How the Tax Code Can Save Small-Market Baseball Teams

Former Major League Baseball commissioner Fay Vincent had an intriguing op-ed in yesterday's Wall Street Journal wondering why star players like Albert Pujols don't demand an ownership stake in their ball club along with their eye-popping salaries. The tax advantages would be considerable, since capital gains income from ownership would be taxed at a much lower rate than ordinary salary, which is subject to the income tax. As Vincent writes,

If modern stars are smart they will soon begin to emulate highly paid business executives and improve greatly their compensation by adopting more sophisticated tax planning. In the business and entertainment worlds, top executives and talent do not work exclusively for salaries. They want and get a piece of the action. They want to create and own assets, defer income and control their tax exposure.

Vincent focuses on what players stand to gain from such an arrangement. But it's just as interesting to imagine how baseball teams could benefit--especially small-market teams that can't compete with big-market teams on salary alone. If teams like the A's, Padres, Marlins, etc., were to offer a small ownership stake to free agents, you'd have to imagine they'd instantly be able to compete with the Yankees, Red Sox, Tigers, and Yankees for the likes of Cliff Lee, Adrian Gonzalez, and other high-priced talent. If I'm not mistaken, the A's retained general manager Billy Beane (of "Moneyball" fame) by offering just such an arrangement.

There is nothing in the current baseball labor agreement that would prohibit a player from owning part of his team, although Vincent notes that the player would have to sell his stake if he were to leave for another team. But that should only increase the appeal of such an arrangement from a team standpoint--shouldn't it?--since the biggest concern for small-market teams with good players is watching them depart for greener pastures. Not only would small-market teams stand a much better chance of attracting such players; they'd be more likely to hold onto them in the long term, since the player would presumably come under some pretty serious pressure from his accountant to stay put and reap the tax benefits.