In our series on New Collective Agreement Negotiations (CBA) between MLB and MLBPA, we have looked at two of the main issues so far. Those are free agency and arbitration. The Competitive Balance Tax (CBT), also known as the luxury tax, is another major subject that separates the two sides.
The CBT is basically designed to act as a âsoft salary cap,â meaning that teams can exceed the CBT threshold if they wish, but they incur monetary penalties for doing so. These penalties are assessed as a percentage of the amount by which the team exceeds the threshold.
Does the CBT strive to control the spending of clubs in major markets? To a certain extent, yes. First, let’s take a look at CBT thresholds in recent years:
2017: $ 195 million *
2018: $ 197 million
2019: $ 206 million
2020: $ 208 million
2021: $ 210 million
From MLB.com, below is an explanation of how CBT works. Salaries and other monetary benefits paid to players on the 40-player list, calculated at the end of the season, are taken into account:
A club first exceeding the competitive equilibrium tax threshold must pay a 20 percent tax on all exceedances. A club exceeding the threshold for a second consecutive season will see that figure drop to 30%, and three or more consecutive seasons exceeding the threshold come with a luxury tax of 50%. If a club drops below the luxury tax threshold for a season, the penalty level is reset. So a club that crosses the threshold for two consecutive seasons but then falls below that level would be back to 20% the next time they cross the threshold.
Clubs that exceed the $ 20 million to $ 40 million threshold are also subject to a 12% surcharge. Meanwhile, those who exceed it by more than $ 40 million are taxed at a rate of 42.5% the first time and at a rate of 45% if they exceed it by more than $ 40 million again the or the following years.
Starting in 2018, clubs that cross the threshold of $ 40 million or more will see their highest pick in the next Rule 4 draft drop 10 places, unless the pick falls in the top six. In this case, the team will see their second-highest selection drop 10 places instead.
Since 2002, eight teams have paid CBT taxes (data available until the 2020 season):
- New York Yankees (2003-2017, 2019)
- Los Angeles Dodgers (2013-2017)
- Boston Red Sox (2004-2007, 2010-2011, 2015-2016, 2018-2019)
- Chicago Cubs (2016, 2019)
- Detroit Tigers (2008, 2016-2017)
- San Francisco Giants (2015-2017)
- Washington Nationals (2017-2018)
- Los Angeles Angels (2004)
(Editor’s note: You’ll notice that nearly every team here has won or won a World Series around the time they passed CBT, with the Yankees in 15 of their 16 seasons going over tax as one of the exceptions.)
Half of the money collected through the tax goes to individual players’ funds, and 50% of it is redistributed to teams that have not paid the tax.
CBT appears to be restraining spending somewhat, although it is clear that some franchises (Yankees, Dodgers, and Red Sox) are less inhibited by doing so than most. The MLBPA has made it clear that they want competition addressed in the new collective agreement, but they want the CBT threshold to increase significantly. This can be counterproductive, as the teams at the top of the income totem pole will likely spend more, but wouldn’t that limit the competition (or confine it to the top)? The owners want the threshold to go down (or at least go up very slowly over the course of the new collective agreement) and the tax to go up. Both sides have quite the conundrum.
In his article by athleticism, Ken Rosenthal proposes a significant increase in the CBT threshold and a reduction in tax rates. His reasoning is that teams should be less discouraged from spending, to increase the overall wealth of players in the game. Rosenthal further suggests the possibility of a payroll floor, with perhaps a reverse tax, where teams that do not spend at the floor level incur a tax.
I generally favor players’ arguments in CBA negotiations for the obvious reason, they are gambling. Yes, the owners are the risk takers and captains of the industry, but the gambling holds on to TV contracts, ticket sales, MLB enforcement, merchandise sales and so on. Most, if not all, are the result of the fascination that we, as fans, have with the players.
However, I will hijack here. I think it’s time for a tough salary cap in baseball. Take a look at this logic of The conversation, an academic publication:
Without salary caps, teams ânot havingâ might feel that they have no real chance against the âhavesâ. But because of the salary caps, these teams feel like they have a fighting chance, so they spend money on player salaries, which increases the team’s average salary expense. This means that the immediate effect of a salary cap is an increase in the player’s average salary, while the salaries of superstars decrease. From that perspective, the NHL Players Association’s first war on the salary cap ended up hurting average players and protecting the superstars.
Here is a graphic from the article showing the impact of the NHL salary cap on player salaries:
The NFL and NHL have salary caps (the NBA has a luxury tax model). It’s time for baseball to catch up and really try to keep up with the competition. MLBPA can say they want to make the game more competitive by increasing spending at lower levels (and it should happen), but until there is some restraint at the top, does the competition have really been addressed?
With a CBT, we hear about scenarios where teams will âexceedâ the tax threshold. Steve Cohen has said he wants to win a World Series in three to five years. It’s possible (and music to my ears as a fan) that he would get frustrated for a year and accept several high-value contracts by the trade-in deadline to win. But is it really fair competition? Can the Royals or the Pirates do this?
I know MLBPA will probably never go for a hard cap on salary. But if it works for other sports, it can work in baseball. It would take some big tradeoffs to do that (and it probably never will be), but if the idea of ââtackling the competition in the game, let’s not do it lip service, let’s hit it from both sides.