The Captain's Blog

Most in the baseball media have declared management as the winner in the sport’s latest round of labor negotiations. Over the last two days, I’ve portrayed the outcome as a split decision by illustrating how the new CBA will do little to change the prevailing trends in the game. But, that begs the question: is the status quo good for the players?

Rise in Luxury Tax Threshold, 2003-2021

Source: MLB

The first step toward answering that question is to consider the history of the current luxury tax system, which dates back to 2003. Since then, three new agreements have amended the structure, resulting in a rising threshold, but decreasing capacity as a percentage of revenue. This latter trend has been cited as a failure by the MLBPA, but that criticism is baseless. The reason why luxury tax capacity compared to revenue has declined is because the sport’s business fundamentals have improved dramatically, not because the threshold has limited salary growth. After all, in 2015, the last year for which there are official numbers, there was a $1.3 billion gap between capacity and actual player compensation, so even if the new CBA provided for no increase in threshold, there would still be plenty of room for salary growth. However, the new agreement does call for an 11% bump in the tax trigger over the next five years, which is double the rise that resulted in the previous accord. So, even if big spenders like the Yankees and Dodgers are deterred from spending more, the other 28 teams have more than enough room to pick up the slack.

Luxury Tax Capacity as a Percentage of Net Revenue, 2003-2015
Note: Revenue is net of stadium debt service.
Source: MLB, Forbes (net revenue)

Why was a luxury tax implemented in the first place? In 2000, baseball convened a blue ribbon panel to study the game’s economic structure, and among its findings were a series of stringent recommendations designed to even the playing field for all teams. That was the genesis of the “competitive balance tax”. The original plan called for a 50% tax on payrolls over $84 million, but when the MLBPA acquiesced to the system as part of the 2002 CBA, the threshold was increased to $117 million and the initial tax dropped to 17.5%. With the threshold capacity amounting to 90% of industry net revenue, the new system was little more than a Yankee tax, and that’s pretty much what it turned out to be until the Dodgers joined the fray.

Total Player Compensation as a Percentage of Net Revenue, 2003-2015
Note: Revenue is net of stadium debt service. Total compensation is actual payroll + player benefit costs + players’ share of the postseason revenue pool. Benefit costs are determined by working backward from the known 2015 amount and assuming a 4% growth rate (CBA calls for increases up to 10%).
Source: MLB releases published by AP (actual payroll), baseball-almanac (postseason revenue) and Forbes (net revenue)

In the first two years under the luxury tax system, the Yankees didn’t stop spending, but most other teams did. Meanwhile, revenues started to accelerate. The result was a decline in overall player compensation and a significant drop in the players’ inflated share of the revenue pie. From that point, however, the system reached a state of equilibrium, allowing the owners and players to prosper. Revenue kept increasing, and salaries followed close behind, or just ahead, a trend that has continued right up to the current deal.

Annual Rates of Revenue Growth and Total Player Comp, 2004-2015
Note: Revenue is net of stadium debt service. Total compensation is actual payroll + player benefit costs + players’ share of the postseason revenue pool. Benefit costs are determined by working backward from the known 2015 amount and assuming a 4% growth rate (CBA calls for increases up to 10%).
Source: MLB releases published by AP (actual payroll), baseball-almanac (postseason revenue) and Forbes (net revenue)

Without accepting a hard cap, compromising on the guaranteed status of its contracts, or sharing in any of the business risks of a strict revenue/compensation agreement, the MLBPA has held onto a fair share of the industry pie (a conclusion that is contrary to some analyses, which are based on faulty data, but the basis for recent criticisms of the new CBA). Although management certainly made up lost ground in the initial years of the new luxury tax system, an accurate reading of the data demonstrates that both sides have benefited from the game’s growth. In other words, maintaining the status quo is, in fact, a victory for management and labor alike.