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MLB Reportedly Proposes $180MM First Luxury Tax Threshold, $100MM Salary Floor To MLBPA

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With the current collective bargaining agreement set to expire on December 1, 2021, Major League Baseball and the MLB Players Association have been in talks regarding the potential structure of the next CBA. MLB made its first core economic proposal to the MLBPA this week, report Evan Drellich and Ken Rosenthal of the Athletic.

MLB’s proposal included a lower threshold for taxes on team spending, with teams subject to a 25% tax on any spending above $180MM, report Drellich and Rosenthal. There would be three additional tax brackets at some point above that mark (for a total of four tax brackets), with the tax rate increasing as teams hit those higher overage levels. As a trade-off, MLB proposed that teams be subject to a $100MM salary minimum. MLB’s entire proposal was presented as a package deal as opposed to a series of one-by-one potential provisions.

For comparison’s sake, the current CBA contains three tiers of luxury tax penalization. For the 2021 season, the first tier begins at $210MM and contains a 20% tax on overages up through $230MM. There’s a 32% tax on overages between $230MM and $250MM and a 62.5% tax on any payments beyond $250MM. Those penalties escalate for teams that pay the tax in multiple consecutive seasons.

(Under the current CBA, a team’s luxury tax number is calculated by tabulating the average annual values of its financial obligations — not its actual payroll in any given season. It’s not clear whether MLB’s proposal would continue to be based on contracts’ AAV’s as opposed to current-year obligations).

The luxury tax has become an obvious deterrent to spending for most high-payroll teams. Only the Dodgers have been comfortable blowing by the thresholds to incur the loftiest penalties associated with the third bracket this season. Teams like the Padres, Yankees, Phillies, Red Sox and Astros all have CBT numbers hovering right around the $210MM lowest threshold and either contemplated or were seemingly dead-set upon avoiding the tax during their offseason and trade deadline maneuvering. Of that group, it seems only San Diego might have exceeded the threshold by a narrow margin, although it’s not yet clear that’s the case. Even if the Friars did go over the first threshold, they didn’t exceed it by enough to incur particularly meaningful financial penalties this year.

Given that the luxury tax has served as a de facto salary cap for some of the league’s top spenders, it doesn’t seem likely the MLBPA will be particularly enamored with the idea of lowering that first threshold such a substantial amount. Indeed, it’s widely expected the MLBPA will be pushing for a dramatic increase to those thresholds during the current session of CBA talks. MLB also offered the union an option to leave the luxury tax status quo, report Drellich and Rosenthal, although it’s not clear what other conditions would be involved in that scenario.

MLB is obviously aware that getting the MLBPA’s assent on lower tax thresholds will be extremely difficult (if not impossible). That’s likely the reason for the inclusion of the proposed salary floor, with the league reasoning that setting a minimum payroll would increase some teams’ spending and more equally divide team payrolls for competitive balance reasons. Twelve teams (Pirates, Indians, Marlins, Orioles, Rays, Mariners, Tigers, A’s, Royals, Rangers, Diamondbacks and Brewers) entered the 2021 season with an actual payroll below $100MM, in the estimation of Cot’s Baseball Contracts. (Seven had an estimated luxury tax payroll below $100MM). The league’s proposal contained some method of redistributing tax money collected from the higher spenders to spur spending among those lowest-payroll clubs, Drellich and Rosenthal report.

Of course, there’s plenty about the league’s proposal that’s unknown. Drellich and Rosenthal note that it’s unclear how the league would penalize teams that don’t reach the spending minimum, or even in what season that minimum would go into effect. It’s also debatable whether the presence of a salary floor would actually increase free agent spending or truly disincentivize teams from conducting long-term rebuilds. It’s equally easy to envision a low-payroll rebuilder acquiring an underperforming veteran player on an expensive contract — along with prospect talent — from a high-payroll club looking to duck under the tax threshold.

For instance, the Padres and Rangers reportedly had pre-deadline discussions about a deal that would’ve sent first baseman Eric Hosmer (who’s on an eight-year, $144MM contract) and top outfield prospect Robert Hassell III to Texas to acquire Joey Gallo. That obviously didn’t come to fruition, but it’s a useful illustration of the creative ways teams could work around the lower tax thresholds/salary floor. The Rangers picking up Hosmer would’ve pushed their payroll up over $100MM while shedding money from San Diego’s books — without having any direct impact on the free agent market.

Of course, there’s still a few months for the two sides to bandy about proposals before the expiration of the current CBA. The MLBPA made its first proposal back in May, report Drellich and Rosenthal, with one emphasis being on earlier arbitration eligibility for younger players.

There’s obviously a significant amount of each proposal that hasn’t yet been made public. Drellich’s and Rosenthal’s report sheds some early light on both sides’ vision for the long-term future of the sport, but there’ll be plenty more back-and-forth between the league and the MLBPA over the coming months in what’s widely expected to be a fairly contentious negotiation. The full piece is worth a perusal for subscribers to the Athletic interested in the sport’s labor dynamics.
 
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