Inevitable for Vegas: Salary Cap & Taxes

by

The Vegas Golden Knights have to adhere to the National Hockey League’s salary cap as an official member of the league. There are specific parameters the Golden Knights will have to follow at the 2017 Expansion Draft, as well as during free agency. Based on their location in Las Vegas, the team will see the benefit of not having state income tax. However, as a member of the Pacific Conference, they will see the financial burdens of often facing California teams.

Salary Cap Highlights

As any NHL club has to, the Golden Knights must follow the NHL salary cap. The salary cap criteria are mandated in the NHL’s collective bargaining agreement (CBA). The current CBA, which was created in 2013 and expires in 2022 (unless the NHL and NHL Players Association decide to opt out in 2019), states the regulations all teams must follow.

The CBA sets the minimum NHL salary, which will be $650,000 for 2016-17, and will continue to increase until 2021-22. On the other hand, the maximum NHL salary cannot be more than 20 percent of the salary cap. Additionally, Vegas management can retain salary on three traded contracts at a time.

A player’s cap hit is his annual average value (AAV) – so even if the contract features a fluctuating salary that varies throughout its term, the cap hit would be the AAV throughout. The maximum term a team can sign a free agent to is seven years, but when re-signing a player the maximum term is extended to eight years.

2017 Expansion Draft

The Golden Knights will select one player from each of the 30 NHL clubs at the expansion draft.

Since the exact salary cap and floor have not been established for the 2017-18 season, the cap requirements are based on the 2016-17 cap for the purposes of the expansion draft. The total cap hit value of the 30 selected players must be between $43.8 million (60 percent of the salary cap) and the cap ceiling of $73 million.

Of the 30 players selected, there must be at least 14 forwards, nine defensemen, and three goaltenders. The Golden Knights can only select 10 players that are either pending restricted free agents (RFAs) or unrestricted free agents (UFAs). A drafted player cannot be bought out by the Golden Knights for a full year.

http://gty.im/105222574

Tax Benefits of Vegas

Nevada does not collect state income tax, meaning that players of the Golden Knights will receive more take-home from their salaries and the team will have the luxury of signing players to less expensive contracts. If a player were to sign in a state that collects income tax, hundreds of thousands – even millions – of dollars could be collected as tax payments. Players often seek higher contracts from teams in states with the tax burden, and conversely lesser contracts in states without taxes.

During the 2015 offseason, it was reported by the Canadian Taxpayers Federation (CTF) and Americans for Tax Reform (ATR) that 54 percent of the 116 NHL UFAs signed with teams with lower tax rates. Additionally, 60 percent of players with no-trade clauses (NTC) that were traded in the offseason moved to a market with lower taxes. While not all decisions are necessarily influenced by taxes, many are – particularly when dealing with free agency.

The Dallas Stars, Florida Panthers, Nashville Predators, and Tampa Bay Lightning all are within states that have the lowest tax burden for their players. California, New York, and Montreal, on the other hand, have some of the highest tax rates.

Steven Stamkos, Tampa Bay Lightning
Lightning captain Steven Stamkos (Kim Klement-USA TODAY Sports)

When Steven Stamkos was a pending UFA last season, it was considered how much the salary would fluctuate between each city that was considered a contender. A seven-year, $10 million AAV contract in New York, Detroit, Buffalo, Boston, and Toronto was compared to an eight-year, $8.5 million AAV in Tampa Bay.

By re-signing in Tampa Bay, his net income (after considering all fees and taxes) would be $36,782,272 – which is the highest of all the options. If Stamkos instead signed in Toronto, the net income would be much lower at $29,729,000. The net income varies for each location, but the value of New York, Detroit, Buffalo, and Boston would fall between Tampa Bay’s and Toronto’s. Ultimately, Stamkos re-signed with the Lightning for eight years at an $8.5 million AAV.

With over hundreds of UFAs this offseason, Vegas could be a contender for many because of their salary cap flexibility due to their lower taxes. There are certainly a number of factors to assess other than taxes when looking to sign with a team, but it is nonetheless something to consider.

Away Games and the Jock Tax

While those who play for the Golden Knights will not have to pay state income tax, they will owe jock taxes to opposing cities and states they visit. Within the United States, the only states (with NHL teams) that do not have a jock tax are Florida, Tennessee, Texas, and the District of Columbia. There are a number of cities that have their own jock taxes in addition to the state tax. NHL cities with the jock tax are Columbus, Detroit, Philadelphia, Pittsburgh, and St. Louis.

The tax rate varies between cities and states, and Golden Knight players will visit every NHL city and state with the tax at least once in the season. Unfortunately, as a member of the Pacific Division, the Golden Knights will visit California often – the state with the highest jock tax rate (13%). The Golden Knights will play their divisional opponents a number of times throughout the regular season – one opponent five times and six opponents four times each. Between the Anaheim Ducks, Los Angeles Kings, and San Jose Sharks, the Golden Knights will visit California at least six times a season.

(John Hefti-USA TODAY Sports)

Regardless of where a player signs, he will have to face the jock tax. Unfortunately, being in certain divisions means visiting certain cities and states more often. Many players are cognizant of the taxes they will be subjected to and consider that when signing with a team (or waiving a NTC to be traded). While having to visit California often is not ideal, it is not a significant deterrent when a player is fortunate enough to not owe state income tax.

The NHL originally projected a flat salary cap for next season, which means there would be minimal (if any) increases to the current $73-million ceiling. Later, it was announced that depending on the NHLPA inflator negotiations, the cap could increase to $75.5-$76 million. For many NHL teams, this is concerning because teams have to re-sign players with little flexibility that was not anticipated when signing previous contracts.

The Golden Knights, on the other hand, could benefit from this because they can afford to sign free agents without the constraints of past contracts. And having the ability to sign players to a lower cap hit (that is the same value after taxes) gives Vegas general manager George McPhee even more latitude this offseason. While a stagnant cap can stifle free agency, the addition of the Golden Knights will reignite the frenzy.