"Steinbrenner's Tax Shelter" Forbes Magazine 05/08/06

Steinbrenner's Tax Shelter
Michael Ozanian and Lesley Kump 05.08.06

Baseball's revenue-sharing system has penalized George Steinbrenner for creating value. The new Yankee Stadium will help him lessen the damage.

Bankrolled by their cable money, by far the most in baseball, the Yankees were able to capture four World Series titles from 1996 through 2000 and barely missed a fifth title in 2001. Their success revived an age-old lament: The Yanks were monopolizing baseball. They could outbid other teams for the game's best players.

Solution: socialism. Beginning with the 2003 season, a new, four-year Major League Baseball agreement raised the level of redistribution in the sport. It increased from 20% to 34% the percentage of certain revenue streams (primarily luxury suites, tickets and local television, minus certain costs) that rich teams had to chip into a pot handed to poor teams. It also instituted a tax on player payrolls over $117 million ($136.5 million in 2006).

Last season baseball transferred $300 million from 14 rich teams to 16 teams with the lowest revenues. Of that amount the Yankees, with revenues of $354 million, kicked in $77 million, while the second-largest contributor, the Boston Red Sox, chipped in $51 million. On last season's league-high payroll of $223 million, George Steinbrenner also paid a tax of $34 million, money that MLB used to cover overhead.
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Steinbrenner is being penalized for success. Having paid $10 million in 1973 for a lousy team, he has leveraged the Yankee brand by creating a regional sports network, raking in $62 million last year, $16 million more than the crosstown Mets took home in cable revenue. The Yanks also got $49 million from sponsors. Despite the stiff league taxes, Steinbrenner's gushing revenues make his team worth $1 billion by our estimate. Steinbrenner and his family own 80% of the franchise.

What does a taxpayer do when rates go up? Find a tax shelter. It seems that Steinbrenner has one in the form of a 51,000-seat stadium.

New York City will borrow the $800 million cost of a new stadium to be opened in the Bronx in time (it is hoped) for the 2009 season. The team will pay the city $55 million a year in lieu of certain taxes and the money used to pay off the bonds. This debt service, along with $25 million in operating and maintenance expenses, is deductible against the revenues that are subject to the 34% tax. Once the new stadium is in place, the Yanks will save $7.8 million a year in revenue-sharing taxes if they amortize their stadium-financing cost over the life of their 40-year lease, according to sports economist Andrew Zimbalist, author of the recently published In the Best Interests of Baseball? (Wiley, 2006).

One baseball executive estimates that the new stadium will boost the Yankees' revenue by $45 million a year from such things as tickets and luxury suites. The Yankees will earn more from nonbaseball events like concerts and save the $5 million a year in rent that they pay at their current stadium. All told, the new stadium should increase the team's bottom line (after league assessments but before state and federal taxes) by roughly $25 million a year, according to insiders familiar with the team's finances.

With a stadium windfall like that for the Yankees, don't be surprised if MLB tries to rewrite the revenue-sharing rules before Steinbrenner settles into his new home.