1-Man’s Opinion on Sports–Friday. “Baseball–War on the Luxury Tax”

Posted by on December 3rd, 2021  •  0 Comments  • 

“Baseball War Over Luxury Tax”—

Baseball is shutdown.
The verbal gunfire has increased.
The Union and the Commissioner are now at war over ‘money’.

The big issue is the baseball luxury tax, in which big market teams pay a tax on every dollar they spend in payroll, over a certain amount.  Last year’s tax kicked in when team surpassed the 218-payroll threshold.

If you go over the tax three years in a row, you not only pay a dollar-for-dollar tax on the overage, you lose draft picks and International signing slot money.

The Union maintains the Tax amounts to a salary cap, and it may in some sense.

The Union also says the free agent system is ‘broken’, oddly, saying that hours after Max Scherzer signed a record (43M) a year free agent deal, and players took in 1.6B in guaranteed money over the final 4-days before the lockdown happened.

The owners say baseball has to reign in spending, that this cannot continue to go on, all while spending what they spent from Saturday-thru-Tuesday night.

It all has to be negotiated and it will be, but it will be bloody.

Here’s a look at the entire Luxury Tax timeline-courtesty of MLB-Trade rumors website:

There was a time when the MLB players’ union felt that a luxury tax is just a salary cap in another form, with is why they rejected such proposals back in 1994.  Nonetheless, in the first post-strike collective bargaining agreement, executive director Don Fehr “finally said yes to the luxury tax – the first time the union agreed to any form of payroll restraint since free agency changed everything in 1976,” to quote Jon Pessah’s book The Game.

Though Pessah called that CBA a “huge victory for Fehr and the union” for other reasons, the owners did get their foot in the door on the matter of a luxury tax.  The luxury tax wound up snowballing into a major problem for the players in recent years.

In that CBA, the tax thresholds were set like this:

1996: no luxury tax
1997: $51MM
1998: $55MM, a 7.8% increase
1999: $58.9MM, a 7.1% increase
2000: no luxury tax
2001: if MLBPA exercises its option for ’01, no luxury tax
Mechanisms were also put in place that could allow the 1997-99 thresholds to be higher, depending on where the fifth and sixth-highest payrolls in the game landed.  Tax rates were set at 35% on the overage for ’97-98 and 34% for ’99.

While that CBA technically ended with two years sans luxury tax, it became part of all future agreements.  The agreement that began in 2003 saw the luxury tax rebranded as the “competitive balance tax.”  The MLBPA was able to achieve an initial major increase in the thresholds from where they left off in ’99:

2003: $117MM, a 98.6% increase from ’99
2004: $120.5MM, a 3% increase
2005: $128MM, a 6.2% increase
2006: $136.5MM, a 6.6% increase
For this CBA, a concept was introduced to penalize second, third, or fourth-time offenders with a higher tax rate.  The first-time offender rates were set at 17.5% in ’03 and 22.5% in 2004-05, yet was removed entirely for ’06.  30-40% tax rates were set for teams that exceeded the threshold multiple times during that CBA.

For the CBA beginning in 2007, the tax thresholds were set as follows:

2007: $148MM, an 8.4% increase
2008: $155MM, a 4.7% increase
2009: $162MM, a 4.5% increase
2010: $170MM, a 4.9% increase
2011: $178MM, a 4.7% increase
Here after an initial “new CBA” leap, we start to see the tax thresholds moving up more slowly.  The tax rates were set at 22.5%, 30%, and 40% and began penalizing teams for exceeding the thresholds in consecutive years, introducing the concept of teams “resetting” its rate by getting under the threshold for one season.

For the CBA beginning in 2012, these were the tax thresholds:

2012: $178MM, no increase
2013: $178MM, no increase
2014: $189MM, a 6.2% increase
2015: $189MM, no increase
2016: $189MM, no increase
Here, the players’ union made large concessions that had a compounding effect they’re still feeling today.  If the MLBPA had achieved simply a repeat of the increases from the previous CBA, the 2016 tax threshold would have sat at about $232MM.

The next agreement introduced the concept of luxury tax tiers, adding first and second surcharge thresholds after the base tax one.  For example, 2021 included thresholds at $210MM, $230MM, and $250MM.  This CBA also introduced penalties involving the draft.

2017: $195MM base tax threshold, a 3.2% increase
2018: $197MM, a 1.0% increase
2019: $206MM, a 4.6% increase
2020: $208MM, a 1.0% increase
2021: $210MM, a 1.0% increase
While better than the previous CBA, the MLBPA again agreed to tiny increases in the base tax threshold.  A simple 5% increase per year beginning in 2012 would have put the 2021 base tax threshold around $290MM, yet it sat only at $210MM.  Not coincidentally, only the Dodgers and Padres exceeded a $210MM payroll this year.  You can see the restraint this put on a club like the Yankees, which had a lower 2019 Opening Day payroll than it had in 2005.

In the current negotiations, MLB made an initial proposal that included lowering the base tax threshold to $180MM.  According to Gabe Lacques and Bob Nightengale of USA Today, “In final proposals exchanged Wednesday, players requested a $245 million luxury tax threshold, with no progressive penalties for offenders; owners are offering a $214 million threshold, rising to $220 million in the final year of a five-year agreement.”

With a request to jump to $245MM, the MLBPA is proposing a 16.7% jump over the ’21 threshold, which would only begin to make up the ground they lost due to the non-existent or miniscule increases from 2012 onward.  MLB, meanwhile, would like to increase the base tax threshold by 1.9% for 2022 and is proposing average annual increases of less than 1%.

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