Page 7

Luxury tax payments and other miscellaneous funds are also put into the pot. The pot is then redistributed amongst the thirty teams, with poorer teams receiving larger portions of the pot. While the league’s revenue sharing system succeeds in redistributing wealth, it does not significantly improve parity amongst the teams. Rich teams still spend large amounts of money on team payroll, regardless or revenue sharing. Moreover, teams receiving large portions of the pot have often misused the funds. Rather than investing in a higher payroll and signing better talent, MLB organizations have, in the past, used the shared revenue to otherwise increase profits. The new CBA requires that teams spend a portion of shared revenue on payroll. The effects of this stipulation have yet to be seen, however. More importantly, the league’s CBA implements a luxury tax. Organizations that spend over a specified amount of money in total payroll face a monetary penalty for their actions. The luxury tax threshold varies from year to year and is stipulated in the CBA. For the upcoming 2012 season, the threshold is $178 million. The amount paid depends on the offense. First time offenders must pay 22.5% of salaries above the threshold. Second times offenders must pay 30% and third (and sequent) time offenders must pay 40% of salaries above the threshold. While the luxury tax attempts to deter teams from spending huge amounts of money, it has been wholly unsuccessful. Since the tax was first implemented in 2003, only four organizations have been

penalized. Over the nine-year period, the New York Yankees have paid over $192 million in penalties. The Boston Red Sox have been penalized approximately $15 million, the Los Angeles Angels of Anaheim $1.3 million, and the Detroit Tigers under $1 million. Why has the luxury tax proven ineffective? The most likely answer is that the threshold has been placed too high. The average team payroll at the beginning of the 2011 season was approximately $93 million, just over half of the luxury tax threshold. Moreover, only three teams were even close to the limit: the New York Yankees ($202.7 million), the Philadelphia Phillies ($173 million), and the Boston Red Sox ($161.8 million). What does the league need to do to achieve competitive balance? The league’s current luxury tax has done little to improve the league’s competitive balance, but would the league benefit from a different, more stringent system? Should the league adopt a salary cap? Of the nations four major professional sports leagues, Major League Baseball is the only league without a true salary cap. The NHL adopted a hard salary cap for the 2005-06 season. Under the new CBA adopted in the summer of 2011, the NFL also adopted a hard salary cap of $120 million and a salary floor of $108 million. The NBA’s salary cap is a “soft” cap; teams cannot spend above a certain payroll threshold except in the case of certain “exceptions,” included in the league’s new collective bargaining agreement. For example, under the “Larry Bird” rule, teams are allowed to spend above

the maximum payroll in order to re-sign their own free agents. Of the three contrasting leagues, the system currently in place under the NFL’s CBA provides the best solution the league’s concerns. A simple hard salary cap would be ineffective: unless the league were to adopt a lower maximum than the luxury tax threshold, the cap would only affect a few teams. A soft cap would also be fairly pointless—there are too many exceptions. With a salary cap and a salary floor, however, not only would teams be disallowed from generating a high payroll, but they would also be banned from spending too little money on major league talent. The system could be particularly effective in MLB, where astonishingly low payrolls are almost as big of a problem as high payrolls. Unfortunately, the league seems particularly hesitant towards change in this regard. In the recent labor talks that concluded in early December, team owners and the league’s players’ association debated the institution of a luxury tax in reverse. Under the proposed system, there would be a thresh-

old at the lower end of the payroll scale. Teams that spend below the threshold would be hit with a tax, just as teams that spend above the current luxury tax threshold are penalized. Not surprisingly, the system was not adopted. Team owners—particularly the owners of the league’s poorer teams— want to ability and opportunity to keep costs down. With a new CBA adopted only a month ago, the league’s luxury tax system will remain in place for at least the next five seasons, effectively ensuring that a competitive balance will not be achieved.


Jeff Francoeur, right fielder for the Kansas City Royals, plays for a franchise which had the smallest payroll in the MLB for 2011. The first and last time the Royals won the World Series was in 1985.

January 2012




NBR Winter 2012 Newsletter  
NBR Winter 2012 Newsletter