The Competitive Balance Tax

Remember 1994, the season that seemed poised to see the White Sox vs the Yankees for the right to take on the mighty Montreal Expos in the World Series? While fans everywhere were paying attention to the games on the field, the players and owners were paying attention to the games unfolding, “behind the curtains.” Nobody wanted to think about an MLB strike/work stoppage, but the season was not going to end the way everyone thought.

 

In 1992, the owners led by Bud Selig and Jerry Reinsdorf, forced then commissioner Fay Vincent out because he hadn’t done enough to help the owners of small market teams, and in their opinions didn’t side with the owners often enough. The help Bud and Jerry were looking to create, was a salary cap. The salary cap was opposed by big market owners and MLB players alike. The players were obviously not too high on a salary cap since being granted the right of, “free agency” in 1976. Free agency allowed the player more freedom to negotiate their own contract and choose a team/city they wanted to play for. The owners; however, wouldn’t budge on creating a salary cap. As customary of negotiations, both sides couldn’t come to an agreement and on August 11th, 1994 the players played their last game of the season. The season ended in a lost cause as the players organized to strike and both sides continued to negotiate, but could not find common ground and the postseason was cancelled on September 14th. 

 

The players returned for the shortened 1995 season (144 games), and in 1996 players and owners agreed to the new collective bargaining agreement. The new agreement included the Luxury Tax, the precursor to the Competitive Balance Tax. The Luxury Tax stated that the top five salary teams in each year would pay a 34% fine on each dollar a team spent beyond halfway between the salaries of the 5th and 6th team. For example, if the 5th highest salary team had a payroll of $100 million and the 6th highest salary team had a payroll of $98 million, the top 5 teams would pay 34% on each dollar they spent over $99 million.

 

As time progressed, the Luxury Tax morphed into what MLB uses today, the Competitive Balance System.The new CBS (as we will call it), was developed in 2002. The difference between the CBS and the LT, is that instead of having teams (small market clubs, MIL-TB-CLE) be beholden to what other teams spent (big market clubs, NYY-BOS-LAD) there was a solid number put on it. A predetermined number that teams would have to stay under or pay a percentage of every dollar that the team was over that threshold.  The threshold started at 117 million in 2003, compared to the 206 million that it will be in 2019. First time offenders would pay a fee of 17.5% of excess payrolls (later increased to 22.5%), second time offenders would pay 30%, and third time offenders would pay 40%. In the 2012 CBA, after seeing teams go over more than three times, the agreement added a 50% taxation level when teams went over the limit four or more times. Under the 2016 CBA, first time offenders would pay a fee of 20% on the dollar, second time offenders would pay a 30% on the dollar, and third or subsequent time offenders would have to pay 50% on the dollar (These offenses must be in consecutive years for these percentages. If a team falls below the threshold one year the penalty re-sets the next year to the “first offense”).

Threshold vs. Year

Let’s look at the Yankees to see the financial implications for this tax, you are allowed to go over, but in the Yankees case they went over every year from 2003 to 2017. Costing the Bronx Bombers an extra 319.6 million dollars in overages. The first 13 million of tax money is used to fund player benefits and half of the remainder will be used to fund player Individual Retirement Accounts. The other half will be given to teams not over the tax threshold.

 

Now your asking yourself, why do I care, its billionaires losing money by paying millionaires more than an arbitrary number. How does this really affect my favorite organization? Well, beginning in 2018, clubs that are $40 million or more above the threshold: have their highest selection in the next amatuer draft moved back 10 places, (unless the pick falls in the top six.) In that case, the team will have its second-highest selection moved back 10 places instead. The Red Sox, last years World Champions, were more than 40 million dollars over the threshold and will be the first team to have a draft penalty because of it, they were scheduled to draft 33rd overall. Next year’s tax starts at $206 million, and Boston’s rates will rise from 20 percent to 30 percent on the first $20 million over, 32 percent to 42 percent on the next $20 million and 62.5 percent to 75 percent on any amount over $246 million. GM Dave Dombrowski says they will be over all three levels again.

 

Let us know what you think, leave a comment below follow us on Twitter @SidedSox and on our Facebook page. You can also email us at SoxSided@gmail.com with any questions, comments, complaints, or things you would like to see us take a swing at. I can only speak for myself but I feel comfortable saying that we would not only not mind, but enjoy doing some mail bag articles. 2018 is coming to a close and we are really finding our footing and with your help and participation we are going to have a really good 2019. As always thanks for reading.

 

Mort

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