Would a Luxury Tax Resolve the Cap Crunch in the NHL?

The official free agency period in the National Hockey League (NHL) began on July 28th and the first few hours have been busy. The flat cap of $81.5 million could not restrain teams any longer as teams spent more than four times the amount in the first two hours of free agency compared to 2020. The salary cap used to be tied to hockey-related revenue under the collective bargaining agreement between the NHL and the NHL Players Association; teams would forecast how the cap would rise with revenues and budget. Unfortunately, this model was disrupted when the coronavirus pandemic abruptly ended the sports season. This added a new wrinkle for general managers as cap space is now seen as a premium luxury.

This leads to this article’s main discussion; would a luxury tax resolve the issues of the flat cap? The NHL’s salary cap was introduced in 2005 to bring more parity to the league. While the intention of parity should be welcomed zealously, over the past decade the NHL has had the least amount of parity for championships. The NHL had six unique champions compared to the NBA at seven and eight each for the NFL and MLB respectively.

The salary cap prevents teams from keeping their current stars, for example, Dougie Hamilton, the former defenseman for the Carolina Hurricanes, who just signed with the New Jersey Devils a whopping seven-year, $63 million for an average annual value (AAV) of $9 million per season. Or for better illustration, the Las Vegas Golden Knights traded their star goalie, Marc André Fleury to the Chicago Blackhawks for virtually no return.[1] The league shouldn’t see teams trade away their own cornerstones in the name of salary cap.

So how should the NHL resolve this? An outright removal of the salary cap would probably yield another lockout, and no one wants that, I certainly do not wish to see this as the NHL kept me sane during the national lock down. Instead, a moderate solution should be proposed. A few ideas may consist of a soft cap in which would give teams more flexibility, but a bolder move would be a luxury tax.

The luxury tax would aid the revenue-sharing practice the NHL currently uses.[2] The luxury tax would apply a tax for salaries above a certain threshold. As a result, the revenues generated from the tax would be reallocated to teams playing in smaller markets. This would create better efficiency than the current revenue-sharing models. Imagine the Tampa Bay Lightning signing back all their players from their past two championships, and the money beyond the luxury threshold would go to a team like the Columbus Blue Jackets. This money could serve as a draw for players that would have considered leaving the small-market team.

On the other hand, as great as that fantasy might sound, let’s look at Major League Baseball (MLB) a league that embraced the luxury tax. Only eight teams in 2019 surpassed the luxury tax and small-market teams still seem to suffer. Perhaps this narrative does serve as a warning for those that are against the luxury tax proposal.

The goal of parity seems to be an ideal, virtually unattainable but always worth striving for. I am sure endless proposals and counterproposals have been made, but as a fan of the game, we should want as many teams as possible competing for championships, when the league benefits, all of us fans benefit too.

Austin is a rising third year law student at Washington College of Law, Am. U.; M.S., Finance, Am. U.; B.A., Geo. Wash. Univ.

[1] Filipe Dimas, Abandoning the salary cap for a luxury tax would benefit the NHL more than just the Leafs, THELEAFSNATION, https://theleafsnation.com/2021/07/28/abandoning-the-salary-cap-for-a-luxury-tax-would-benefit-the-nhl-more-than-just-the-leafs/, Jul. 28, 2021 (last visited Jul. 29, 2021). [2] Dimas, supra.