The Collective Balance Tax, A Real Solution, and How it Effects the Diamondbacks

When you start out with 30 billionaires in a room who got all their money in a number of different ways and think because they are billionaires their way is always the right way, and you add at least 1 representative per club, most of which are millionaires and are in the top percentage of their field, it is going to be difficult to get anything pertaining to money worked out. I would have loved to be the proverbial fly on the wall in the negotiation room when all the arguing was going on, or in the case of the MLBPA and MLB, when there was little to nothing going on. We all know that the biggest sticking point in these negotiations from day 1 was and now that we have canceled regular-season games still is, the Collective Balance Tax. But, after we define it, see where both sides currently are, figure out who has paid it and how much, and where the money goes...I am going to let you know what the powers that be could do to actually allow the Collective Balance Tax to IMPROVE the game of baseball.

THE DEFINITION

As defined by Major League Baseball on their own website; Each year, clubs that exceed a predetermined payroll threshold (don't you dare call it a salary cap) are subject to a Competitive Balance Tax -- which is commonly referred to as a "luxury tax." Those who carry payrolls above that threshold are taxed on each dollar above the threshold, with the tax rate increasing based on the number of consecutive years a club has exceeded the threshold. A team's Competitive Balance Tax figure is determined using the average annual value of each player's contract on the 40-man roster, plus any additional player benefits (those would be things like players on injured reserve and players who are in the minors, not on the 40 man roster with major league contracts). Every team's final CBT figure is calculated at the end of each season. 

The threshold was $189 million from 2014-16, but the following increases were put in place per the 2017-21 Collective Bargaining Agreement:

2017: $195 million

2018: $197 million

2019: $206 million

2020: $208 million

2021: $210 million

If you play without an agreement, you’re vulnerable to a strike at any point in time, what happened in 1994 is the MLBPA picked August, when we were most vulnerable because of the proximity of the large revenue dollars associated with the postseason. We wanted to take that option away and try to force the parties to deal with the issues and get an agreement now, which is what we continue to believe is best for the fans.

A club exceeding the Competitive Balance Tax threshold for the first time must pay a 20% tax on all overages. A club exceeding the threshold for a second consecutive season will see that figure rise to 30%, and three or more straight seasons of exceeding the threshold come with a 50% luxury tax. If a club dips below the luxury tax threshold for a season, the penalty level is reset. So, a club that exceeds the threshold for two straight seasons but then drops below that level would be back at 20% the next time it exceeds the threshold. Clubs that exceed the threshold by $20MM to $40MM are also subject to a 12% surtax. Meanwhile, those who exceed it by more than $40MM are taxed at a 42.5% rate the first time and a 45% rate if they exceed it by more than $40MM again the following year(s). Beginning in 2018, clubs that are $40MM or more above the threshold shall have their highest selection in the next Rule 4 Draft moved back 10 places unless the pick falls in the top 6. In that case, the team will have its second-highest selection moved back 10 places instead.

I know there was a lot to take in there but, please note a few things that are very important and will figure prominently in our discussion; 1) The only money a team pays tax on is the amount above the CBT 2) It is not players on the 25, 26 or "active" rosters, it is players on a teams entire 40 man roster, 3) The penalties increase as the number of consecutive years a team goes over the CBT threshold increases. But the penalties reset if the team stays under the CBT threshold.

WHO HAS PAID THE TAX

Since 2003 until 2019 only 8 different teams have paid the tax. The Los Angeles Angels of Anaheim have paid once in 2004 and it cost them $927,059. The Washington Nationals have paid twice in both 2017 and 2018 costing them a combined $3.84MM. The Detroit Tigers paid 3 times in 2008 and back to back years in 2016-17 totaling $9MM. The Chicago Cubs paid the tax in 2016 and 2019 costing them a total of $11MM. The Boston Red Sox have paid the tax 11 separate seasons 04-07, 10-11, 15-16, 18-19 for a total of $50.5MM. The Los Angeles Dodgers paid from 13-17 costing them a total of $150MM and of course the New York Yankees paid the tax from 2003-2017 and in 2019 costing them a staggering $348MM.

WHERE DOES THE TAX MONEY GO

On December 2 in each contract year, the Commissioner's Office notifies every team that exceeded the tax threshold that they must pay their tax by January 21 of the following calendar year. The first $13 million will be used to defray clubs' funding obligations under the MLB Players Benefits Agreements. Of the remaining sum, 50% of the remaining proceeds collected for each Contract Year, with accrued interest, will be used to fund player compensation as described in the MLB Players Benefits Plan Agreements and the other 50% shall be distributed to clubs that did not exceed the Base Tax Threshold in that Contract Year. Until I researched this, I always just assumed that all the tax penalty money was just divided up evenly between the bottom-feeding clubs. I did not know it paid for such things as benefits and compensation.

Why is this such a sticking point?

From 2003 to 2019, the last full season before the COVID-19 pandemic, league revenues grew 167%, from $3.88 billion to $10.37 billion, according to data published at Statista in an article from The Score. The base tax threshold rose 76% in that period, from $117 million to $206 million. The union requested the Collective Balance Tax threshold to begin at $238 million and include annual increases of $244 million, $250 million, $256 million, and $263 million during the final year.       

MLB proposed increasing the tax rates to 50%, 75%, and 100%, regardless of whether the team was a first-time or repeat offender, plus added draft-pick penalties for going over the second and third tiers. Exceeding the top tier would also mean losing a first-round draft pick. That is a big jump from 20%, 30% and 50% like it was in the last agreement. Players have no interest in any of that.

• Not surprisingly, an Associated Press analysis of 2021 Opening Day salaries found that average salaries fell 4.8% compared to the previous full season of 2019 and 6.4% since average salaries peaked in 2017, the first year of the most recent CBA. In a piece written by Gordon Wittenmyer of NBC Sports Chicago. A more telling salary trend identified in the same AP report: is that the median salary (midpoint between the highest and lowest salary) dropped 18% since 2019, to $1.15MM and 30% since a record-high median of $1.65MM in 2015. In other words, the salary disparity between the top-paid players and the vast numbers of those paid less than $1MM is trending more dramatically than the drop in the overall share of industry revenue.
• The MLBPA wants the veterans to still get paid like they were young (like the 3 years $130MM contract Max Scherzer just signed with the Mets), and increase not only the minimum salary but also the players in their middle years to be compensated better. The league minimum salary in 2021 was $570,500. In the new CBA, the league has agreed to raise that minimum salary to $615,000 while the MLPA is looking for a minimum of $715,000 according to The Athletic's Evan Drellich. The MLBPA originally started their negotiations wanting a 36% increase on the minimum salary to $775,000. But in 2021 the average player salary was 7 times higher than the minimum salary at around $4.17MM according to an article published by Christina Gough for statista.com.

In general, a major-league career is short-lived compared to many other professions. In a recent study done by the New York Times the average service time in the majors is 5.6 years. As a fan, it is hard for me to either feel sorry for or get behind either party in this debate. We all know the owners are flush with cash, and even though I tend to side with the players, I also can't feel sorry for a person who even if they only make the minimum for the minimum amount of years (which would be $615,000 for 3 years) that is still over $1.5MM for 3 years. But what if I said that I could come up with a way that should make both parties happy and help the game? Keep reading.