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Home Maury Brown How Changes to MLB’s Luxury Tax Could Influence Player Contracts, Now

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How Changes to MLB’s Luxury Tax Could Influence Player Contracts, Now PDF Print E-mail
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Written by Maury Brown   
Friday, 05 November 2010 14:46

Biz of BaseballAlready, MLB’s Hot Stove season is under way. As players and clubs work through options within player contracts, the next wave of free agent signings or contract extensions will be getting underway in earnest.

And while the current labor agreement between the league and players doesn’t expire until December of 2011, the new CBA could have influence on how clubs that have high levels of player payroll react now.

More specifically, MLB’s soft-cap system could come into play. While the Competitive Balance Tax (or as it’s more commonly known as the Luxury Tax) is set to expire at the end of the current labor agreement, the expectation is it will continue within the new Basic Agreement when it is reached. It’s also very possible that there will be tweaks to it, either in terms of where the payroll thresholds land, or in the tax associated with those clubs that exceed the Luxury Tax payroll limits.

Here’s how the current system works.

For 2011, any club that has an end of year player payroll that breaks the $178 million threshold shall be taxed for every dollar they go over. The tax rate depends on how many times a club has broken the threshold in concurrent years. Since the Yankees were the only club to break the threshold last season, they will be assessed a 40 percent rate if they went over the threshold this season. To date, only four clubs have broken these thresholds since the tax was put into place. Below is a breakdown of each club by year, the amount of tax they have paid for a give year, and the total amount a club has paid up through December of 2010

Luxury Tax (2003-2009)
Click the image above to see total luxury tax monies collected from
2003 to 2009. LT is not part of revenue-sharing

As the table shows, the Yankees paid $25,689,173 in Luxury Tax last year, and have been penalized a staggering $174,183,419 since 2003, the first year clubs began being taxed. The Yankees are the only club to break the ceiling in each year since the LT was put in place. The Red Sox did so from 2004-2007, and the Angels (2004) and Tigers (2008) have done so only once)

Each year on December 12, any club that has broken the threshold is informed of the amount owed. The MLBPA is also informed as Luxury Tax money is not revenue-sharing, but rather mostly returned to the players in the form of benefits. After $5 million is skimmed off the top for league services, 75 percent of the remaining amount goes back to the players. If you wonder why the players went for the soft-cap in MLB, here’s a large reason why. The remaining 25 percent goes into the league’s Industry Growth Fund.

Here’s why contracts now could be influenced.

Based upon the current agreement getting ready to expire, if the tax rate is adjusted to address the likes of the Yankees busting the threshold each year, or if it is collectively bargained to lower the threshold from the current $178 million set for 2011, clubs may rethink how the structure multi-year contracts this year, and next year, how much they are willing to offer players for single year deals based upon total player payroll.

Last year, the Yankees had a $220,024,917 end of year payroll. The Mets were a far distant second $142,229,759, nowhere near the $162 million threshold for last year (see end of year payrolls for all 30 clubs for 2009)

The Opening Day payroll for the Yankees for the 2010 season was $206,333,389, already over the threshold limit for this season, while the Red Sox were at $162,447,333, closer to the $170 million threshold for this contract year, but likely safe.

(See 2010 Opening Day payrolls for all 30 clubs)

How these clubs (or the Cubs who had $146,609,000, or Phillies at $141,928,379 Opening Day payrolls) approach signings for 2011 and beyond could be dictated with a look as to how the Luxury Tax might be structured in the upcoming CBA.

To add to this, while we’re talking about those at the top, it’s possible that those on the bottom might be – to repeat might be – impacted, should some form of penalty be assessed some new tax for those that go below a certain threshold. While not a traditional “salary floor” that is hard, discussion has circulated about a “soft floor” – a Luxury Tax in reverse – where the likes of the Marlins or Pirates could choose to go below a certain payroll threshold, but be taxed if they did so.

So keep an eye out on player contracts that move into 2011. It could be that the new CBA set to go online for the 2012 influences how some clubs choose to structure their overall player payrolls. That could drive how multi-year contracts are structured this off-season.


Maury BrownMaury Brown is the Founder and President of the Business of Sports Network, which includes The Biz of Baseball, The Biz of Football, The Biz of Basketball and The Biz of Hockey, as well as a contributor to FanGraphs and Forbes SportsMoney. He is available for hire or freelance. Brown's full bio is here. He looks forward to your comments via email and can be contacted through the Business of Sports Network.

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