MLB owners still trying to harden the de facto salary cap

There is no formal salary cap in major league baseball. Teams can spend as much as they like on player salaries, in theory. However, there are penalties in place for doing so, and there hasn’t been a more divisive issue between owners and players than the salary cap since free agency became a permanent part of the landscape in professional sports. Now, MLB owners propose to make the competitive balance tax (CBT) even more punitive on big spending teams, and that remains a complete non-starter with the players.

Of all the issues remaining to be resolved in the current collective bargaining talks, and there are several, none is more upsetting to players than the draconian measures being proposed to penalize teams that dare to spend more than the CBT threshold on player salaries. The union regrets ever agreeing to what amounts to a soft salary cap in the first place. The owners would like

Owners have dropped proposals to radically overhaul free agency and arbitration, but their proposals to harden what has become a de facto salary cap remain on the table.

1994 players’ strike over salary cap

When MLB owners attempted to force the players to accept a salary cap, the result was a strike that ended the 1994 season, World Series and all. Before the 1995 season, owners attempted to unilaterally implement a salary cap, and were prepared to use replacement players to open the season. It took a federal court injunction to stop them, finding that MLB bargained in bad faith.

After playing the 1995 and 1996 seasons with no agreement, and after owners rejected a deal that had been bargained between the MLBPA and MLB, the two sides reached an agreement for the 1997- 2000 seasons. Talks were complicated by the fact that MLB had no commissioner after the owners fired Fay Vincent. Bud Selig was acting commissioner and Rob Manfred outside counsel for MLB. This time around, MLB has a commissioner in Manfred who appears widely disliked for his handling of the game in recent years.

A brief history of the competitive balance tax

Many owners still insisted on a salary cap, even though there was no chance that the players would agree to one. In order to get a deal done, the first “Competitive Balance Tax” was implemented. A tax was levied on the teams with the five highest payrolls, regardless of how much they spent on player salaries.

Since 2001, the CBT has been a part of every CBA, being tied to payroll, with three tax tiers, and surtaxes for teams that go over in two or three plus consecutive seasons. Tax is paid on the amount over the threshold.

The CBT threshold was set at $117 million in 2001 and has gradually increased each season to the current lowest threshold of $210 million, with a tax rate of 20 percent for first time violators. The tax rate has never gone higher than that for first timers at the lowest threshold.

Penalties have become stiffer, currently topping out at a total of 92.5 percent for a third time offender with a payroll over $250 million. The most recent CBA, which expired in December, contained penalties affecting draft position and loss of international bonus pool money for the first time.

In 2021, all but two teams had payrolls that were under the lowest threshold in 2021, which was $210 million. The Padres paid a first time tax of 20 percent for a penalty of $1.6 million. The Dodgers paid a first time tax of $32.65 million with a payroll of $285.6 million. The top rate was 62.5 percent on the portion above $250 million. They will also have their first round draft pick in 2022 moved back ten slots.

It is worth noting that, should the previous CBA be continued due to an impasse, the CBT would not automatically be a part of it. The CBA had a sunset provision that expressly ended the CBT on December 2, 2021. Still, MLB insists on a CBT and the players have included one in their proposals.

There shall be no Competitive Balance Tax in place following the 2021 championship season, and the Parties expressly acknowledge and agree that the provisions of this Article XXIII … shall not survive the expiration of this Agreement

The de facto salary cap

As players fought hard against any mention of a salary cap, they have gradually allowed CBT penalties to creep in to the point where it acts as a de facto salary cap.

• When the last CBA was signed, six teams had payrolls above the tax threshold, including the Detroit Tigers. All of them cut payroll to get under the threshold and reset their tax brackets.
• In 2021, the Boston Red Sox, New York Yankees, New York Mets, Houston Astros, and San Francisco Giants were within $4 million of the tax threshold without going over. Their owners have openly talked about getting under the tax threshold.
• The Los Angeles Dodgers were under the tax threshold three seasons before going over in 2021
• The New York Mets are currently the only team on track to exceed any proposed threshold

MLB’s proposal

Owners want very little increase in tax thresholds, and much harsher penalties. According to the Athletic:

• Increasing the lowest tax threshold to just $214 million, scaling up to $220 million over five years. That represents an increase of less than one percent per season over the term of the deal, not even keeping pace with inflation, let alone MLB’s soaring revenues. (see graph below)
• A tax increase from 20 percent to 50 percent at the lowest tier, with the added penalty of losing a number 3 amateur draft pick and a number 3 international draft pick (although there is no international draft yet)
• A second tier penalty at $234 million with a 75% tax, and draft penalties of second picks in amateur and international drafts
• A third tier penalty at $254 million with a 100% penalty and draft penalties of first picks in the amateur and international drafts
• There would be no escalating penalties for second or third time tax payers, as those penalties are advanced to the first year

MLB owners know very well that the players will never accept such proposals. In fact, one of the stated goals of the players in the current CBA talks is to “remove artificial restraints on competition”, a direct reference to the CBT. This proposal adds even more restraints at the top. Meanwhile, the sides are nowhere near each other in terms of creating a salary floor as a potential countermeasure.

MLBPA’s proposal

The players have proposed keeping the current tax rates including surtaxes, but increasing the tax thresholds and removing draft penalties. The Athletic reports:

• $245 million lowest threshold in 2022. keeping a 20% tax for first time offenders, 30% second time, and 50% third time
• The lowest tier would increase $7 million each year of the CBA, to $252 million in 2023, $259 million in 2024, $266 million in 2025, and $273 million in 2026 (2.8 percent per year)
• The second tier is $20 million higher in each year and the third tier is $40 million higher than the first, so the second and third tiers in 2022 would be set at $265M and $285M.
• The surtaxes for second time offenders would be 12 % more and for third timers wold be 42.5 to 45% more.
• There would be no draft penalties or international bonus pool consequences

Under the players’ proposal, the tax structure is very similar to the current scheme, with higher tax thresholds and no added penalties. The top tax rate would be 95% for a third time payer exceeding the highest threshold.

Is there a solution?

Despite the name, the owner’s purpose in implementing the CBT is to restrict spending. In fact, a salary floor, or tax on lower payrolls would do more to improve competitive balance than harsher penalties on the upper end of the pay scale.

The bottom line is that owners want to restrict spending and the players want to remove restrictions. Even when owners proposed a salary floor at $100 million, but with a lower tax threshold of $180 million, the players rejected it and haven’t mentioned a salary floor since. The union’s knee jerk reaction to any talk of a salary floor is based on the idea that it is the flip side of a hard salary cap, even if the CBT provides a form of de facto salary cap already.

This problem can be solved once the more extreme terms of the owners’ proposal are taken off the table. The owners are lobbying for maintaining the status quo in almost every area of the CBA, yet they want expanded playoffs, an international draft, and advertising patches on uniforms, but they’re not offering the players much in return.

The gap between $245 million and $214 million can be closed. Merely adjusting for inflation, which was 7 percent in 2021, would bring it to $225 million and the midpoint between the two proposals is $230 million. Following is one suggestion:

$225 million+ payroll = 25% tax on the overage

$250 million+ payroll = 50% tax

$275 million+ payroll = 75% tax

$300 million+ payroll = 100% tax

In this model, thresholds increase modestly while tax rates increase at each tier, especially on the upper end. Thresholds would have to increase by $5 million per season (about 2 percent), or be adjusted for inflation (which is probably more). There are no draft penalties or escalators here for going over the threshold in successive seasons, so there is no incentive to slash payroll to “reset” the tax rate.

Ideally, there should also be a tax on payrolls under $100 million, if the players haven’t let that ship sail away. Demanding that revenue sharing dollars be spent on player salaries would also force teams to bring their payrolls up to competitive levels.

The players have few chips to bargain with, and they don’t want to spend them to maintain the status quo. We can only hope that the owners’ CBT proposals are just another stalling tactic, a card that will eventually be played in negotiations, because there will be no baseball until the attempt to increase penalties is taken off the table.