End Corporate Welfare

Right From the Start

The 2011-2012 NBA season is increasingly in question as the league and representatives of the players’ association remain at loggerheads over salaries. Commission David Stern has already cancelled the pre-season and each week seemingly brings another announcement of regulars season games cancelled.

Normally, as a free market conservative, I would say good luck to the millionaire players and the millionaire owners and let us know when you have exhausted each other’s patience and pocketbooks. But there is a lesson to be learned here and an opportunity to strike a blow for the common man.

When I moved to Portland in 1985, I attended the Trailblazer games on a regular basis. Sometimes, when the company tickets were available and sometimes when we just purchased tickets ourselves. The company had a “skybox” and at least four sets of tickets (four seats each) scattered around the arena – none of them above the second tier and all of them near mid-court. At one time or another I used every set including a couple of times in the skybox. When we purchased tickets we usually sat in the second tier and as close to mid-court as we could get. I have no idea what the company paid for those tickets but I do know they were deductible as a business expense. My recollection is that we paid about $20 each for the tickets we purchased – they were not deductible.

I checked online for Blazer ticket prices for the 2011-12 season. Tickets in the “nose-bleed” sections behind the baskets go for $21 to $37 each. Tickets in the middle tiers behind the baskets range from $67 to $92 per seat. And tickets on the first level but not at mid-court range from $100 to $300. I have no idea what the courtside seats cost but my guess is somewhere in the neighborhood of $1000 per seat per game. And the “skyboxes” are astronomical. And while the rules for use of these have tightened significantly, they are still deductible as a business expense.

Ticket prices for these basketball games have increased nearly five-fold in the space of twenty-five years and the Portland Trailblazers are one of the more affordable teams to follow. At the same time “market value” of the franchises like the Trailblazers have increased significantly and the salaries for players have reached stratospheric levels. And normally, I would say, that is what the market will bear and, therefore, enjoy your wealth.

There is a “chicken or egg” debate over the price of these tickets – they have increased significantly because players’ salaries have increased; or players’ salaries have increased because ticket prices have increased significantly. Neither is particularly relevant because the government has intervened in the free market to allow the kind of price distortion attendant to both the ticket price and the players’ salaries.

First, the government intervened to provide and exemption from the antitrust laws. That means that the National Basketball Association owners can and do limit both the number of teams and the locations where the NBA plays. While there is collective bargaining between management and the players, the management of all of the teams bargains as a unit to set terms and conditions for the players within the league. They also bargain collectively with the television companies for broadcast rights and compensation. The limited numbers of franchises, venues, players and television broadcasts give the owners leverage in the marketplace that allows them to extract “extra-market” rates for tickets and broadcast rights.

Second, the “extra-market” leverage available to the NBA owners is then accompanied by a tax deduction to business for the “extra-market” rates for tickets – which makes the tickets more affordable. The net effect of providing a tax deduction for business that is not available to individuals is to shift a larger share of the tax burden to individuals. It is the same effect is found with tax breaks for alternative energy (both producers and consumers), electric cars, and other beneficiaries of successful government lobbying.

In both such instances, the government has “chosen” the winners in an otherwise free market – a government sanctioned limitation on the number of providers who can conspire to fix compensation and other terms of employment accompanied by a tax policy which discriminates between business and individuals in the purchase of services (entertainment). No wonder there is agitation in the street from both the left and the right regarding the nation’s tax policy.

Absent the antitrust exemption there might be a proliferation of teams which would mean that the entertainment provided would be more widely available. Absent favorable tax treatment, the owners might have to rely on individuals instead of businesses for ticket sales, which would force the price back down to affordable levels.

The reason that the United State income tax policy requires 72,000 pages of regulation is because the tax code is riddled with exception, favors and special treatment. There are about 100,000 people employed by the IRS and at least an equal number in the private sector advising and defending people with regard to the tax laws. It is more than a cottage industry and neither the public or private sector can be said to be productive. Today’s income tax system represents more social policy and influence peddling that revenue production for the country’s needs.

Adoption of a flat tax without deductions would eliminate the 72,000 pages of regulation, most of the IRS employees, and the marketplace distortions described above. Prices for a whole variety of services – including professional sports – would reflect their actual worth rather than an inflated value based on government tax policy.

In the past I have proposed that Oregon adopt a two-tier flat tax with income equal to the minimum wage exempt and the split point between the first and second tiers being $250,000 (adjusted annually for inflation). There would be no tax on capital gains or inheritance. The same proposal would work on a national level, although I would add to that a national sales tax to replace payroll taxes dedicated solely for the support of Social Security and Medicare.