My Plan for a New CBA Part Two: Luxury Tax

The current MLB lockout, like pretty much everything these days, boils down to money. In the first segment of this series I laid out a plan to ensure revenue sharing funds ended up in the pockets of players and not owners. A salary floor tied to funds that are already supposedly earmarked for player salaries should be an easy “yes” and lead to the harder talks.

As a fan I love the players asserting that tanking is a competitive balance issue. Nobody wants to watch bad baseball teams whose front offices aren’t even pretending to want to win.

That said, this stance does back the players into a corner a bit when it comes to the luxury tax. If they truly want a competitive league with each team having a shot at glory, you can’t have one squad spending three times as much as another. That wouldn’t bode well for competitive balance.

Oops. Not the way the MLBPA wanted that one to go I’d imagine.

The current luxury tax system is rather complicated, it generally only affects one or two teams, and even then only in certain years. Plus the number is set rather arbitrarily and often provides a clear incentive for big market teams to avoid spending on payroll.

If there is going to be a salary floor for competitive balance, the luxury tax thresholds need to be based off that floor. The floor in my model will change from year to year as it is a two year average of revenue sharing funds. The luxury tax thresholds need to change accordingly.

Also, there needs to be some phasing in of the tax. The current all or nothing makes little sense and really creates a soft salary cap. Plus the ability to get below the luxury tax threshold to reduce future tax payments creates disincentive for large market clubs to continually go big.

Here’s how my progressive tax system would work, using $125 million as an estimated salary floor for 2022.

Floor to 150% of floor: no tax. Please, spend up to $188 million and pay no taxes.

151% of floor to 169.9% of floor: 15% tax. If you can spend $189 million to $212.5 million you can afford to kick in a tad bit extra to help your smaller market partners.

170%-185% of cap: 30% tax. For the large but not quite elite spenders, this hurts a bit. Enough that a club might think twice about a contract if they already have a $210 million payroll. But from $212,500 to $231,250 you get hit twice as hard as level one.

186%+ of floor is a 50% tax. This is designed to keep the Dodgers and Yankees from simply running away from the field. Any dime above $231,250 and you get to kick in a nickel. You obviously have it.

There is no resetting, no multiple year stipulations, etc. Payroll is calculated at the end of the year and taxes are levied based on which bucket(s) apply to your scenario.

After 2021 only two teams paid luxury tax and the calculations are complex. Now let’s compare that to my system.

The Dodgers had a final payroll number of 285.6 million. Their tax bill would be 15% of $23 million covered in the first bucket ($3.45 million), 30% of the $18ish million in bucket two ($5.4 million), and 50% on the $55 million they spent beyond the top bucket ($27.5 million) for a total of about $36.5 million.

Nearly identical to the number they paid this year in real life but with no possibility of resetting it to zero so they can lap the field again in the future. For their part, the Padres would have paid about $4.6 million this year opposed to the $1.3 million they actually paid.

In taking a look at 2021 MLB payrolls, a total of five teams would have paid some level of tax, all but two only the first tier in my system. All in all it would not impact the spending of most clubs nor would it have a huge impact on the total amount of luxury tax paid each year. There would be a jump and the teams paying it might rotate a bit as competitive windows open and close, but really you can count on the top 7 or 8 markets paying this most of the time.

What do do with the money? Great question.

Because I have a heart I want to say give each team $1 million per year and force them to use it on salaries, food plans and housing vouchers for minor league players. But because I have a brain I know the MLBPA reps don’t care about their minor league counterparts and I need to steer this money back to big league players.

I’d create an escrow fund which holds the money and distributes it to clubs to use on payroll based on inverted market size. The smallest market team could access 7% of the funds in that account with the 10th smallest market club able to access 0.5%. There would be a sliding basis between those two points.

So let’s say the Pirates, finally forced to spend money, are sitting at $120 million in payroll, must spend another $5 million to reach the floor, but prefer a guy in the $10 million per year range. No problem, offer the deal, apply for the luxury tax funds and offset the difference.

It would be pretty silly for a team to set a long term payroll hoping for luxury tax funds that may or may not be there. I realize that. But year after year we see utility players, mid rotation starters, and bullpen arms that are worthy of an MLB job who don’t get them.

So, now we have a floor to increase player pay and competitive balance. We have a tax system that makes sense and should help keep the big markets from running away from the smaller markets. And we have yet another incentive for the owners and players to work together to grow the game. As the revenues increase so will the salary floor and luxury tax thresholds. That is better for all involved.

One aspect this could really impact is the trade market. That’s definitely an article for another day but adding a contract or shedding one midseason could impact a lot of clubs. Moving that $8 million reliever might get a team down a bucket, adding him might kick the other team into one. But with the progressive tax system it shouldn’t impact the franchises enough to really sway decisions.