From the non-surprising baseball news that you can use files from Christmas Week ….the Yankees will pay a luxury tax due to their payroll exceeding the 2010 threshold
“The Yankees must pay $18 million — nearly $8 million less than 2009, when they won the World Series — as a penalty for surpassing the $170 million luxury-tax threshold, according to The Associated Press.”
“The Yankees have exceeded the threshold in all eight years since the tax was imposed, topping out at $33.98 million in 2005 and owing more than $191 million in all for regularly having the highest payroll in baseball. Last season, their payroll for luxury-tax purposes was $215,053,064. “
“Since 2003, three other teams have paid the competitive-balance tax, as it is formally known, including the Boston Red Sox, the only other club this year to owe money. The Red Sox, who missed the playoffs for the first time in four seasons, must pay $1.5 million, their first penalty since 2007. The Detroit Tigers were billed $1.3 million in 2008, while the Angels were taxed $927,059 in 2004.”
The luxury tax existed briefly in the 1990’s and was revived as part of the 2002-06 collective bargaining agreement between owners and players. It is now called the “competitive balance tax” in the CBA. But what actually happens to the money?
Per the CBA, when Major League Baseball collects luxury taxes from teams, they set aside five million dollars in case the have to refund payments to a team. If no teams get a refund, the money is then earmarked for the Industry Growth Fund. After money is distributed for the promotion of Major League Baseball, 50% of whatever amount leftover is used for funding player benefits and 25% is used for funding baseball programs in other countries. The final 25% is placed into the Industry Growth Fund as well.
So this money does not go to teams like Florida, Kansas City and Pittsburgh. Teams get added help from the revenue sharing program, in which all thirty teams pay 31% of their local revenues into a pot each season that is evenly divided. The only time a poorer team gets a special advantage is when MLB distributes portions of their Central Fund, which consists of sources like national television contracts. The lower a team’s revenues are, the more money the team gets from the Central Fund distribution.
Even though the luxury tax seems like nothing, when combined with the revenue sharing system and baseball’s revenue growth in seeming defiance of a recession, there has been a positive effect on the finances of the game as a whole.
As noted in the Sports Business Journal in 2008, “the percentage of revenues that went to baseball player’s salaries has also dropped since 2002 without the use of a salary cap. In the last five years, the percentage of MLB revenue paid to baseball players has dived from a high of 63 percent in 2003 to as low as 51 percent. More generally, league revenue going to players has dropped from a percentage in the high 50s to low 60s in the early 2000s to between 51 percent and 55 percent in the last four years.”
“MLB players’ share of revenue peaked just after Donald Fehr and Bud Selig announced a new collective-bargaining agreement in 2002. Rob Manfred, Executive Vice President of Major League Baseball for Labor Relations, gave two major reasons for the decrease in the players’ percentage of league revenue: the luxury tax and revenue-sharing provisions of the CBAs that were negotiated in 2002 and 2006, and high overall league revenue growth.”
Even though the luxury tax and revenue sharing are a gentle tap on the breaks of team spending and available revenues, it has worked to control player salaries since 2002.
And what has happened to competitive balance since 2002? Six different teams have won a World Series and twenty-three out of thirty teams have made the playoffs. So the label “competitive balance tax” is not a complete misnomer.
And as I mentioned earlier, baseball seemed to have bypassed the recession. According to estimates of total baseball revenue by Forbes Magazine, MLB revenues for 2007 were $ 6.1 billion, in 2008 they were $ 6.5 billion, in 2009 they were $ 6.6 billion and the estimate for 2010 is approximately $ 7.0 billion,
If you were looking for a reason that almost $ 1 billion in salary commitments were made during he recent winter meetings, it is because as an entity, major league baseball is financially healthy and in far better financial shape and a state of labor peace than the NFL, NBA and NHL. .