Exploring whether the NHL should implement a luxury tax as opposed to a hard salary cap

The NHL offseason can be a long and uneventful wait for fans, especially after the draft and free agency. That being said, we’re going to take a look at how to bolster more interest in the game with rule changes.

With more and more star-studded players demanding long-term, high dollar value contracts in a player-forward era of sports, it could be time for the NHL to reevaluate their stance on the salary cap. With minuscule increases to the cap over the last five seasons and finally increased revenue league-wide last season, maybe a hard salary cap just isn’t realistic going forward.

History of the salary cap

The NHL’s salary cap was implemented during the 2004–05 lockout season. The idea was first proposed during the 1994–95 lockout to combat larger market teams with higher revenues from signing veteran players to massive contracts. This inevitably led to teams like the New York Rangers being loaded with talent while smaller market teams had no way of coming close to matching the contracts being offered by big market teams.

After continuing issues in the late 1990s and early 2000s, the league made it a condition of an agreement during the ’04 lockout, not budging on their position this time. The players association swore to never sign a collective bargaining agreement with a salary cap but at the time, a staggering 75% of the NHL’s total revenue was being implicated towards payroll. As a result, the NHL would begin the 2005–06 season with a flat salary cap of $39M USD.

Since its inception, the NHL’s salary cap saw massive growth in its first ten years, raising from $39M USD in 2005–06 to $71.4M USD in 2015–16. Since then, the cap has only raised a total of $12.1M USD in the last eight years.

Now, keep in mind the global pandemic impacted professional sports revenue significantly, causing the NHL to enforce a “flat cap” from the 2019–20 season until 2021–22 at a total payroll of $81.5M USD. It then increased by $1M USD last season. The coming season will see another $1M USD increase to the cap. Although it is an increase, many people around the league expected a bump of at least $2M–$3M USD this season due to the league’s bounce back from the pandemic. Sadly, Gary Bettman has other thoughts on the situation.

What is a luxury tax?

Luxury tax is a surcharge a team has to pay in accordance to the amount of money said team is over the salary cap. The luxury tax’s intended function is loosely the same as a hard caps, to encourage competitive play. The main difference is that a hard cap prevents teams from exceeding the salary cap, while a luxury tax allows teams to exceed the cap, just for a fee.

The more money a team exceeds the cap by, the more their surcharge will be. For example, in the NBA a luxary tax is implemented within payroll ranges. If a team is under $4.99M USD over the cap, they pay a surcharge equal to $1.50 for each $1 spent over the cap. For every increase of $5M USD after $10M USD an extra $0.75 is added to the charge, with the $5M – $9.99M range seeing a $0.25 increase. For example if a team is $8M over the cap, they would be within the $1.75 surcharge window and pay the league a total of $14M USD as a penalty.

If another team was $12M over the cap, they sit in the $2.50 surcharge window and would pay the league a total of $30M USD as penalty. That luxury tax can work out to be a huge chunk of change considering the NBA’s luxury tax cap sat at $162M USD last season with its most taxed team—the Los Angeles Clippers—paying a whopping $155M USD in luxury tax. Ouch.

Evidently, there’s sufficient penalty for overspending and on top of that, the NBA surcharge windows double for repeat offenders. As you can see the system does a good job of pressuring owners financially not to overspend. Other leagues with luxury tax such as the CFL, penalize repeat offenders by stripping draft picks on top of a surcharge.

Where does all that “tax” money go you ask? It’s distributed evenly to the teams who didn’t exceed the cap as a reward. This helps balance revenue across the league. Stronger teams with higher payrolls have more fan interest, in turn usually earning more revenue. They pay their tax for exceeding the cap and proportionally send that excess revenue towards the lower grossing franchises.

The cherry on top is that most professional leagues that do implement luxury tax, aren’t seeing the highest payroll teams win championships. Showing that spending big doesn’t always equal winning big.

This means if you can maximize performance while also staying below the tax threshold, you’re maximizing your revenue. Earning money by staying below the cap from the league, while also from increased team revenue due to performance, tickets, apparel, etc.

Impacts on the NHL

Although the currently salary cap has sat flat for the past three seasons, player salaries have continued to increase. This has caused a ripple effect with teams struggling to get rid of large contracts.

Teams like the Arizona Coyotes—who struggle to meet the salary cap minimum—are prime targets for teams to dump contract dollars. The Coyotes subsequently trade or release the player while retaining a percentage of their contract value, helping them raise to the cap floor, and act as a cash saver for the other team.

On the opposite end of the spectrum, a team like the Edmonton Oilers with two generational talents in Connor McDavid and Leon Draisaitl, are spending over a quarter of the cap on two players ($21M USD combined). It’s taken the Oilers the better part of a decade to built around Connor McDavid who’s carried the franchise since he was drafted in 2015.

With a luxury tax system, the Oilers could’ve selectively spent over the cap to build around the generational superstar and maximize his talent window.

Now, the NBA is evidence that system doesn’t always work, which is a plus. We don’t want to head to the other end of the spectrum and end up where we were in the 1990s and early 2000s. The goal is a happy medium. Teams willing to risk more and spend big, seek bigger rewards in return. Paying higher salaries in theory should equal an increased level of play and thus drawing more fans and revenue to the franchise.

For teams that fall on their face like the LA Clippers, their mistakes help balance out the leagues revenue sharing and in turn give lower market teams more of a leg to stand on financially. This could help Gary Bettman’s beloved Arizona Coyotes break out of the league basement, increase interest in the game overall with more star studded teams, and overall grow the game of hockey quicker.

It’d be taxing, but worth it

Implementing a luxury tax does inevitably decrease competition initially, but implications such as higher surcharges for repeat offenders and better revenue sharing allow teams to have fighting chances in the long run without getting stuck in the poor draft and poor spend cycle the Arizona Coyotes are stuck in.

Furthermore, the NHL has much larger roster sizes than the NBA does, increasing the risk for mismanaging contracts in both a fixed cap, and luxury tax system. In theory, this should make it much more difficult for franchises to construct “super teams” that have taken over the NBA’s landscape. The inability to opt out of contracts in the NHL also adds further risk to teams overspending and makes these super teams much riskier to construct.

In the NBA, you can rid contracts off the books at the drop of a hat and a hefty pay out to the player, in the NHL you’d still have to try and negotiate a trade to rid a players unfavourable contract.

Overall, it’s worth a shot. The league needs a boost and the luxury tax system benefits owners and players. The NHL salary cap is due for an overhaul and the luxury tax could be the launchpad to increasing league revenue substantially and growing the game to a higher level in the international professional sports scene.

Photo by Brett Holmes/Icon Sportswire

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