Cool or Drool: MLB’s New Luxury Tax Levels Playing Field
Sports fans always want to believe that their team has the same shot at winning as any other. While we all know “fairness” is not clear cut, perhaps no factor influences the outcomes of professional sports leagues more than the politics of player compensation.
While most leagues have shifted toward a salary cap or restricted payroll, MLB continues to host massive payroll differentials between teams of varied financial capabilities. The league’s new contract-bargaining agreement was reached on Nov. 30, and while it will not include the long-awaited salary cap when it takes effect in 2017, it includes a stronger luxury tax that should level the financial playing field.
In 2016, teams were allowed to pay their roster a total of $189 million before they were penalized with taxes. With the new deal, the threshold will rise to $195 million in 2017, and rise gradually each year until it reaches $210 million in 2021. When teams violate that threshold, they will be taxed by the league. Teams will be taxed 50 percent for the first $20 million over the threshold. Additionally, teams could face a 50 percent tax and 12 percent surcharge for the next $20 million, then a 50 percent tax and 42 percent surcharge for the next indefinite amount over the threshold.
This change could curb the spending of the wealthiest teams, like the Los Angeles Dodgers, who spent $291 million in 2015. The Dodgers essentially ignored the current system, the Competitive Balance Tax, which placed an overage tax on any payrolls above $189 million. In the 2017 season, that type of overspending will be utterly unsustainable. The Dodgers’ payroll will hover at around $193 million for 2017 if they do not re-sign key players Justin Turner and Kenley Jansen. That leaves a meager $2 million more to spend before they hit the threshold and have to start paying the luxury tax.
Limiting the Dodgers’ payroll funds would create a vastly different team than in recent years. It would force the team to re-evaluate its minor league system and other organizational needs as they consider how to make space in their payroll for expensive free agents.
Every few years, the MLB releases a contract-bargaining agreement designed to implement new rules and decisions that apply to all 30 teams. The last CBA was a 311-page PDF released in 2011 that reads like a rulebook written by snarky sports lawyers. Despite its complicated language, it was meant to keep the peace in baseball.
While this luxury tax is the clear shining star, the CBA provides other changes to the traditional MLB rulebook. Home-field advantage in the World Series will now go to the pennant winner with a better record. Smokeless tobacco is now banned. The minimum salary is also rising in the minor leagues despite the luxury tax. Perhaps no rule is more bizarre than players’ food allowance on the road decreasing sharply from $105 to $30 per day. However, teams will be required to supply food in the clubhouse.
Overall, this soft salary cap has the potential to make the league fairer for less wealthy franchises, as well as decreasing the excessively rising salaries of MLB stars. As seen over the years, there is a clear link between the payroll and the success of a franchise — with only the Cleveland making the playoffs this past year of the team’s with the 15-lowest payrolls. While there will still be decently sized payroll differentials between franchises in 2017, the future for baseball is less bleak. Unless you’re a Dodgers fan, the new CBA earns a COOL for promoting fairness in the MLB.