Why baseball's big spenders now risk a 92 percent luxury tax

New deal continues labor peace in baseball (2:41)

Tim Kurkjian breaks down how MLB players and owners were able to reach agreement on a five-year labor contract. (2:41)

We have a new collective bargaining agreement between the players and the owners, and while it will take a few days to digest everything and analyze the impact, it appears the new deal primarily tweaks many aspects of the existing CBA. One of the most important changes, however, is an increase in the luxury thresholds and penalties that should serve to help small-market teams and hold down salaries. In other words, this item looks like a clear win for the owners (except for the owners of the few teams willing to spend over the luxury tax).

Jayson Stark reports:

    If the Dodgers don't get their 2017 payroll under $235 million, it appears as if their tax rate would rise to an astounding 92 (yes, ninety-two) percent as a third-time offender subject to a 50 percent tax plus a 42 percent "surtax" for being $40 million over the threshold. Wow. Two different agents used the term "soft cap" on Wednesday night to describe the effect of a rate that high. But no matter what you call it, it's the strongest deterrent to spending to ever appear in a baseball labor agreement. There's no debate about that.

The old luxury tax threshold was $189 million. That jumps to $195 million for 2017, then to $197 million, $206 million, $209 million and $210 million through 2021, the final season of the agreement. The Dodgers, who spent $291 million on payroll in 2015 (and paid $43 million in luxury tax), spent more than $270 million in 2016 (final figures and tax payments haven't been released). So if the Dodgers carry another $270 million payroll in 2017, they would be taxed at a higer rate on payroll spent over $195 million. This is how it would break down:

Total over threshold: $75 million

50% tax on first 20 million over: $10 million

50% tax and 12% surcharge on next $20 million over: $12.4 million

50% tax and 42% surcharge on the final $45 million over: $41.4 million

Total tax bill: $63.8 million

The Dodgers' overall tax payments from 2013 to 2015 totaled $81.6 million.

According to Baseball-Reference.com, the Dodgers' current estimated payroll for 2017 is about $193 million, but that's without the possible re-signings of Justin Turner and Kenley Jansen, not to mention any other high-salaried additions. The Dodgers, however, don't even own the highest estimated payroll right now. The Tigers are at $197 million; the Red Sox are close behind at $191 million. That payroll figure is one reason we're hearing reports about the Tigers looking to trade some of their veterans.

(Along with the Dodgers, the Yankees, Red Sox and Giants all paid a tax bill in 2015, with the Yankees paying $26.1 million and the Red Sox and Giants each paying less than $2 million. In 2016, the Dodgers and Yankees went over the threshold again, the Red Sox and the Tigers have likely exceeded it, and the Rangers were also pushing up against it as well.)

The owners like to sell the tax as a "competitive balance" tax or even as a form of social welfare. Of course, it also serves to limit the growth of player salaries, since it can act as a de facto salary cap, for the most part restricting the spending of the richest teams. The Yankees, for example, aren't spending much more on payroll than they did in 2005, when they spent more than $208 million. As Nathaniel Grow writes at FanGraphs:

    ... the luxury tax is a major factor in the precipitous decline of the players' share of total league revenues over the last 10-15 years. In particular, whereas the luxury-tax threshold was originally set at a level approximating roughly 90% of the average MLB team’s share of overall league revenues back in 2003, in recent years it has dropped to a level representing less than 65% of the average team's revenue share.

In other words, the rate of overall league revenue has increased at a higher rate than the increase in the tax threshold. The new agreement reaches an 11 percent increase in the threshold in the fifth year over the 2016 number, but league revenues have been increasing much faster. Forbes reported that 2015 revenue was an estimated $9.5 billion, up $500 million from the year before, or about a 5.5 percent increase in one season. Revenue for 2016 was expected to climb for the 14th year in a row.

That said, when Brett Cecil is signing a $30 million contract, Jason Castro is getting $24 million and guys like Pablo Sandoval turn into $95 million pumpkins, the players are never going to win the public war on salaries, even if their share of revenue is declining. The success of small-market teams like the Indians, Royals and Pirates in recent seasons and the Athletics and Rays in the not-too-distant past helps the owners spin that the luxury tax is working to create more competitive balance (although the Indians were the only team in the bottom half of payroll to make the playoffs in 2016).

Bottom line: The Dodgers in particular are up a small creek for 2017. It will be interesting to see how the new CBA affects their offseason moving forward.