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MLB’s Pairing of New Luxury Tax Threshold With Salary Floor Presents Conundrum

Updated: Aug 11, 2022

The Athletic’s Evan Drellich and Ken Rosenthal reported on Wednesday that MLB has proposed lowering the initial luxury tax threshold[1] and adding a salary floor in an introductory economic proposal ahead of more substantial Collective Bargaining Act discussions this fall. The current CBA runs through December 1.

The proposal allegedly includes a salary floor, a concept long lobbied for by players and their advocates in the media[2] that would be set at $100M. Currently, six teams have payrolls below the $100M mark, with two others hovering around that number[3]. More concerning news for the players is the suggestion of a four-tier luxury system, which creates a new lowest tier beginning at a $180M threshold. Taxes related to that tier would begin at 25%.

This new proposed threshold adds a fourth tier to the existing three tier system. Teams that currently exceed the 2021 luxury threshold of $210M incur a 20% tax on each dollar above that threshold. Clubs exceeding the threshold by $20M to $40M incur an additional 12% surtax upon each dollar above the $20M threshold. Exceeding the threshold by more than $40M carries a 42.5% penalty the first time and a 45% rate if the tax threshold is exceeded by more than $40M in a second consecutive season. Being $40M or more above the threshold for successive years also results in Rule 4 picks being moved back 10 selections[4]. These taxes are progressive and are outlined in the chart below[5]. According to Spotrac, just two teams (the LA Dodgers and Boston Red Sox) have exceeded the Luxury Tax mark in 2021[6], and only the Dodgers have blown past the $40M overage marker.

(Chart Courtesy of MLB Trade Rumors)

Still, the penalties of exceeding the luxury tax, even by extreme amounts, are paltry compared to the possible benefits. On their way to a gentleman’s sweep of the Dodgers in the 2018 World Series, the Boston Red Sox blew past the $40M overages in 2018 and during their 2019 championship hangover season. All told, the Red Sox paid less than $30M in taxes stemming from this largesse[7]. Considering the financial benefits that come with winning the World Series, it is likely that Fenway Sports Group would make this trade off again. When the 2019 Red Sox bottomed out, the club proceeded to do the unthinkable and trade their homegrown face of the franchise Mookie Betts to the Dodgers rather than award him a new contract. The team was able to get back under the tax threshold, but opted not to enter the $20M surtax phase at the deadline this season and have since seen their 10 game lead over the rival Yankees dissolve.

Boston’s actions in trading Betts speaks to the fact that the luxury tax as it is currently constructed already effectively operates like a salary cap. Each season, like clockwork, billionaire baseball team owners say that they are “absolutely”[8] “willing”[9] to exceed the threshold and that the luxury tax “is not a hard line”[10] in the sand. However, if you look at teams’ actions, they gather around the luxury tax line and very few teams have shown a willingness to consistently go for it and pay the tax. The fact that this alleged proposal calls for a lower threshold that would carry a higher tax should give pause to the players’ association as they negotiate this next CBA. The actions of the owners since the creation of the tax should leave no doubt as to where many teams will draw the line on spending and therefore effectively cap player salaries. It would also remain to be seen whether teams would actually use the salary floor to raise the average salary of players (a serious concern for the union given the current club attitudes towards substantial free agent contracts).

Of course, it is important to note that this is an introductory offer and that these ideas are likely to develop as negotiations continue. One positive note to take from this story is that discussions are taking place in person as the league and the players attempt to avoid a catastrophic work stoppage in 2022.

For more on this story and everything at the intersection of sports and law, keep it tuned to Conduct Detrimental.

[1] [2] [3] [4] [5] [6] [7] [8] [9] [10]

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