A fight over this issue looms large as MLB lockout threatens spring training
The 1994 strike that took down baseball’s crown jewel — and has served as a cautionary tale ever since — was the result of mounting tensions and well-earned mistrust between the players and MLB team owners. But at its most simple, it was about a salary cap — the team owners tried to implement one, and the players struck in response.
The current lockout, which is about a week away from likely disrupting baseball’s spring calendar, remains ongoing for many reasons. But even if the rest of them were resolved, there would still be a significant battle left to wage over the league’s attempt to curtail spending at the upper end of the sport.
It’s not quite a cap. But these negotiations are shaping up to include a contentious and potentially protracted fight over whether baseball moves toward or away from one. And the two sides haven’t talked about it since before the lockout started, even as an on-time start to spring training looks increasingly far-fetched.
When a new collective bargaining agreement was eventually reached two years after the ‘94 strike, there was no cap, but there was a luxury tax on the top payrolls as a compromise. In subsequent CBAs, that’s become what’s known as the competitive balance tax — which sets a payroll threshold above which teams are taxed at escalating rates. The threshold itself and the penalties for surpassing it are a wonky but significant part of every negotiation with demonstrable effect on team behavior, functioning as a so-called “soft cap.”
The purpose of the CBT is to disincentivize flush teams from spending wildly. The league contends that doing so is in the game’s best interest (although the relationship between payroll and success is a complicated and, at times, tenuous one). What’s undeniable is it’s in the team owners’ financial best interests, as it makes it more difficult to justify expenditures that would put teams over the threshold. It discourages behavior — signing players to expensive deals — most team owners don’t want to engage in anyway. It’s an excuse, basically, but one that has real teeth. Team owners are always looking to turn a profit and being taxed on a certain portion of their outlay makes it harder to do so.
The softness, though, is key. Because teams do go over the CBT. Since 2003 — the first year the CBT existed in something like its current form — no fewer than one team and no more than six have exceeded the threshold in a given year. Even if teams are admittedly cognizant and cautious about the CBT, it’s not quite the hard cap that has remained a hard-line issue for the MLB Players Association. Other sports leagues have caps; baseball players and their multi-hundred-million-dollar deals do not.
If you dig into the details, you can see teams adjust their spending in response to penalties written into the CBT — dipping back below it to reset their clocks when recidivism started getting taxed at higher rates. Even as the union has successfully resisted the implementation of a cap, the league has worked to make the porous upper limit on spending increasingly less so.
Ahead of the 2016 CBA negotiations — coming off a CBA that included several years where the CBT did not increase at all — Nathaniel Grow wrote at FanGraphs how the issue contributed to the declining percentage of revenues going toward players:
“In hindsight, then, the MLBPA likely made a mistake by agreeing to a more restrictive luxury tax framework in the last several CBAs.”
The looming logjam in these negotiations is the union will likely try not to make that same mistake again.
What are MLB, union proposing right now?
In 2021, the CBT was $210 million. Penalties started at a 20% tax on overages. Repeat offenders would be taxed at 30% in their second year and 50% in their third year. There are surcharges (an additional 12% and then an additional 42.5% or 45% on top of that) for clubs that surpass subsequent thresholds at $230 million and $250 million, and clubs that sail past $250 million will have their first or second draft pick moved back 10 spots.
Additionally, teams above the CBT lose an extra draft pick when signing free agents who have qualifying offers attached to them. (This is all very complicated, yes. You can read the official language here and the actual CBA language, with examples, here.)
Both proposals on this topic in the current negotiations are from before the team owners implemented a lockout on Dec. 2. The union’s would raise the CBT to $245 million in the first year and to $273 million by 2026. The taxes are the same as the outgoing CBA, but the non-economic deterrents (like draft penalties) are removed.
The league would say that number is far too high and would exacerbate the nearly $200 million disparity in payrolls between the top and bottom teams. It’s an increase of $35 million when the highest single-year jump was previously $11 million and the average increase is $6 million.
Of course, if the CBT had actually gone up $6 million every year since 2003 it would have been $225 million in 2021 and $231 million this year. If it had gone up 4% per year — lower than the growth rate in the first decade of its existence, but more than it has in recent CBAs — it would be over $246 million this year. And if disparity is a problem, it stems more from the nearly $150 million gap between the highest team below the CBT and the lowest payroll than anything happening above it.
The league’s proposal starts the CBT at $214 million in 2022 and gets up to $220 million by the final year of the CBA (a $6 million gain over four years, which would, notably, bring down the existing average).
Crucially, it also includes much stronger penalties. Rather than punish recidivism, all teams that go over the first threshold will pay a 50% tax on the overages. The surcharges for subsequent thresholds are 25% and 50% — meaning a team that goes over all three would pay a 50% tax between the first and second, a 75% tax between the second and third and a 100% tax on anything above the third.
The non-economic penalties are also stricter: If teams go over the base threshold, they lose a third-round pick. Over the second threshold, teams lose a second-round pick — or the equivalent to the punishment the Boston Red Sox got over a sign-stealing offense. Over the third threshold, teams lose a first-round pick. That is partially counterbalanced by doing away with the loss of draft picks by teams that sign free agents with qualifying offers.
In each of the past two five-year CBA terms, teams went over the CBT 15 times. Only nine different clubs have paid the piper since 2003. The league’s goal, it would seem based on the proposal to make overages even less appealing, is to reduce that number. In other words, MLB wants the CBT to function a little bit more like a cap.
The lockout’s major hurdle
Which brings us back to the line in the sand drawn over 25 years ago.
The league would likely argue that if it was a true cap, the kind that is paired with a floor in other leagues, it would be lower than the existing CBT threshold. In August, MLB proposed something like that — a lower luxury tax threshold at $180 million and the introduction of a $100 million payroll floor.
Lowering the CBT is a non-starter for the union, so the league moved on from that proposal along with the concept of a floor to force the parity team owners are so eager to induce with the de facto soft cap.
Whether the union was “right” to reject a construct that would prevent teams from bottoming out while curbing the free spenders who typically fuel blockbuster salary growth is immaterial. In a negotiation where the union has made no bones about its desire to grow the players’ portion of the pie, rather than simply move money around, it’s seeking both recourse for younger players to get paid earlier and a loosening of the reins on top teams. The league has shown a willingness to entertain the former — but at the expense of the latter.
MLB is playing a long game when it comes to a cap, and it’s kind of working. The team owners’ current proposal wouldn’t get them there, but it’s a philosophical step in that direction, calcifying the existing soft cap.
Meanwhile the players’ long-term strategy depends not just on categorically rejecting a hard cap, but also stemming the slow creep from competitive balance tax toward one.
Opening day is still about two months away, but the ground left to cover in that time is vast and fraught. And they won't be able to bridge it until they start talking about the CBT.
