How MLB’s luxury tax became the sticking point between owners and players

The Competitive Balance Tax (CBT), better known as the luxury tax, is a sticking point in the ongoing labor negotiations between Major League Baseball and the Players Association. The CBT is said to be the major hot-button topic blocking both parties from reaching a deal on a new Collective Bargaining Agreement (CBA), simply because the owners are unwilling to bend for a higher luxury tax threshold. Since this issue can sometimes become complex and confusing, here are some details and concerns surrounding the luxury tax.

What is the CBT?

The CBT is a significant measure that limits MLB clubs from spending. It was originally added to the CBA in 1997, then after a three-year hiatus, it was reintroduced in 2003. Since MLB does not have a hard salary cap like the NBA or NFL, the CBT was initially constructed to restrain runaway spending from big-market teams and, as its name implies, balance competition in the league. But there is no evidence to suggest that the CBT has promoted, or even balanced, competition. Rather, players believe the luxury tax acts as a soft salary cap, and there is evidence to prove it.

In essence, teams are penalized if the combined annual average value (AAV) of their player contracts exceed that season’s tax threshold. A club that carries a payroll above that threshold is taxed on each dollar above that limit. If that same club goes over that threshold in consecutive years, becoming a repeat offender, the taxes and penalties become harsher.

Under the expired CBA status quo, first-time offenders paid a 20% fine on its overage; a two-time offender paid a 30% fine; a three-time, or more, offender paid a 50% fine. There were also additional taxes for exceeding the threshold by $20 million (12% surtax); $40 million (42.5% surtax); and over $40 million (45%). Teams that exceeded $40 million over the tax line would also have their top draft pick moved further down. If a team dips below the luxury tax threshold for one season, the penalty level is reset. Under the most recent CBA, part of luxury tax payments fund players’ benefits and retirement plans, and the rest (half after the first $13 million) is distributed to teams under the threshold.

The owners’ new proposed tax penalties are so much harsher than the penalties in the expired CBA, including more extreme draft-pick penalties, that they are extremely unlikely to be approved by the MLBPA.

Which teams are the biggest tax offenders?

In 2021, under the now-expired CBA, the CBT threshold was $210 million with financial and draft-pick penalties for going over that threshold. Only two teams topped that $210 million threshold last season: the Dodgers (sporting a $285.6 million CBT payroll, according to the AP) and the Padres ($216.5 million). While on the surface two teams going over the threshold is hardly a reason for such a contentious fight, the fact is all mid-market and big-market teams factor the CBT threshold into their annual payrolls.

To the players’ point that the CBT functions as a soft salary cap: Five teams finished within $4 million of the $210 million threshold last season, per the AP. The Phillies ($209.4 million), Yankees ($208.4 million), Mets ($207.7 million), Red Sox ($207.6 million) and Astros ($206.6 million) all just managed to stay under the CBT, further justifying the players’ position that the luxury tax is being viewed by teams as a salary cap.

As things currently stand, the Mets (with a projected payroll of $265 million that will likely wind up being closer to $300 million) are the only team with a higher projected CBT payroll than the owners’ and players’ most recent proposed figures for a new threshold.

Since 1997, only nine teams have ever exceeded the threshold: the Yankees, Red Sox, Dodgers, Tigers, Giants, Cubs, Angels, Nationals and Padres. In CBT history, only six of those nine teams have exceeded the CBT multiple times, and just three of those six teams have exceeded the CBT more than twice. “We’re seeing it act as a salary cap,” Mets pitcher Max Scherzer said earlier this week. “No other way can be shown, point blank, plain and simple, than the San Diego Padres having a higher payroll than New York Yankees.”

Why should the CBT have higher thresholds?

The players want higher CBT thresholds, while the owners do not. Players have pointed out that the CBT is not growing at the same rate of MLB’s annual revenue. The higher the CBT threshold, the more willing big-market clubs are to keep spending. The lower the CBT threshold, and the harsher the penalties, the more incentive teams have to stay below the CBT. When teams purposefully try to avoid being one-time or repeat offenders of the CBT, it leads to clubs repressing player salaries.

And that’s why owners would prefer lower CBT thresholds. Owners want to maximize their profit, and a lower threshold allows for decreased team payrolls and slashed player salaries, all while teams continue to profit as MLB’s annual revenue grows significantly each year. Here is an example of the recent and ongoing disparity between MLB revenue and player salary, which lopsidedly favors the owners.

From 2015-19, MLB revenue jumped from $8.2 billion to $10.7 billion for a 30% increase, according to Spotrac. But in the same period, the average player salary decreased from $4.45 million to $4.17 million, while the median fell from $1.65 million to $1.15 million, per Spotrac. Further, of the 1,400-plus players who accrued at least a single day of 2021 service time, 41% earned under $1 million.

What are the latest proposed CBT thresholds from owners and players?

Owners and players remain significantly far apart on their proposed CBT thresholds to be included in the next CBA, which will cover seasons from 2022-2026. In fact, although MLB offered players a slight increase from the thresholds in the expired CBA, four hardline owners voted against increasing the thresholds at all. And players rejected that offer as too low anyway.

Below are the most up-to-date proposals, with the players’ proposed thresholds on the left and the owners’ in parentheses.

— 2022: $238 million ($220 million)

— 2023: $244 million ($220 million)

— 2024: $250 million ($220 million)

— 2025: $256 million ($224 million)

— 2026: $263 million ($230 million)