Updated: Jul 20, 2022
I. Introduction/History of the Collective Bargaining Tax
Major League Baseball (MLB) came to an agreement with the players association (PA) last week, ending a 99 day lockout implemented by MLB. One of the biggest sticking points in the current negotiation was the owners’ unwillingness to budge on the parameters of the competitive balance tax (CBT). The CBT serves the purpose of the MLB’s unofficial salary cap. Essentially, teams are penalized if the average annual value of their player contracts exceeds the given tax threshold. The fine becomes even greater the more a team exceeds the threshold, and there is the possibility of losing draft capital.
The CBT has been relatively successful acting as a pseudo salary cap. Throughout the CBT’s history, only six franchises have ever exceeded the CBT multiple times, and just three of those teams have done it more than twice. A common trend amongst teams that have violated the threshold has been to quickly get below it every few years, resetting the penalties and avoiding additional penalties for repeat offenders. Even though the CBT has played its role as a “soft cap,” it is clear that was not enough for owners.
The owners’ goal was clear: alter the CBT to serve as a hard cap that teams cannot exceed without facing serious ramifications. Throughout the CBA negotiations, owners were pushing for stiffer penalties while maintaining the thresholds from the previous CBT. Although the two sides moved closer on the threshold number on Monday, March 7, the discrepancy between the two sides remained large. This gap comes from the two sides’ differing ideologies on what the CBT is doing for the sport.
II. The Parties’ Positions
The owners believe the CBT is promoting competitive balance, while the players believe it is suppressing their salaries. It is challenging to determine which side is correct in their position. There is no hard data that proves the CBT helps maintain competitive balance by keeping teams to spending roughly around the same amounts. Comparing the 2021 Tampa Bay Rays to the 2021 Los Angeles Angels exemplifies this. The Tampa Bay Rays had a total payroll of $60,388,600 in 2021, while the Los Angeles Angels had a payroll of $177,353,000 in 2021. The Rays were 100 game winners and AL East champions, while the Angels won a measly 77 games and came in fourth in the AL West. There is no guarantee the soft salary cap function of the CBT will maintain competitive balance within the sport. There is a finite amount of money in baseball, contrary to what the players and the media portray. The owners were unwilling to raise the CBT because they already made concessions by raising the minimum salary by $130,000 and creating a bonus pool to pay the top 30 young players for their achievements. From their perspective, these implementations will help young players be compensated for their worth without raising the CBT, which in turn will help maintain competitive balance. The reality of the CBT is that it cannot force teams to spend, nor can it force teams to stay under its threshold.
There is also no hard data proving the CBT is suppressing player salaries. It is true teams have a certain amount they can spend on players before being penalized, but raising the threshold does not guarantee that teams will spend more. As mentioned earlier, there have only ever been six teams to exceed the CBT multiple times. The rest of the league does not scratch the surface of the threshold year over year. Yes, raising the threshold may allow the big spenders to spend more, but it does not mean mid-small market teams will spend more. The players are firm in their position that a higher CBT threshold will lead a majority of teams to spend more, ultimately raising player salaries. Over time, owners make more money while the CBT deters spending. The players believe even if raising the threshold cannot force teams to spend, it will produce more bidders for a player’s services in the free agent market.
Both positions hold merit, but neither position guarantees what it claims. The reason the CBT was the centerpiece of this negotiation is because both sides were stuck in their positions regarding what they believe it is doing for the sport. Both sides raise valid points when defending their positions, but there is only a finite amount of money for the sides to negotiate over. Something the players need to realize is if more money is going toward minimum salaries and a bonus pool for the top 30 young players, the less money there will be for veterans to increase their salaries and in turn raise the CBT threshold.
Both sides nearly lost some of finite amount of money baseball has due to this labor dispute, and a big reason for this was the differing views on the CBT threshold. The players made an effort to move the needle by agreeing to reduce the time to implement rule changes. This means that the 2023 season will likely have a pitch clock, ban on shifts, and enlarged bases. These changes would speed up the game and create more action. This could be something the league accepts in return for conceding on some economic issues. The question remained, will they concede on the CBT threshold, or are they going to remain dug in on moving baseball closer and closer to a hard salary cap? Ultimately, the sides agreed to a $230 million CBT threshold in 2022 that increases by $2 million each year until it hits $244 million in 2026. This was a strong compromise between the two sides since MLB initially did not want to raise it from $220 million and the players wanted it to start at $238 million and get to $263 million in 2026. Now that the threshold is set, only time will tell whether the system acts more in favor of competitive balance or suppressing player salaries.
Sources:  https://www.cbssports.com/mlb/news/how-mlbs-luxury-tax-became-a-lockout-sticking-point-and-why-owners-proposal-would-lead-to-drastic-changes/  Id.  http://www.stevetheump.com/Payrolls.htm
Michael Perlo is a J.D. Candidate at the University of Buffalo School of Law.