The early analysis of MLB's new collective bargaining agreement between the players and the owners is that the owners “won,” primarily because the new luxury-tax thresholds didn’t increase much and the penalties for going over are viewed as severe, with stuff like “92 percent tax rate” on high payrolls bandied about.
Could teams actually pay a 92 percent luxury tax?! Yes -- and no. Here's the math, using the 2014-16 payrolls of the Dodgers and Yankees -- baseball’s biggest spenders -- against the 2017-19 tax thresholds as case studies.
2017 threshold: $195 million
2018: $197 million
2019: $206 million
These are the penalties:
• First time over: 20 percent tax on the overage
• Second time: 30 percent
• Third time: 50 percent
There are also surtaxes:
• Between $20 million and $40 million over the threshold: 12 percent
• $40 million over: 42.5 percent
• Second time $40 million over: 45 percent
The important thing to know here is the 42.5 percent tax rate, for example, is only on the dollars spent beyond the $40 million already above the threshold. So if the threshold is $195 million and a team spends $236 million, a potential 92.5 percent tax rate is applied only to the $1 million over $235 million, not the entire $41 million over the threshold.
OK, let's see how this works in our theoretical examples.
2014/2017: $257.2 million payroll ($195 million threshold)
Payroll: $62.2 million over threshold
Tax: 20 percent for first time over ($12.4 million)
Surtax: 42.5 percent on $22.2 million ($9.4 million)
Total tax: $21.8 million
2015/2018: $291.1 payroll ($197 million threshold)
Payroll: $94.1 million over threshold
Tax: 30 percent for second time over ($28.2 million)
Surtax: 45 percent on $54.1 million ($24.3 million)
Total tax: $52.5 million
2016/2019: $275 million estimated payroll ($206 million threshold)
Payroll: $69 million over threshold
Tax: 50 percent for third time over ($34.5 million)
Surtax: 45 percent on $29 million ($13.1 million)
Total tax: $47.6 million
That's a three-year tax bill of $121.9 million. By comparison, from 2013 to 2015, the Dodgers had a three-year total of $81.6 million. But about $70 million of that was from just 2014 and 2015. An estimated tax of $40 million in 2016 would push their three-year 2014-16 total to $110 million -- not much lower than our $121.9 million figure above.
So while reports of "92 percent tax rate" sound onerous, the highest tax rates aren't really all that different from the previous CBA. That doesn't mean the thresholds shouldn't have been higher, but the tax rates shouldn't create a deflation of player salaries. Yes, if revenues continue to grow, it's possible that the players' share of that revenue will continue to decrease, but that's a complex issue that goes beyond just the competitive balance tax. (For example, changing aging patterns means older players might simply not got paid as much.)
2014/2017: $218.5 million ($195 million threshold)
Payroll: $23.5 million over threshold
Tax: 20 percent for first time over ($4.7 million)
Surtax: 12 percent on $3.5 million ($0.4 million)
Total tax: $5.1 million
2015/2018: $223.6 million ($197 million threshold)
Payroll: $26.6 million over threshold
Tax: 30 percent for second time over ($8 million)
Surtax: 12 percent on $6.6 million ($0.8 million)
Total tax: $8.8 million
2016/2019: $220 million estimated payroll ($206 million threshold)
Payroll: $14 million over threshold
Tax: 50 percent for third time over ($7 million)
Total tax: $7 million
So the Yankees' three-year tax bill would be $20.9 million.
As you can see, the penalties for going way over can add up, but the penalties were severe in the previous CBA as well, at least for repeat offenders. At the minimum, you can certainly see why the Dodgers are aiming to get their payroll under $235 million, or at least not much beyond that for 2017.