The History of the Competitive Balance Tax
Today, for the first time since the lockout began on Dec. 2, 2021, Major League Baseball will finally make a proposal to the players’ union regarding the major economic issues that are at the center of the current labor dispute. At this point, you know what they are: time of service, free agency requirements, arbitration, and luxury tax, to name a few. Here at Pinstripe Alley we have written extensively about these topics and the negotiation between the league and the union, including Esteban’s two articles from early November on the status of preliminary negotiations and the union’s second offer to the league – two of the pieces which, unfortunately, still largely reflect the current state of the negotiations, considering that they were written two months ago.
But how did we get here? How did these seemingly procedural issues become the hot topics they are today? Over the next few days, we’re going to take a journey through the history of “fundamental economic issues,” both inside and outside of Major League Baseball, to better unravel the disconnect between players and society. property. We’ll start with something that has been very relevant to the New York Yankees since its inception in the mid-1990s: the Competitive Balance Tax, colloquially known as the Luxury Tax.
Not surprisingly, CBT dates back to the sport’s last work stoppage, the players’ strike of 1994-95. Its roots, however, can be found much earlier, in the movements of the 1980s and 1990s to implement salary caps in professional sports, which occurred after the advent of free agency in the 1970s and 1980s.
The will of the owners of a salary cap is historically very clear. Despite its stated goal of ensuring a competitive balance by preventing the wealthiest teams from stockpiling all the best players in free agency, a salary cap – whether it’s a hard cap, like the one used by the NFL, or a soft cap, like the one that exists in the NBA – is specifically designed to reduce free agency fees for team owners. With two exceptions, in the early days of the NHL and in the 1940s for the NBA, salary caps were a direct result of increases in free agency payrolls. After years of a free agency illusion that was essentially prevented by heavy draft pick compensation (teams could lose up to two first-round picks for signing a free agent), the NFL finally allowed unrestricted free agency in 1993 in exchange for a cap. — the contracts, however, remained unsecured, as is the case to date.
Major League Baseball was no exception to this trend. During CBA negotiations in 1989, the league proposed a salary cap in an agreement that was so favorable to the team that it would have been dead on the table even if the union was open to a cap. While the NBA’s salary cap guaranteed 53% of league revenue to players, MLB only offered players 43% of ticket and broadcast revenue, which themselves accounted for 82% of overall revenue. set the baseline at only 35% of overall turnover. Needless to say, it was an absolute failure, and when the 1990 lockout happened, a salary cap was one of the first demands dropped.
However, the owners would not accept defeat and would try to implement a salary cap next time, which would directly lead to the 1994–95 players’ strike. In the end, the league was unable to implement one, and despite union reluctance – they thought it would be a disguised cap – a luxury tax was implemented instead. . A compromise between the league’s insistence on a salary cap and union resistance to it, the initial luxury tax penalized teams with the top five salaries in a given year, fining them for every dollar. spent in the middle period between the fifth and sixth highest payroll. This system was in place from 1997 to 2000 and was allowed to expire after the 2000 season.
Beginning in 2003, the luxury tax system returned, largely in the format found today. As part of CBA bargaining, the league and union set a threshold – originally $117 million, rising to $136.5 million in 2006. Teams that exceeded that threshold were given impose a penalty of 17.5% for each dollar above the threshold, increasing to 30, 40, and 50% for each subsequent year above. Subsequent labor agreements increased the luxury tax cap (to $162 million in 2009, $178 million in 2011, and $189 million in 2014).
The 2016 ABC saw the first major changes to the luxury tax system since 2002. The increase over the ABC’s lifetime, from $195 million to $210 million, was small, although it actually represented an increase over the increase between the two previous agreements. More importantly, the penalties have been increased. Teams that exceeded the under-$20 million threshold were penalized 20% for the first offense, rising to 30 and 50% in subsequent seasons. Exceeding the limit by $20-40 million incurs an additional fee (12.5%), while teams that exceed it by more than $40 million pay a 42.5% penalty and lose 10 places in the first round amateur draft.
Now, does the competitive equilibrium tax actually work as intended? Well, it depends on whether you look at his stated intention or his place in the history of employer/employee relations. Whether or not it is as the name suggests and increases competitive equilibrium is up for debate, largely because what actual competitive equilibrium means is highly uncertain (for anyone looking to read this, there is a good amount of articles that can be found on the subject on Google Scholar, although many of them are unfortunately behind a paywall). Seen solely as a way to cap player salaries, CBT is a resounding success, as team payrolls have largely stagnated over the past decade and have fallen since 2017.