California’s “jock tax” is well known, but this steep income tax on athletes who spend time in the state isn’t the only game in town. Proposition 40, the wealth tax initiative on the November ballot, presents another tax that would negatively impact professional sports teams in California.
Two NFL teams play in the same stadium in Inglewood, but the stadium’s owner lives in Texas. Stan Kroenke owns the Los Angeles Rams and several other sports franchises, including the U.K.’s Arsenal soccer club. All told, California boasts 15 sports teams across the four major sports leagues, and for six of them, the plurality or controlling owner lives outside the state. A California wealth tax would fall on the value of sports teams with California owners, but it cannot reach the value of in-state franchises with out-of-state owners, implicitly favoring nonresident ownership.
Proposition 40 imposes a one-time tax, but California is no stranger to temporary taxes later adopted as permanent features of the tax code. And while it is far from the most economically significant effect, a wealth tax could change the playing field for the state’s many professional playing fields.
According to Forbes estimates, the Los Angeles Chargers’ annual operating income is about 0.7 percent of franchise value, while operating income as a percentage of franchise value is 1.2 percent and 2.5 percent, respectively, for the San Francisco 49ers and Los Angeles Rams. In other words, even a 1 percent annual wealth tax on the Chargers and 49ers would wipe out most or all of the California-based owners’ shares of those franchises’ operating income.
Stadium ownership makes the penalty even larger. A stadium financed by the ownership group is taxable wealth; an arena owned by the city is not. Levi’s Stadium is owned by a public authority, Sacramento owns Golden 1 Center, and San Diego has majority ownership of Petco Park, whereas the Chase Center, Intuit Dome, and SoFi Stadium were privately financed.
Although most real property is excluded from the wealth tax, real estate held by business entities is taxable. A privately financed arena is valued nearly at cost, whereas leasing a public stadium is negligible for wealth tax purposes. Economists sharply criticize public stadium subsidies, but a wealth tax would push in the wrong direction, making private financing more expensive and public ownership more attractive.
A wealth tax would also influence who buys California teams. Franchises usually appreciate in value, but their cash flow is limited – often with operating income around 1 percent of franchise value, as noted above. A wealth tax could capture most or all of an in-state owner’s share of annual proceeds. Consequently, with a wealth tax in place, out-of-state bidders can pay more for the same team, existing owners may have a strong incentive to depart, and teams with local ownership may operate under tighter margins.
If the wealth tax forces in-state owners to operate at a loss, that can affect their ability to invest and to compete. It hands a win to the away teams.
Whether local ownership of California’s sports franchises matters is a matter of opinion. But it’s a microcosm of a larger problem: a wealth tax would make California far less attractive for the nation’s wealthiest individuals – people who run businesses, make investments, participate in local philanthropy, and, yes, buy local sports teams. Far more important than any advantage conferred upon a visiting sports franchise, or to a team with nonresident ownership, is the advantage conferred on businesses founded elsewhere. California would lose out on that success.
A tax that depends on a billionaire’s address will lead to address changes. California has long benefited, both economically and in state revenue, from being home to so many entrepreneurs, innovators, and venture capitalists. Driving them out would be something of an own goal.
Jared Walczak is president of Walczak Policy Consulting and a visiting fellow with the California Tax Foundation