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Sunday, August 14, 2022
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How MLB’s luxury tax became a lockout sticking point and why owners’ proposal would lead to drastic changes


With Major League Baseball’s owner-imposed lockout now imperiling the start of the regular season, the league and the MLB Players Association are expected to meet more frequently this week with the hope of reaching a new Collective Bargaining Agreement before Opening Day must be postponed. (The unofficial deadline to avoid that fate is believed to be Feb. 28.) One of the biggest sticking points in the negotiations thus far has been the owners’ unwillingness to budge on the parameters of the Competitive Balance Tax (hereafter referred to as the CBT).

For those unhip to baseball’s finer workings, the CBT is a mechanism that was first introduced as a luxury tax. In recent years, the owners have fashioned the CBT into the league’s unofficial salary cap. You can read more about that transformation by clicking here, but the gist is that teams are penalized if the combined average annual value of their player contracts exceeded the tax line. The further over the threshold a team is, the steeper the fine. Under the old CBA, teams that went more than $ 40 million beyond the tax line would even have their top draft pick moved further down.

Although those penalties are trifling for the franchises, they’ve served as an effective deterrent. Only six franchises have ever exceeded the CBT multiple times during its history, and just three of those teams have done it more than twice. The most common violaters have even made a habit out of ducking under the line every few years, so as to reset their penalties and avoid the additional multipliers tacked on for repeat offenders. Teams going over the tax line is not a true problem, and yet the owners have prioritized adding teeth to the CBT in a way that overstates the threat.

The league’s most recent proposal would increase the lowest threshold overage tax rate from 20 percent to 50 percent for first-time violators; the second tier would increase from 32 percent to 75 percent; and the final tier would increase from 62.5 percent to 100 percent. There would be no additional tax for subsequent offenders (as there was under the old CBA); there would, however, be new draft-pick-related penalties for crossing any of the three thresholds.

The owners’ intent is clear: they’re no longer satisfied with a “soft” cap, even if few teams cross the boundary; they want a “hard” cap that can not be as easily displaced. What makes the league’s proposal particularly unreasonable is how they’re pushing for these stiffer penalties while refusing to substantially raise the tax line and, at the same time, requesting an expanded postseason that would equal a revenue boon.

The difference between MLB and the MLBPA’s proposals on the tax growth rate is absurd. As Jay Jaffe pointed out at FanGraphs, the year-to-year annual change in MLB’s proposal would be less than 1 percent for most of the CBA; the MLBPA’s most recent proposal, for comparison, would include a massive hike in year one before increasing by about 3 percent year-to-year the rest of the way. Put another way, the two sides are more than $ 50 million apart on their idealized tax line for the 2026 season.

Perhaps the above contradiction – the owners knowing they’ll make more money, yet being eager to spend even less of it – has been best spelled out by Travis Sawchik of The Score, who recently illustrated how revenue and the tax line are uncoupled :

The CBT is a cleverly, if incorrectly branded instrument. The implication is that its presence helps promote parity. There’s no evidence that the CBT (or any other salary-cap variation) achieves a desired effect beyond suppressing salaries. What the owners are doing in their latest proposal is laying that truth bare. They want to increase the size of the pie, but they also want to ensure that they get an even greater share of said pie.

None of this should come as an unexpected development. The owners have consistently fought for a salary cap during past CBA negotiations, and they’ve even won the ability in recent CBA to install spending caps at other levels of the game. Hence teams being permitted to spend only so much in the draft, or on the international free-agent market. (Even when the owners have willingly spent more on talent, like giving minor-league players a slight bump, they’ve responded by trimming the total number of minor-league jobs to make up for it.) It was only a matter of time before they tried again for a hard cap at the big-league level.

What is surprising is how they’ve stuck by such a radical vision this late in the process. These types of proposals are perceived to be a trademark of early negotiations. The problem is that these negotiations have been ongoing for more than two months; the owners’ unwillingness to relent or to bend towards a more agreeable number in this arena would not seem to be a promising sign that a deal will be reached before Opening Day is postponed.

Perhaps that all starts to change this week. If not, there are two paths forward: the players flinching and giving in to avoid going over the cliff together, or the owners’ desire for a hard cap derailing the season.





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