Every Luxury Must Be Paid For

As Spring Training for the upcoming MLB season continues, some marquee free agents were recently signed to teams looking for future success. Manny Machado signed a 10 year contract for $300 million with the San Diego Padres. At the time of the signing, it was the largest contract ever signed by a free agent in any U.S. sport. However, he did not hold this record for long. Eight days later, another free agent player made history with the new largest free agent contract in U.S. history. Bryce Harper, now with the Philadelphia Phillies, signed for 13 years for $330 million.

Major League Baseball is the only major professional sports league in the United States that does not utilize a salary cap for its teams. In sports, a salary cap is a collectively bargained amount of money that teams can spend on player contracts. Proponents of the salary cap assert that by placing this limit, teams can keep overall costs down and the league is able to maintain a more competitive balance.

Instead of using a salary cap, the MLB’s collective bargaining agreement (CBA) calls for the usage of a luxury tax. The MLB luxury tax, also known as the competitive balance tax (CBT), functions similarly to other salary caps in other leagues. The luxury tax sets a threshold for teams that cannot be crossed without a fee. For the upcoming 2019 season, that threshold is set to $206 million. This means that if a team surpasses $206 million in player salaries for a given season, the team will face a certain percentage of excess fees that increases with each violation of the threshold. In this way, teams are able to exceed a “salary cap” set forth by the league, but only at a premium.

Last year, the Boston Red Sox were one of only two teams (along with the Washington Nationals) to go over the luxury tax limit. The Red Sox paid $239.5 million for their payroll, resulting in a $11.95 million luxury tax bill (https://www.cbssports.com/mlb/news/only-red-sox-nationals-owe-luxury-tax-in-2018-as-mlb-teams-combine-for-smallest-bill-in-15-years/). In fact, the 2018 season resulted in the smallest amount of luxury taxes paid since the year 2003. The Red Sox went on to win their ninth World Series title.

Some argue that the team owners in big markets (like Boston, New York or Los Angeles) are able to spend more money on the best talent and, thus, enjoy more success for their teams. Although, spending the most money does not necessarily guarantee team success. In the 2015 season, the top nine teams in terms of payroll all failed to win a playoff series (https://www.usatoday.com/story/sports/mlb/2015/12/01/los-angeles-dodgers-luxury-tax-record-payroll-new-york-yankees/76612114/).

The 2015 World Series Champions? Coming in well below the luxury tax limit, it was the small market Kansas City Royals.

Perhaps you do not have to spend the most amount of money to enjoy the most amount of success.


One Reply to “Every Luxury Must Be Paid For”

  1. I wonder where the collected luxury tax money goes? Could it be used to benefit the teams with cheaper rosters and smaller markets?

Leave a Reply

Your email address will not be published. Required fields are marked *