Eight Teams Combine For Record $209.8MM In Luxury Tax Bills
Major League Baseball announces that eight teams have surpassed the Competitive Balance Tax threshold, resulting in a total bill of $209.8MM for the 2023 season.
Teams and Tax Amounts
The calculations for the luxury tax for the 2023 season have been finalized by Major League Baseball. This year, a record-breaking eight teams have exceeded the Competitive Balance Tax threshold, resulting in a combined tax bill of $209.8MM. This surpasses the previous records of six teams in 2016 and 2022, as well as the total sum of $78.5MM in 2022.
Here is the breakdown of what each of the eight teams owes for surpassing the $233MM base CBT threshold:
Mets: $100,781,932 Padres: $39.7MM Yankees: $32.4MM Dodgers: $19.4MM Phillies: $6.98MM Blue Jays: $5.5MM Braves: $3.2MM Rangers: $1.8MM
How the Luxury Tax Operates
The luxury tax is calculated based on the average annual value of salaries for players on the 40-man roster. It considers deferred money in contracts and reduces the luxury tax number accordingly. For example, Shohei Ohtani's $700MM deal with the Dodgers includes $680MM in deferred money, resulting in a lower luxury tax hit of roughly $46MM per season instead of $70MM.
Teams are categorized as "first-time payors" if they haven't exceeded the CBT threshold in the previous season. The surcharge percentages vary based on the number of consecutive seasons a team has surpassed the threshold. This year's CBT class consisted of three first-time payors, three two-time payors, and two three-time payors.
The $293MM threshold, also known as the "Steve Cohen Tax," was introduced in the last Collective Bargaining Agreement and signifies the fourth penalty tier. Despite only surpassing the CBT twice, the Mets, owned by Steve Cohen, set new standards for tax payouts with a tax payroll of $374.7MM and a tax bill of approximately $100.78MM.
Implications and Distribution of Tax Revenues
Exceeding the luxury tax threshold not only comes with financial consequences but also impacts a team's ability to sign qualifying offer-rejecting free agents. The penalties can involve additional compensation required to sign such players and reduced compensation received if a team's own qualified free agent signs with another team. The financial cost of the penalties is considered less significant compared to these implications.
Although spending on talent doesn't guarantee success on the field, it is often seen as a recipe for success. In the case of the eight tax payor teams, the Mets had a losing record, while the Padres and Yankees barely reached a .500 record. The other five tax payors managed to reach the playoffs, with the Phillies and Rangers winning at least one postseason series.
The $209.8MM in tax revenues will be allocated in three ways by the league. $3.5MM will be used to fund player benefits, $103.15MM will go towards individual player retirement accounts, and the remaining $103.15MM will be distributed amongst revenue-sharing recipient teams based on their growth in non-media local revenue over a specific period of time.
