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What about a reverse luxury tax?

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U.S. Bureau Of Engraving And Printing Oversees Dollar Bill Production Photo by Mark Wilson/Getty Images

Here we are, mid-February, and some of the premier free agents (and two of them generational talents) have yet to sign.

Some will be quick to point to collusion or that no team wants to spend big money anymore, a point that I don’t think is all that well founded (the bulk of the missing money is in the middle tier of free agents, not the top or lower end).

There has been some ideas bandied about that the luxury tax (a harsh penalty system for teams spending money above a soft cap) has worked as a de facto salary cap:

Under the most recent collective bargaining agreement, however, something unexpected has happened: The CBT appears to have turned into a de facto salary cap, with a diminishing number of teams willing to cross it.

I’m not quite sure this is true. The evidence would be that if teams that had historically spent large sums of money on payroll suddenly stopped spending that amount. Now some teams, like the Yankees and Dodgers, have publicly said that they are going to try to get under the luxury tax, especially now given how harsh the penalties are.

So what does that tax end up going towards? Per the CBA:

(a) The first $13 million of proceeds collected for each Contract Year shall be used to defray the Clubs’ funding obligations arising from the Major League Baseball Players Benefit Plan Agreements. (b) 50% of the remaining proceeds collected for each Contract Year, with accrued interest, shall be used to fund contributions to the Players’ individual retirement accounts, as provided in the Major League Baseball Players Benefit Plan Agreements. (c) The other 50% of the remaining proceeds collected for each Contract Year, with accrued interest, shall be provided to Clubs that did not exceed the Base Tax Threshold in that Contract Year.

So a good amount of the proceeds of the tax revenue directly go towards the benefit of teams. While likely all teams benefit from the first $13M collected (positive changes of funded status of pension obligations means less money you owe to that obligation), only some teams benefit from the other 50% collected. That money is paid out to teams who stayed under the tax. Right now that is a lot of teams and given only a few violated the threshold, it’s a small piece of pie being split up 28 different ways. However if teams decided to just go hog wild, you could see that growing.

Assuming five teams spend over the threshold

While it would take a handful of teams spending a not insignificant amount over the threshold, it could net almost $3M per team. And that is with five teams spending above the threshold. If more teams spent, that both more money and a larger pie for the other teams.

Think about it this way: it’s well founded that while operating profit and team wins aren’t strongly correlated, salary and team wins are (ie: teams that spend more typically win more). Crossing the luxury tax thresholds means giving money directly to other teams (a reminder that the luxury tax is actually called the competitive balance tax). If more money means more wins, you would be giving money directly to your “competitors’

Now typically that money has been a small amount (in 2018 the Red Sox and Nationals paid ~$15M combined) but in an ideal ever-spending market, those “taxes” would be much higher because teams would be willing to pay them to capture more wins (since spending goes hand in hand with winning). But in a counterweight, the more a team spends, the more it helps it’s competition. Baseball is a zero-sum game in total. Every win must have an accompanying loss. So while every win your money buys someone else doesn’t mean you get a loss, it does mean that you are actively helping another team compete against you. And every dollar you don’t spend (because of fear of penalties) is a win you don’t buy for yourself (and in theory you give to someone else; though that seems a bit abstract than realistic).

The real question is, would teams actually spend more without a cap?

Change in total spending by teams

2017 was the first year of the new harsher luxury tax rules, and teams spent basically the same year-over-year. Spending was slightly down on a three year average but was unchanged really on a five year average. 2018 represented a sharper decline in spending on all three timescales and the first eye catching thing is the negative spending trend. This however isn’t the first time that has happened (2004 and 2010 were negative to flat as well). There were also lower growth years in the three and five year trends, and the 2018 five year change was basically spot on average.

Okay so we’ve talked about the normal luxury tax, a hot button issue this offseason. There is another hot button issue this winter though (and one that has seemingly been discussed for awhile now) is tanking; teams purposefully trying not to compete. There have been several “solutions” thrown out to this (a tanking tax, a new playoff bracket, draft pick losses for consecutive poor years, relegation, etc...).

Maybe we can solve the luxury tax system (a tool to curb MLB spending), the tanking issue (which I don’t think should be “fixed” but let’s roll with it), and the free agent freeze we’ve seen. Let’s introduce a reverse luxury cap, where teams aren’t penalized for spending too much, but they are penalized for spending not enough. Now this sounds like a salary floor, like the NBA has, but the salary floor isn’t as harsh as the luxury tax. In the NBA, any team who spends less than 90% of the league salary cap has to pay the difference to their players (so if a team spends $85M with a $100M salary cap, they would pay $5M to the players and call it done). In the MLB going over the luxury tax (under the reverse luxury tax) cost you a penalty, draft picks, and international money. MLB teams couldn’t simply just make up the difference by paying it out to their current players.

This makes the penalty for the reverse luxury tax stiffer than the penalty for the salary floor, as the salary floor penalty is just to distribute that difference.

If we draw that spending = wins logic from earlier into the reverse luxury tax, we solve a few issues:

Tanking - since spending should mean more wins, then teams should be more competitive

Frozen free agent market - having to spend a minimum amount obviously means more money is spent on free agents

Middle tier - It’s possible a reverse luxury tax would flow some of that capital to the middle class free agents. Teams probably don’t want to spend $10M on some replacement level player to get over the minimum, and they aren’t going to sign an elite free agent to do it either. This means they would probably focus the money on the good value players (like a Mike Moustakas).

It’s an...idea and not an incredibly wild one I don’t think. The downsides would be...I don’t know. I guess if you think free agency is fine as is, then this system would go against that. Also owners would probably hate this because they couldn’t run dirt poor (in baseball terms) payrolls to make a big payday for themselves (which might not be true because owners could just pay themselves a chunk out of revenue first and then claim they lost money at the bottom line).

But there would be more money spent on free agency, which would likely flow to the middle and bottom tier of free agents and theoretically teams would be more competitive overall. Or they would find a way to tank anyways, spend that money on bad players who will cost them wins, and nothing will be different really in the end.