When you go to a tournament, you pay to play and find out who the best player is. That's the purpose of putting the money on the line. Of course this isn't the only reason to play fighting games, everyone has to start somewhere and you don't start as a "best player."
For players competing with the mindset of "I want to/I'm going to win" a paid tournament is usually the way to go. At the end of the day $5 is a pretty small amount of money to help prepare your play and your mindset for NCR, EVO, SCR, etc etc -- when you play in tournaments all the time it really helps you play to 100% in a major. I can assure any of you planning to travel at all and wanting to do well in other tournaments, playing with money on the line (even minor) WILL help. (And of course if you're entering with the mindset of "I'm going to win" you have no issue putting money on the line as you are planning on winning it back anyways)
That said, there are plenty of players who have already resigned to losing. It's no secret that there are (oftentimes large) skill gaps in the fighting game community. It can be caused by a variety of things and everyone has their own reasons, and that's fine. I think it's kind of silly to expect players like this to play in a paid tournament. I'll play Marvel - but I don't enter tournaments for it! That's because I don't practice Marvel with the intention/desire to win tournaments. These players can still play to win, want to improve, and learn from the tournament experience - but of course the entry fee comes across more as a "tax" than anything else. I think this idea of a "bad player tax" is kind of silly. I don't push people to go to tournaments because I want to win money from them, I push them to show up to tournaments so they can play offline and grow through playing.
In my area we had a pretty active tournament scene for a while but the top players settled in quickly and we had pretty much the same top4 every tournament, this, combined with our local venue offering very little casuals(new/weak players are unable to grow), caused attendance to start dropping. Everyone already knew the players that were going to win etc and many players more or less gave up on the game or now enter "just to support." If it was up to me, tournaments would be full of players who (rightfully) plan on winning(not "just supporting"), or at the very least, kicking a lot of ass. But as I mentioned before we all play games for different reasons, have differing amounts of time and money, p4 isn't your main game, you're waiting for blazblue cp etc etc. -- and even still, only one player can win and 25% of entrants (must) go 0-2.
I wonder how many SoCal players are still hungry? How many people are sitting at home practicing for Rebel Up thinking to themselves "I'm going to beat brkrdave this time." or "I need to practice the Mitsuru matchups so I don't lose to TLoc/shtkn again." etc etc. How would it feel to them if they finally won, but that win didn't mean anything. I know most of the players out there, and they are great guys, but if you finally beat brkrdave in a tournament and he just kind of shrugged it off "eh, well these tournaments don't really mean anything anymore so I wasn't really trying that hard..."
But outside of the topX players, free play is honestly a lot better for growth. Hell, you could even run jp style team matches. Free entry, random teams, single elim. It's a pretty fast and fun event that breaks the ice for new players by pairing them up with people - and of course if your teammate is counting on you you don't want to let them down!
Edit: anyways regardless of what the community decides to do, just know that you guys have an event which makes the rest of the country(or at least me!) very jealous. So enjoy it