Yahoo Contributor Network
This article was created on the Yahoo Contributor Network, where users like you are published on Yahoo every day. Learn more »Yahoo Contributor Network
What is the MLB Luxury Tax? a Fan’s Perspective
In an effort to equalize the financial playing field for MLB teams, the league charges the richer teams a luxury tax if they exceed a certain amount in player salaries. It's the league's way of making sure teams with a lot of money can't simply outspend teams with lower budgets, instead of using a salary cap.
Two teams were hit with the luxury tax this season, the New York Yankees and the Boston Red Sox. It's no surprise they're also the two top ranked teams in Forbes' list of the most valuable baseball franchises. The Yankees are valued at $1.7 billion, the Red Sox at $917 million and I actually think both numbers are a bit low.
MLB has set a threshold of $178 million for team payroll and teams that exceed that amount must pay the league a luxury tax, based on the amount exceeding that threshold. The limit stays at $178 million through the 2013 season, then rises to $189 million for the three seasons after that. For the 2011 luxury tax, the Yankees had a final payroll of $212.7 million and Boston reported $189.4 million.
Among other things, MLB teams are limited by their location in how much revenue they can generate. The New York Yankees reach a huge audience and can make enormous broadcast deals. The Pittsburgh Pirates, have a smaller audience and market. The Yankees earned $427 million in revenue last year, the Pirates earned $160 million. It's that gap that MLB hope to bridge by using the luxury tax.
The New York Yankees pay at a rate of 40% on the amount of their payroll over $178 million. That figure includes the average, annual value of player contract, plus benefits. The Boston Red Sox, who exceeded the threshold for the second straight year, pays 30%. There is an incentive to lower payroll, if in any year the team goes under the threshold, the rate decreases 17.5% the next time the tax is paid.
Under MLB's new labor contract, the Yankees' rate will increase to 42.5% next season and rise again to 50% in 2013 if they continue to break the threshold. Boston will see a 40% rate next season. The team was hit with a $13.9 million luxury tax bill for 2011, which was actually their lowest since 2003. The Red Sox got a bill for $3.4 million, more than double their bill in 2010, which was $1.5 million.
The Los Angeles Dodgers had a $110 million payroll for both 2010 and 2011, down from their $132 million paid in 2009. I wonder what the recent $160 million deal with Matt Kemp will do to that number next season. The team payroll totals must also include prorated shares of any signing bonuses.
Freddy Sherman grew up in Philadelphia, which didn't make being a Los Angeles Dodgers fan easy. He has lived in Los Angeles for twenty years, now able to follow the Dodgers openly and attends games frequently. You can follow him on Twitter: @thefredsherman .
More from this contributor:
Note: This article was written by a Yahoo! contributor. Sign up here to start publishing your own sports content.