There was a time when the MLB players’ union felt that a luxury tax is just a salary cap in another form, with is why they rejected such proposals back in 1994. Nonetheless, in the first post-strike collective bargaining agreement, executive director Don Fehr “finally said yes to the luxury tax – the first time the union agreed to any form of payroll restraint since free agency changed everything in 1976,” to quote Jon Pessah’s book The Game.
Though Pessah called that CBA a “huge victory for Fehr and the union” for other reasons, the owners did get their foot in the door on the matter of a luxury tax. The luxury tax wound up snowballing into a major problem for the players in recent years.
In that CBA, the tax thresholds were set like this:
- 1996: no luxury tax
- 1997: $51MM
- 1998: $55MM, a 7.8% increase
- 1999: $58.9MM, a 7.1% increase
- 2000: no luxury tax
- 2001: if MLBPA exercises its option for ’01, no luxury tax
Mechanisms were also put in place that could allow the 1997-99 thresholds to be higher, depending on where the fifth and sixth-highest payrolls in the game landed. Tax rates were set at 35% on the overage for ’97-98 and 34% for ’99.
While that CBA technically ended with two years sans luxury tax, it became part of all future agreements. The agreement that began in 2003 saw the luxury tax rebranded as the “competitive balance tax.” The MLBPA was able to achieve an initial major increase in the thresholds from where they left off in ’99:
- 2003: $117MM, a 98.6% increase from ’99
- 2004: $120.5MM, a 3% increase
- 2005: $128MM, a 6.2% increase
- 2006: $136.5MM, a 6.6% increase
For this CBA, a concept was introduced to penalize second, third, or fourth-time offenders with a higher tax rate. The first-time offender rates were set at 17.5% in ’03 and 22.5% in 2004-05, yet was removed entirely for ’06. 30-40% tax rates were set for teams that exceeded the threshold multiple times during that CBA.
For the CBA beginning in 2007, the tax thresholds were set as follows:
- 2007: $148MM, an 8.4% increase
- 2008: $155MM, a 4.7% increase
- 2009: $162MM, a 4.5% increase
- 2010: $170MM, a 4.9% increase
- 2011: $178MM, a 4.7% increase
Here after an initial “new CBA” leap, we start to see the tax thresholds moving up more slowly. The tax rates were set at 22.5%, 30%, and 40% and began penalizing teams for exceeding the thresholds in consecutive years, introducing the concept of teams “resetting” its rate by getting under the threshold for one season.
For the CBA beginning in 2012, these were the tax thresholds:
- 2012: $178MM, no increase
- 2013: $178MM, no increase
- 2014: $189MM, a 6.2% increase
- 2015: $189MM, no increase
- 2016: $189MM, no increase
Here, the players’ union made large concessions that had a compounding effect they’re still feeling today. If the MLBPA had achieved simply a repeat of the increases from the previous CBA, the 2016 tax threshold would have sat at about $232MM.
The next agreement introduced the concept of luxury tax tiers, adding first and second surcharge thresholds after the base tax one. For example, 2021 included thresholds at $210MM, $230MM, and $250MM. This CBA also introduced penalties involving the draft.
- 2017: $195MM base tax threshold, a 3.2% increase
- 2018: $197MM, a 1.0% increase
- 2019: $206MM, a 4.6% increase
- 2020: $208MM, a 1.0% increase
- 2021: $210MM, a 1.0% increase
While better than the previous CBA, the MLBPA again agreed to tiny increases in the base tax threshold. A simple 5% increase per year beginning in 2012 would have put the 2021 base tax threshold around $290MM, yet it sat only at $210MM. Not coincidentally, only the Dodgers and Padres exceeded a $210MM payroll this year. You can see the restraint this put on a club like the Yankees, which had a lower 2019 Opening Day payroll than it had in 2005.
In the current negotiations, MLB made an initial proposal that included lowering the base tax threshold to $180MM. According to Gabe Lacques and Bob Nightengale of USA Today, “In final proposals exchanged Wednesday, players requested a $245 million luxury tax threshold, with no progressive penalties for offenders; owners are offering a $214 million threshold, rising to $220 million in the final year of a five-year agreement.”
With a request to jump to $245MM, the MLBPA is proposing a 16.7% jump over the ’21 threshold, which would only begin to make up the ground they lost due to the non-existent or miniscule increases from 2012 onward. MLB, meanwhile, would like to increase the base tax threshold by 1.9% for 2022 and is proposing average annual increases of less than 1%.