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Betting the House on Vegas

What type of advantage does the NHL expansion team in Vegas have in signing free agents in the open market?  

Introduction

Earlier this month, the Vegas Golden Knights outbid several NHL teams in signing Russian forward Vadim Shipachyov to a two-year $9 million contract.  Vegas General Manager George McPhee noted that with no state income tax in Nevada it would be “like getting a free house to play there, because what you’re saving in taxes can pay your mortgage.”  As one of only five teams residing in a state without income tax, Vegas now has an advantage in competing for talent in the open market. By signing Shipachyov, it’s evident that McPhee understands this.

Contracts in Terms of True Value

While teams and representatives negotiate the total salary of a contract, I’ve stressed in several previous articles that it’s the true value after tax that is of greatest importance.

While all athletes incur federal tax liability on their earnings, their exposure to state and local taxes will be dictated by a team’s home and road schedule.  For example, this upcoming season, a player in the National Hockey League (NHL) will potentially play in 22 US jurisdictions while also playing in four additional Canadian provinces.  By analyzing each team’s home and away schedule a player’s unique tax liability can be determined.

To measure the advantage the Golden Knights’ players will receive for playing in Nevada, we first need to determine the team’s schedule for the upcoming season.  Although the Knights are not exposed to any resident tax in Nevada, they will be taxed as non-residents on any road games played in a state or city that levies tax.  Therefore, knowing where the Knights will play their road games will determine a player’s exposure to non-resident tax.

Quantifying the Advantage

Without knowing the exact schedule, it is not possible to determine definite dollar values, but an estimated schedule can be composed.  The estimated schedule can then give an approximate net value for new contracts signed with the franchise as well as increases in net value players could earn by being drafted in the expansion draft.

Vadim Shipachyov

Using the recent signing of Shipachyov as an example, the advantage that the Golden Knights have in the open market can be demonstrated.

According to various reports there were several teams bidding on Shipachyov’s services including the Montreal Canadiens and Vancouver Canucks.

Team

Contract Value

AAV

After-Tax Value

Difference

Vegas Golden Knights

$9,000,000.00

$4,500,000.00

$2,632,052.58

$0.00

Vancouver Canucks

$9,000,000.00

$4,500,000.00

$2,406,715.24

-$225,337.35

Montreal Candiens

$9,000,000.00

$4,500,000.00

$2,146,419.67

-$485,632.91

In comparing Shipachyov’s after tax value on his contract with the Golden Knights to that of the Canadiens and Canucks, the value on his contract is worth nearly a quarter of a million more per year with the Knights than that of the Canucks and nearly a half million more per year than that of the Candiens.  Therefore,  for the Canadiens to offer the same after-tax value as the Knights, they would have needed to offer him $5,518,136 per year to compensate him for the additional tax he would be subjected to.

Players Drafted in Expansion Draft

Free agents who sign with the Golden Knights are not  the only ones to benefit.  Players exposed and selected in the expansion draft by the Golden Knights, in nearly every case will  benefit financially.  Although there is no certainty to the players Vegas will ultimately select, there has been plenty of speculation. The following three players are  hypothetical examples of how their selection would change their financial situation.

Player

Team

Remaining Contract Value

Net Value Current Team

Net Value Vegas

Difference

Dustin Brown

Los Angeles Kings

$25,500,000

$12,499,377.97

$14,914,964.64

$2,415,586.67

Calle Jarnkrok

Nashville Predators

$10,000,000

$5,853,687.09

$5,849,005.74

-$4,681.35

Matt Murray

Pittsburgh Penguins

$11,250,000

$5,366,049.18

$6,580,131.46

$1,214,082.28

As the chart above indicates, from purely a financial standpoint, players should want to be drafted by the Golden Knights.  In the case of Brown and Murray their net income would increase by 19% and 23% respectively.  The economic loss from a player being drafted from another team in a tax-free state will be relatively small and in the case of Calle Jarnkrok the loss in salary would be less than .1%.

Conclusion

Vegas has the potential to be the most successful NHL expansion team in years. Of the last four expansion teams, Nashville was in a tax-free state, but faced a league with no salary cap where large market teams were inherently at an advantage.  Some players may see being drafted in the expansion draft as a negative but if they are looking to maximize their earnings, they should be hoping to be drafted by the Vegas Golden Knights.  Because in the end it may be worth at the very least a mortgage payment on a new home and that you can bet on!

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