MLB’s Competitive Balance Tax, Revenue Sharing System Create Divide Amongst Teams

JohnWallStreet

28 Major League Baseball teams opened their 2019 season on Thursday (the Mariners and A’s opened with a 2-game series in Japan on 3.20), but payroll disparities between the league’s top spenders and everyone else has dampened the hope that typically accompanies Opening Day in many cities. While 3 teams (Red Sox, Yankees, Cubs) will operate with a 40-man payroll of more than $200 million, 11 others plan to compete with payrolls at least $60 million under the league’s $206 million competitive balance tax threshold; including 8 with total payrolls less than $100 million. The league’s use of a competitive balance tax in place of salary cap - and a salary floor - and a revenue sharing system that provides a cushion for clubs unwilling or unable to field a competitive team is at the root of the divide.

Howie Long-Short: Major League Baseball is the only big 4 sports league that does not have a salary cap as a term of their collective bargaining agreement and Indians pitcher Trevor Bauer said “for a long time” the lack of one contributed to the game’s “competitive integrity.” But with few teams willing to assume the penalties that come with crossing the competitive balance tax threshold, it’s now viewed by the players as the pseudo “salary cap [that] it was supposed to prevent.” It’s also resulted in a tremendous divide between the league’s “haves” and “have nots.” According to USA Today, while the Cubs will spend $211 million on players this season, Tampa Bay has less than $54 million in salaries on the books.

The MLB free-agent market operated at a crawl for a second straight winter. High-profile stars Manny Machado and Bryce Harper didn’t sign their 9-figure contracts until they were less than 6 and 4 weeks out from Opening Day, respectively and quality veterans like Dallas Keuchel and Craig Kimbrel remain unsigned as of print. Veterans are finding it difficult to land big money, long-term deals because the teams hold too much leverage. With players having to put in 3 years of service time before they are arbitration eligible and then another 3-years under the team’s control at salaries below market value, there’s a plethora of inexpensive players available. Front offices across the league have wisely decided they’re willing to spend for the elite free-agent who can move the needle, but are no longer willing to break the bank to fill out the roster; and with good reason, the league’s revenue sharing system affords teams the leeway to be bad and still turn a profit.

MLB Deputy Commissioner Dan Halem told us back in January, that despite the slow start he expected teams would allocate more money to free agents during the 2018 off-season than any other. He was right - the 30 teams collectively committed $3.8 billion (previous high, $3.4 billion) to player salaries, but much of that money was awarded to just a handful of players and “many veterans” were forced to take salary cuts. As a result, according to AP studies, the league’s average salary ($4.36 million) as of Opening Day declined for a 2nd consecutive season ($4.41 million in ’18, $4.45 million in ‘17); and for just the 3rd time since the ’94- ‘95 strike.

Even if “every team [wasn ’t] acting like its capped out” [on payroll budget], the luxury tax threshold is lower than it should be and that discrepancy is costing veterans money. The current luxury tax system has been in place since 2003 when teams were given a soft cap of $117 million, but while league revenues are up +188% (to $10.3 billion) since that time, the soft cap has failed to keep pace; only rising +68%. Of course, increasing the luxury tax threshold would only grow the imbalance among teams as the big market clubs would be able to spend even more without penalty.

MLB’s existing CBA expires in 2021 and the players’ association is going to need to negotiate some significant changes to it if free agency, “which drives baseball’s economic system”, is “to remain a meaningful option for the players going forward.” Raising the min. player salary in line with league’s revenue growth since ’03 (from $545K to $850K), cutting down on the service time required before arbitration eligibility (so players get to free agency faster) and on service time manipulation (which would also expedite a player’s path to free agency) would all help to tilt the scales back in the player’s favor.

Fan Marino: It’s tough to watch pro sports teams focus on profits, when the penalties for spending too much are a relative pittance to the upside of winning the World Series. It cost the Red Sox just $12 million and 10 draft spots to operate with the league’s highest salary in 2018 and it paid off with their 9th World Series title.

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