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Why MLB owners are threatening the league’s life to save their luxury tax

The competitive balance tax is emerging as the central issue of these labor negotiations, so let’s take a closer look at how it works and who it serves

(Boston, MA, 06/16/15) Major League Baseball Commissioner Rob Manfred speaks prior to a Major League Baseball game between the Boston Red Sox and Atlanta Braves at Fenway Park in Boston on Tuesday, June 16, 2015. Staff photo by Christopher Evans
Rob Manfred, seen here explaining that legally, they cannot stop bringing him breadsticks
Photo by Christopher Evans/MediaNews Group/Boston Herald via Getty Images

Quibbles about expanded playoffs and the universal DH aside, the union has made three significant asks of the owners as the MLB lockout has dragged on: (1) they want better compensation for the young players whose labor makes up the bulk of the sport; (2) an end to service-time manipulation so players can get their ever-shortening MLB careers started sooner and compensated accordingly; and (3) for the competitive balance tax (CBT), which players believe has functioned as a salary cap over the past few years, to be raised, encouraging team owners to spend more to field a competitive product without incurring penalties.

It’s that last thing that looks to be the biggest sticking point, as signaled by MLB refusing to even address it in earlier negotiations, and if we are to lose baseball for any significant time this season, that will likely be the main culprit, aside from the owners’ intransigence. So let’s review what we know about the CBT, and why making major amendments to it is seen as such a nonstarter from MLB’s side in the negotiations.

The CBT, also called the “luxury tax,” was put into place during the 1997 labor negotiations as a response to the players’ strike in 1994, itself largely driven by MLB attempting to implement a true salary cap. It’s easy to imagine why the owners would want a cap, which would prevent teams from going hog-wild in free agency. As such, the cap has been ownership’s white whale for decades, and its attempted implementation was a significant driving force behind the 1994 cancellation of the World Series. The approval of the CBT, therefore, allowed owners to get as close as they could to a true salary cap by penalizing teams who went over a threshold set by MLB in the name of maintaining “competitive balance” between big spenders/high-revenue teams like the Yankees and smaller clubs like our own dear Mariners.

On the surface level, this seems like a reasonable positive; it allows bigger and more powerful clubs to spend more on free agents, but the financial disincentives are significant enough that it prevents any one team from hoovering up all of the best talent. In addition, since the tax money collected is distributed in part to teams that do not exceed the luxury cap, the CBT theoretically enables smaller clubs to make a splashy free agent signing or two without as much of a financial hit to their more limited profits. At the time, as the Yankees were enthusiastically embracing the “Evil Empire” nickname en route to three consecutive World Series titles, the CBT could be defended as good caretaking of the game, a chance to level the playing field for the little guys.

Except it didn’t work like that. The Yankees gleefully exceeded the luxury tax every year under the first CBT system, and won back-to-back-to-back championships. Even after the CBT was amended in the next CBA in 2002, the pattern hasn’t changed much: teams that spend, spend, just not so much as to get penalized (and if they do get penalized, they strive to get back under the luxury tax as quickly as possible so the penalties reset—something infamously celebrated in a particularly Boston-brained tweet by the official Red Sox account after trading away Mookie Betts). However, in each subsequent CBA, the CBT has been strengthened, adding repeat offender taxes in 2012 and tiering the punishment for those taxes in the 2016 agreement along with draft pick punishments. If the goal of the CBT was to equalize team spending among the bigger and smaller market teams, it has been a categorical failure, as illustrated in this article from Dave Cherman at Pitcher List, which is also a recommended read if you want to learn more about the background at play here:

Unsurprisingly, those higher payroll teams also win more over time, as you’d expect. Since the modern version of the CBT was enacted in 2002, only one team with a payroll in the bottom half of teams has won the World Series: the 2003 Marlins.

However, if the goal of the CBT is not to equalize spending, but to lock the spread of spending between clubs in relative stasis, then it has succeeded with aplomb. Cheap teams still spend roughly the same percentage less than average teams as they did prior to the CBT, while clubs at the top end of payroll spend around the same amount more than average as they did too. Franchise values have famously exploded for every MLB club in the past decade, and before you race to the bottom of this article to leave a comment, yes those values are not equivalent to liquid assets. However, it is the CBT that has ensured the Yankees and their estimated $5+ billion valued organization aren’t running an exponentially higher payroll than the merely $1.2 billion valued Tigers. Whether by franchise valuation or overall league revenue, however, the CBT is not keeping up with what clubs are making, nor even inflation.

In 2021, the CBT threshold was $210M; MLB has proposed incrementally raising it from $214M in 2022 to $222M by 2026. The union wants much more; they proposed the CBT threshold begin at $245M, ending at $276M by 2026. This gives you an idea of how far apart the two sides are, and also makes for a convenient framing by MLB of the greedy players asking for the moon.

But actually, it’s the owners who, despite already owning all the stars, are asking for the moon as well; in addition to only a small increase in the CBT threshold, they also want to increase the tax rate, meaning stiffer penalties for the few teams that dare incur the luxury tax (thereby turning the CBT into a de facto salary cap without also implementing a minimum salary floor across the league).

But here’s the thing: the players should be asking for the moon. The CBT threshold has grown only moderately while revenues have grown exponentially:

Based on revenue growth, the CBT threshold should have been closer to $300M in 2019, almost one hundred million dollars more than where the threshold was set. So when Jeff Passan says the new CBT offer the owners are proposing is worse than the old one, he’s not wrong. The real competitive advantage here is the owners’ ability to artificially freeze club payrolls at a certain level while reaping the rewards of dramatically increased revenue due to lucrative new TV deals, the league embracing legalized gambling as never before, and more.

The CBT already functions as the salary cap owners so dearly wanted decades ago, so it is the thing they want to hold on to the most: It gives them the opportunity to suppress player salaries on a macro level for years to come, even while handing out minor concessions in the form of small, incremental salary raises to the lowest-paid players in the sport. Moreover, it is vital insulation for the majority of owners against rogue owners (see: Cohen, Steve or Steinbrenner, George) who might attempt to plow through mere financial limitations to raise their odds of on-field success and disrupting the self-sustaining cash cow for the rest of them. No matter what the other issues are the two sides will argue about—and there’s plenty of that arguing left to do, as reports continue to trickle out about arbitration and draft pick compensation and anti-tanking draft order measures and the like—this is the argument that matters, maybe the only argument that matters, in determining when we’ll see baseball again.