FanPost

The Rules, They Are A-Changing: Time to Eliminate a Tax


This week's fanpost prompt, combined with some discussions and articles posted on Pinstripe Alley, led me to propose this rule change: eliminate the luxury tax.

History

As the game of baseball recovered from the strike in 1994, the next CBA implemented a "luxury tax" that attempted to even out the competitive balance across the league. Teams like the Yankees and Red Sox and even the Orioles (back when the tax was implemented) were taxed in order to provide teams in smaller markets with financial wherewithal to sign free agents and keep their own homegrown stars (instead of watching them get signed away by the Yankees, for example).

However, in the 20 years since the luxury tax was implemented, the economics of baseball has changed. No longer are big market teams the only teams with money, as even small market teams have generated increased revenue through media agreements with cable companies. Additionally, we've seen more and more that some owners have no interest in using the competitive tax distribution to enhance their teams. If anything, we've seen more owners put money back into their own pockets.

The intended outcome of parity has not been fully realized (or may have been only partially realized). Since 1996, the playoffs have still been dominated by teams that consistently spend money at a certain level. The only smaller payroll teams that seem to enter the playoff picture are those that land a wild card spot.

Can it keep up?

The luxury tax is also woefully inadequate to handle the inflation of MLB salaries. As mentioned in another comment section, the percentage of money that the players make versus the overall profits made by MLB and individual teams is relatively small. A team like the Yankees is worth almost $4B but they balk at having to pay a tax that increases their overall payroll expenditure to amounts far less than even half of a million dollars?

Soon, teams will be severely penalized by the luxury tax, as teams have managed to develop a well-scouted, well-developed, homegrown core. The Yankees, Dodgers, Astros, to name just a few, are going to face multiple homegrown stars reaching free agency with little hope of staying with their team unless payrolls increase drastically. The Yankees have developed a strong collection of homegrown players, not entirely by draft position but by quality scouting and development and draft choices, that will all reach free agency around the same time (and if they keep up their 2017 performances or anything close to it, can each command a salary with an annual value of $30m).

Just in a hypothetical, if Judge, Sanchez, and Severino continue their 2017 success for the next five to six years, in 2023, they'll most definitely command salaries in the $40-45m per year range (considering we're already at the $30-35m range for top players in the league). Those three players alone would take up $120-135m of the Yankees payroll. The current CBA only goes until 2021, but in 2021, the luxury tax threshold is only $210m. Hypothetically, we can project the threshold to reasonably only increase by $2-4m per year (based on the current CBA, unless the next CBA makes drastic increases), we're potentially only looking at $226m in 2024. Can the Yankees really expect to field an entire team and keep these three homegrown stars with that kind of threshold, especially if salaries inflate all over the field? This doesn't even count other potential stars in Greg Bird or Gleyber Torres; or any players they trade for; or any free agents the Yankees may need to sign.

These teams have relatively inexpensive payrolls now (or may hover around the luxury tax threshold) but a time will come where even the threshold raises will not be enough for teams to keep their stars and field an all-around competitive team.

Conclusion

Competitive balance will never exist unless owners are forced to either have a minimum payroll or to reinvest any profit-sharing / competitive balance payments back into their teams. With the rising tide of inflated salaries, there's no stopping the fact that players are going to continue to get paid. Why limit the teams from spending what they need to spend to keep their own players as well as continue to field a competitive team all around.

Let's get rid of the luxury tax and let teams have free reign without financial penalties or IFA pools or draft position/choices being lost.

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