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Baseball's Labor Problem Has a Familiar Culprit: Taxes Players are arguing that MLB's competitive balance tax has served as a de facto salary cap in a sport that isn't supposed to have one By Jared Diamond Follow March 2, 2022 12:00 pm ET JUPITER, Fla.-Major League Baseball players went on strike in 1994 to stop owners from implementing a salary cap. They refused to budge as the World Series was canceled and stood firm for 232 days, in the face of public outcry, to block an artificial constraint on what free agents could earn.
Management lost that fight. Every other North American professional sport has a salary cap, leaving MLB with a financial system that most resembles a free market. It is among the greatest victories in the MLB Players Association's history and demonstrates why it has been one of the nation's strongest unions. Now baseball is embroiled in another ferocious labor dispute. Owners locked out the players on Dec. 2, and on Tuesday, commissioner Rob Manfred canceled the first two series of the regular season after the sides failed to reach a new collective bargaining agreement before MLB's stated deadline. The primary cause of this feud is very similar to the last one-again revolving around baseball's desire to limit teams from spending too much money on players, who oppose such restraints. More than 25 years later, however, the mechanism to limit payrolls goes by a different name: the luxury tax.
Formally known as the competitive balance tax, the luxury tax penalizes teams that surpass certain payroll limits. It was designed to ensure that low-revenue clubs like the Pittsburgh Pirates and the Kansas City Royals can compete with the likes of the New York Yankees and Los Angeles Dodgers. Manfred said Tuesday it is necessary because it is the only mechanism in our agreement that protects some semblance of a level playing field among the clubs." In recent years, however, the players believe the CBT has served as a de facto salary cap in a sport that isn't supposed to have one. Penalizing teams for exceeding certain payroll thresholds -which started at $210 million last season-depresses the market for players, the union argues.
As a result, the union has asked to raise the threshold to $238 million, increasing to $263 million by the end of the deal in 2026. The owners have so far been unwilling to offer to raise it much at all, proposing $220 million and keeping it there for three years, before eventually climbing to $230 million. The luxury tax isn't the only obstacle preventing an accord. The parties are clashing over the minimum salaries and the creation of a performance-based bonus pool for young players, in addition to other things like the playoff format and the draft. But it is the luxury tax that has created the level of acrimony that has led to canceled games. Once that's settled, the rest of the deal would likely fall into place quickly. It's proof that the problems from more than a quarter-century ago never really went away-they just go by another name. "We look at the competitive balance tax as a breakaway spending mechanism. That's how this thing was originally negotiated," said New York Mets pitcher Max Scherzer, a member of the union's executive subcommittee. "We're seeing it act as a salary cap."
The current version of the luxury tax was added to the CBA for the 2003 season, becoming stricter with each new labor contract. At first, wealthy teams weren't afraid to pay it in their pursuit of a championship. The Yankees crossed the threshold every season from 2003 through 2017. The Boston Red Sox were taxed from 2004 through 2007, then again in 2010, 2011, 2015 and 2016. In 2016, six different teams had payrolls high enough to trigger the tax.
Team behavior quickly changed after that with the ratification of a new CBA for the 2017 season that featured far more onerous rates. Surcharges were introduced for going above higher payroll limits and hefty fines were added for repeat offenders, in addition to draft-pick penalties. Last year, for instance, teams that went over $210 million for the first time last year paid a 20% tax on the overage, while third-time offenders paid 50%. Those rates soared even higher for teams with payrolls of $230 million and $250 million, to where crossing the highest threshold in three straight years would trigger a 95% tax. The Dodgers paid $32.7 million in luxury tax in 2021, while the San Diego Padres were charged $1.3 million. The union agreed to that structure-but badly miscalculated its effect, not realizing the owners had slowly but surely created something close to a salary cap. Suddenly, even the richest teams like the Yankees and Dodgers were afraid of the luxury tax, making sure to stay under the threshold once every three years to avoid paying the worst surcharges. In 2020, the Red Sox posted-and later deleted-a tweet celebrating that they had gone under the tax threshold in a year they finished in last place in their division.
gone under the tax threshold in a year they finished in last place in their division. In 2021, five teams had payrolls that were within $4 million of the tax threshold, according to the Associated Press, essentially gerrymandering their rosters to avoid it. Three of those teams -the Yankees, Red Sox and Houston Astros-lost in the postseason and might have benefited from another player or two that would've pushed their payrolls into tax territory. "We've seen it taken advantage of and used in a way that was not intended, and we have great issue with that," said pitcher Andrew Miller, another executive subcommittee member. Throughout the current negotiations, MLB had pushed for even higher tax rates with only small threshold increases, enraging the players. While they have since agreed to keep the rates at status quo, the thresholds remain a major sticking point. In many ways, the CBT situation isn't just a conflict between owners and players, but one between owners and owners. A harsh tax effectively stops the wealthiest owners from outspending the slightly less wealthy ones.
Consider Steve Cohen of the Mets, the richest owner in the sport. He went on a spending spree before the lockout, committing more than $250 million on four free agents, including $130 million over three years for Scherzer. Whenever the season starts, the Mets could have a payroll of $300 million. Would a tougher luxury tax deter him? The owners would probably like to find out. "We have a payroll disparity problem, and to weaken the only mechanism in the agreement that's designed to promote some semblance of competitive balance is just something that I don't think the club group is prepared to do right now," Manfred said.
While it's no doubt easier to succeed with a higher payroll, baseball appears to have plenty of parity by many measures. A different team has won the last eight World Series. The Tampa Bay Rays and Oakland Athletics have managed to be perennial contenders despite low budgets. There hasn't been a repeat champion since the Yankees won three straight from 1998 to 2000. Yet the owners appear to think finding ways to suppress player pay will solve baseball's problems-and once again, the players are ready to miss games to stop it from happening. Write to Jared Diamond at [email protected] Appeared in the March 3, 2022, print edition as 'Labor Dispute Has a Culprit: Taxes'.