The MLB Players Association considered the 1997 collective bargaining agreement a victory, as the players avoided the implementation of a salary cap. The league, though, managed to work in a tax on every dollar that the five highest-spending teams spent over the midpoint of the fifth and sixth highest team payrolls. This was rebranded as a “competitive balance tax” (CBT) under the 2003 CBA and has evolved into what the union now argues strongly resembles a salary cap.
Amid discussions of minimum salary level, playoff format and service time, the luxury tax might be the biggest point of dispute between the players’ union and the MLB in the ongoing 2022 lockout negotiations. The current system taxes all spending over a predetermined threshold at 20%, with the rate increasing to 30% and 50% for second and third time offenders, respectively.
That threshold was $210 million last season. The players have proposed raising it to $238 million for 2022, with an increase to $263 million by 2026. According to The Athletic, the Angels, Diamondbacks, Reds and Tigers owners opposed even a more mild increase to $220 million. The owners have been unwilling to budge from their number, but recent reports say they may be willing to do so if concessions are made by the players in other areas.
The tax threshold, which was originally $117 million in 2003 and gradually rose to $210 million in 2021, has grown significantly slower than league revenues. Indeed, between 2009 and 2019, the threshold rose 27% while average team revenue jumped from $193 million to $343 million for a 78% percent increase.
In addition to the restrictive spending limit, the penalties for exceeding it have increased since the CBT’s inception. The rates are higher now for teams that spend over the base limit for three consecutive years. Furthermore, since 2017 there has been a surcharge for franchises that exceed the threshold by $20 million and an even greater charge for surpassing it by $40 million.
The effect has been that several teams with cash available to dish out higher payrolls are deciding not to. In 2018, the Los Angeles Dodgers and New York Yankees, by far the two biggest taxpayers over the past two decades, both vowed to get under the threshold to avoid paying the repeat offender bill and “reset their clock,” so to speak. Those teams decreased spending from the 2017 season by $58.6 million and $31.2 million, respectively, to each wind up just on the low side of the threshold.
That wasn’t a one-off occurrence. In both 2019 and 2020, the Dodgers spent $205 million in luxury tax payroll, staying just below the demarcation line of $206 million in 2019 and $208 million in 2020. The Yankees were one of five teams to finish last season within $4 million of the threshold while managing to stay below it.
What began as an annual slap on the wrist for the Yankees now curtails spending at the margins by many teams. “We look at the competitive balance tax as a breakaway spending mechanism. That’s how this thing was originally negotiated,” union executive subcommittee member Max Scherzer said. “We’re seeing it act as a salary cap.”
Whether the luxury tax itself or other factors are primarily responsible, MLB salary growth has stagnated recently. Unlike both the NFL and the NBA, the MLB does not tie player compensation to revenues. While average NFL (+77%) and NBA (+96%) salaries have nearly doubled in the last decade, the average MLB salary is only up 21%.
That number perhaps even undersells the disparity. Salaries are actually down over the past five years, and that’s despite an increase in individual players earning upwards of $25 million annually. The median MLB salary in 2021 dropped by a whopping $500,000 compared to 2016.
MLB commissioner Rob Manfred has defended the league’s position. “The competitive balance tax is the only mechanism in the agreement that protects some semblance of a level playing field among clubs,” Manfred said.
Teams in recent years have made it to the World Series despite being in the bottom half of the league in opening-day payroll, including the 2020 Tampa Bay Rays and the 2016 Cleveland Indians. However, the last team to rank 15th or lower in opening-day payroll and win the fall classic was the 2003 Florida Marlins. The players could argue that the luxury tax doesn't actually create a level playing field at all. The league could counter that competitive imbalance would be even worse without it.
Nobody can win the World Series, however, if there isn’t a season. MLB has already canceled a week of the season, with more cancellations likely coming. The luxury tax remains a huge sticking point in negotiations, with the two sides still far apart.