In our series on the negotiations for a new Collective Bargaining Agreement (CBA) between MLB and the MLBPA, so far we have looked two of the major issues. Those are free agency and arbitration. Another major topic keeping the sides apart is the Competitive Balance Tax (CBT), also referred to as the luxury tax.

The CBT is essentially designed to act as a “soft salary cap,” meaning teams can go over the CBT threshold if they so choose, but they incur monetary penalties for doing so. Those penalties are assessed as a percentage of the amount by which the team exceeds the threshold.

Does the CBT work to reign in spending by the big-market clubs? To a degree, it does. First, let’s take a look a the 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 the CBT works. Salaries and other monetary benefits paid to players on the 40-man roster, as calculated at the end of the season, are factored in:

A club exceeding the Competitive Balance Tax threshold for the first time must pay a 20 percent tax on all overages. A club exceeding the threshold for a second consecutive season will see that figure rise to 30 percent, and three or more straight seasons of exceeding the threshold comes with a 50 percent luxury tax. If a club dips below the luxury tax threshold for a season, the penalty level is reset. So, a club that exceeds the threshold for two straight seasons but then drops below that level would be back at 20 percent the next time it exceeds the threshold.

Clubs that exceed the threshold by $20 million to $40 million are also subject to a 12 percent surtax. Meanwhile, those who exceed it by more than $40 million are taxed at a 42.5 percent rate the first time and a 45 percent rate if they exceed it by more than $40 million again the following year(s).

Beginning in 2018, clubs that are $40 million or more above the threshold shall have their highest selection in the next Rule 4 Draft moved back 10 places unless the pick falls in the top six. In that case, the team will have its second-highest selection moved back 10 places instead.

Since 2002, eight teams have paid CBT taxes (data available through 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 either made or won a World Series around the time they exceeded the CBT, the Yankees in 15 of their 16 seasons exceeding the tax as one of the exceptions.)

Half of the money collected from the tax goes to various players’ funds, and 50% of it is re-distributed to teams that did not pay the tax.

The CBT does seem to restrain spending somewhat, though it’s clear that some franchises (Yankees, Dodgers, and Red Sox) are less inhibited by it than most. The MLBPA has made it clear that they want competition addressed in the new CBA, however, they want the CBT threshold to rise significantly. That may be counterproductive, since the teams at the top of the revenue totem pole will likely spend more, but wouldn’t that limit competition (or confine it at the top)? The owners want the threshold to come down (or at least rise very slowly over the course of the new CBA) and the tax to go up. The two sides have quite the conundrum.

In his article in The Athletic, Ken Rosenthal proposes a significant rise in the CBT threshold and a lowering of the tax rates. His rationale is that teams should be less deterred from spending, to increase overall player wealth in the game. Rosenthal further suggests the possibility of a payroll floor, with perhaps a reverse tax, where teams that do not spend to the floor level incur a tax.

Opinion

I generally favor the players’ arguments in CBA negotiations for the obvious reason, they are the game. Yes, the owners are the risk-takers and the captains of industry, but the game sustains itself on television contracts, ticket sales, the MLB app, merchandise sales, etc. Most, if not all of this is the result of the fascination we, as fans, have with the players.

However, I will divert here. I think it’s time for a hard salary cap in baseball. Take a look at this logic from The Conversation, an academic publication:

Without salary caps, the “have not” teams might feel like they have no real chances against the “haves.” But because of salary caps, these teams do feel like they have a fighting chance, so they spend money on player salaries, which increases the average team payroll spending. This means the immediate effect of a salary cap is an increase in the average player’s salary, while superstars’ salaries decrease. From this perspective, the NHL Players Association’s early war against the salary cap ended up hurting average players and protecting the superstars.

Here is a graph from the article showing the impact of the NHL’s salary cap on players’ salaries:

Yes, baseball and hockey are not apples-to-apples (the money is baseball is much greater), however, the average team payroll in the National Hockey League was $81.5 million in 2019-20 compared to $34.3 in 2005-06 — 138 percent higher. The graph shows that the team payroll trend line in the NHL is upward sloping (red line, actual average team salary is the blue line).
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 address competition. The MLBPA can say that they want to make the game more competitive by driving spending up at the lower levels (and that should happen), but until there is some restraint on the top, has competition truly been addressed?
With a CBT, we hear of scenarios where teams will “blow past” 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 may get frustrated one year and take on several high-value contracts at the trade deadline to win. But is that really fair competition? Can the Royals or Pirates do that?
A salary cap does not have to be so low that it a complete deterrent to spending. I’m not suggesting taking the current $210 million CBT threshold, and making that the cap level. How about a hard cap of $250 million in year one of the CBA, escalating to $300 million in year five? This way, there’s plenty of room if teams want to invest heavily (such as acquiring Max Scherzer, Starling Marte, Mark Canha, and Eduardo Escobar in a week), but not so much room that the rich will simply devour the “not so rich.”
I know the MLBPA will likely never go for a hard salary cap. But if it works for other sports, it can work in baseball. There would need to be significant trade-offs to get it done (and it likely never will get done), but if the idea to address competition in the game, let’s not give it lip-service, let’s hit it from both ends.