Few of the game’s core economic features figures to be as impactful in upcoming collective bargaining negotiations as the luxury tax (or competitive balance tax, as it’s officially known). Where to set the tax thresholds and what penalties should be in place for teams that exceed them are key points of issue for the league’s owners and the MLB Players Association.
As a brief primer, the luxury tax was first introduced for the 1997 season. The provision’s purpose is to deter spending among big-market franchises by penalizing teams that exceed certain player expenditures. (MLBTR’s Tim Dierkes covered the year-by-year progression of the luxury tax in a post earlier this month). Teams that surpass certain thresholds will be faced with financial penalties and potential draft choice/international signing bonus forfeitures, which become more significant for teams that exceed the threshold by particularly high margins and/or surpass the mark in multiple consecutive seasons. Teams’ CBT figures are calculated by summing the average annual values of their commitments and accounting for certain player benefits, not by looking at clubs’ actual payrolls in any given year.
For the 2021 season, the first luxury tax marker was set at $210MM. Only the Dodgers and Padres exceeded that figure. Five teams, meanwhile, curtailed their spending between $205MM and $210MM, seemingly treating the CBT threshold as some form of cap.
The three clubs that exceeded the threshold in 2020 (the Yankees, Astros and Cubs) all ducked underneath in 2021. That’s in continuation with a fairly common pattern for teams to “reset” their tax bracket after a year or two above the threshold, thereby avoiding the escalating penalties for exceeding in consecutive years.
It’s not only resetters that stayed below the threshold though. The Phillies, Mets and Red Sox — none of whom exceeded the tax in 2020 — were within $5MM of the mark but decided against surpassing $210MM. MLBTR’s Tim Dierkes explored teams’ increasing reluctance to go over the tax threshold in February. Even for teams that didn’t have firm organizational mandates to stay below the mark, many were reluctant to take on any sort of penalty unless they were in position to blow by those markers, as both Mets owner Steve Cohen and Astros general manager James Click explained over the summer. The fees for exceeding the various thresholds under the 2016-21 CBA were as follows:
With certain high-payroll teams at least planning their budget with the luxury tax in mind — if not treating it as a firm cap altogether — pushing the thresholds up figures to be a point of emphasis for the players. After all, higher thresholds should lead to more willingness about the league’s top teams to spend. In collective bargaining talks before the lockout, the MLBPA proposed a $245MM threshold that would eliminate the escalating penalties for repeat payors, according to Gabe Lacques and Bob Nightengale of USA Today.
The league, predictably, hasn’t been as keen on increasing penalty-free spending capacity. MLB’s first core economics proposal actually called for the first tax threshold to be reduced to $180MM, as Ken Rosenthal and Evan Drellich of the Athletic reported in August. That came attached to a $100MM salary floor designed to incentivize spending among lower-payroll clubs, but the significantly lowered CBT thresholds always looked to be a non-starter for the union.
After the MLBPA rejected the $180MM possibility, the league offered to raise the tax thresholds above the $210MM level from 2021, albeit nowhere near the MLBPA’s target area. Shortly after the beginning of the lockout, Drellich reported the league was willing to push the first tax marker up to $214MM in the early years of a possible CBA, maxing out at $220MM by the end of the deal. That’s more in line with the gradual increases that have been in place in recent collective bargaining agreements than with the MLBPA’s push for a marked uptick.
There are a few different aspects for the league and union to agree upon regarding the competitive balance tax. Identifying a mutually-agreeable base number is the most obvious, but whether to reduce or eliminate penalties for repeat payors could be a point of contention. So too may be how the parties want to handle the escalating fees for clubs that exceed the marker by greater amounts. Indeed, the league’s initial proposal (the one which would’ve included a $180MM base tax threshold) also would’ve involved the creation of a fourth tier of penalization.
Ironing out the finer details of the luxury tax will be a challenge. Back-and-forth regarding the specifics of the CBT figures to be a recurring theme once the parties reinitiate discussions regarding core economics next month.