Jan 15, 2019 - Sports

Baseball's luxury tax has become a salary cap

Illustration of a baseball trophey

Illustration: Lazaro Gamio/Axios

Major League Baseball is the only major U.S. professional sport without a salary cap. But with free agency moving at a glacial pace for the second straight offseason, there is growing concern among players that the league's "luxury tax" has morphed into one.

Be smart: Each season, clubs that exceed a predetermined threshold ($197 million last year, $206 million this year) must pay a "luxury tax" on each dollar spent above that threshold.

What's happening: Last winter, an increasing number of front offices made it a priority to stay below the tax, and it's been more of the same this year.

By the numbers: Just two teams — the Boston Red Sox and the Washington Nationals — paid the luxury tax in 2018, down from five in 2017 and six in 2016.

  • Those two teams paid a combined $14.4 million in taxes, the lowest amount ever paid under the current system (put in place in 2002).
  • After paying the tax for 15 straight years, the New York Yankees avoided it last season. Same with the Los Angeles Dodgers, who had paid it five straight times.

The big picture: Some players believe the owners are using the luxury tax as a convenient excuse to keep payrolls down, with front offices going out of their way to talk about the tax publicly like it's this horrible thing when, in reality, it's peanuts.

  • Proof: For going nearly $50 million over last year's $197 million limit, the Red Sox were taxed just under $12 million. That's nothing.
  • The other side: Repeat luxury tax "offenders" see their tax rates increase exponentially. Therefore, it does make financial sense for teams to dip under the threshold and reset their tax rates like the Yankees and Dodgers just did.

The bottom line, via Sports Illustrated's Jon Tayler:

  • "When MLB instituted the luxury tax ... the idea was simple: keep teams from spending too much. Ostensibly, that helps the little fish keep up with the big ones, but in reality, it was an owner-approved plan to lower spending across the game."
  • "[So] let's call this what it really is. ... It's not a luxury tax. It's a salary cap. And with teams cutting spending by over $100 million in 2018, it's a cap that's getting harder and harder with every passing year."

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