that’s what was stopping them from building a new stadium, it’s no longer an obstacle.

    Maybe the simplest way of thinking of this: Because of that large-market exemption clause, MLB was effectively paying the A’s $35m a year *not* to build a stadium. They’re going to stop doing that now.