Competitive Balance Tax Reforms Could Lead to Labor Negotiations in Major League Baseball

The Major League Baseball Players Association (MLBPA) plans to present Major League Baseball with a personal counteroffer that will take place on January 24.e. Since December 2ndnd Announcing the lockout by Commissioner Manfred in a letter to baseball fans on MLB.com, the negotiations strangely lacked a sense of urgency, highlighted by a 42-day gap between talks on key economic issues. The recent negotiating session on January 13e held via Zoom proved fruitless as several issues remain unresolved and spring training is scheduled to begin in less than a month.

The MLBPA has legitimate concerns regarding service time manipulation, competitive integrity, free agency, salary arbitrage and revenue sharing. Let’s also not forget the heavy tax on competitiveness and how it acts as a deterrent to ball clubs by serving as an actual salary cap. Major League Baseball is very comfortable with the current structures of free agency and revenue sharing. Fortunately, there seems to be an opportunity to have conversations about how to effectively compensate ballplayers who fall within two to three years of service, as well as an increase in the minimum wage.

The prevailing question is whether the MLBPA will make concessions to advance the negotiations or how far they are willing to challenge Major League Baseball. Some believe that concessions have already been made by Major League Baseball regarding the universal batter designation and ideas about how to increase salaries for younger ball players. The concept of a lottery to prevent ball clubs from losing on purpose to secure higher draft picks is appealing, as are revisions to the qualifying offer system and how it adversely affects free choice.

It is likely that the MLBPA will continue to impress Major League Baseball on the importance of creativity and innovation when it comes to matching compensation with performance. While the request will likely fall on deaf ears, expect the MLBPA to fight vigorously for an accelerated path to free agency and incentive-based arbitration and service time initiatives. They will also strongly support reforms of the competitiveness tax, starting with a significant increase in the base tax threshold. It should be a system that encourages ball clubs to actively invest in talent under fair guidelines rather than serving as a barrier to spending with heavy penalties.

Major League Baseball has already shown willingness to raise the base tax threshold in the Competitive Balance Tax. This could be a real opportunity for both sides to finally start serious negotiations on important economic issues. Under the recently expired collective bargaining agreement, the base tax threshold for the 2021 season was $210 million. Major League Baseball has proposed a meager increase to $214 million for the 2022 season with a goal of reaching $220 million by the final season of the next collective bargaining agreement. The MLBPA would like to see a base tax threshold starting at $245 million to boost spending among ball clubs.

According to data collected by Forbes’ Maury Brown and the Associated Press, seven ball clubs had payrolls of at least $200 million in Competitive Balance Tax last season. In total, 15 ball clubs had more than $165 million. Of the 10 ball clubs that qualified for the 2021 postseason, only two eclipsed $165 million in competitive payroll taxes: Milwaukee Brewers ($131,990,136) and Tampa Bay Rays ($89,833,652). Competitive Balance Tax payrolls are calculated by the average annual value of contracts for ball players on the 40-man roster, as well as an additional $15.5 million for benefits.

Only the Los Angeles Dodgers and San Diego Padres were responsible for fines, while the remaining five clubs with at least $200 million in competitiveness payroll taxes fell within $3.4 million of the $210 million base tax threshold. Clearly, the competitiveness tax plays a huge role in the decision-making process for ball clubs, whether it be a free agent purchase or an opportunity to acquire in-season talent through a trade. Although the Boston Red Sox, Los Angeles Dodgers and New York Yankees have become synonymous with the Competitive Balance Tax, a total of nine ball clubs have paid fines totaling $553 million in the past 19 seasons according to Brown’s math. Six of the ball clubs have won 11 world championships together during the current Competitive Balance Tax era (2003-2021).

If you’ve ever had a question about why the competitiveness tax is an important issue for the MLBPA, take a look at the Dodgers and how they were recently penalized for investing in ball players. A crown jewel franchise that is strongly committed to winning, their 2021 Competitive Balance Tax payroll was an astonishing $285,599,944. The Dodgers had crossed the $210 million base tax threshold, as well as the first $230 million surcharge threshold and the second $250 million surcharge threshold. Since they didn’t cross the base tax threshold last season, the Dodgers were classified as a first-time taxpayer in competitiveness, but they still had to pay a hefty tax for assembling a high-quality ball club that has won three national awards. . League pennants and one world championship in the last five seasons.

The Dodgers had to pay three levels of financial penalties. The first was a 20 percent tax on the $20 million difference between the $210 million base tax threshold and the $230 million first allowance threshold. They then had to pay 32 percent in taxes on the $20 million difference between the first $230 million threshold and the second $250 million threshold. Finally, they paid 62.5 percent tax on the remaining $35,599,944. In total, the Dodgers paid a competitive balance tax bill of $32,649,965 after winning 106 ball games and reaching the National League Championship Series. As a result of crossing the second surcharge threshold, the Dodgers were also assessed an additional penalty as their first pick was moved back ten places to 40 in the 2022 draft.e general.

What normally goes unnoticed is where the money goes and who benefits from the Balance Sheet Tax? Last season as an example, the Dodgers and Padres combined fined $33,943,443, with the first $13 million spent funding player benefits. Of the remaining $20,943,443, 50 percent went to fund individual retirement accounts. The final $10,471,722 was split equally among the 28 ball clubs that did not exceed the base tax threshold and received $373,990 each.

The Major League Baseball Players Association’s counteroffer to Major League Baseball should be bold with a direct emphasis on economics. However, they need to identify one area where they can build momentum and set a positive tone for meaningful negotiations. Both are willing to examine revisions to the Competitiveness Tax and would be a good starting point. While seismic changes in tax rates for the first, second or third time paying taxpayers on competitiveness are unlikely, both sides should seriously consider raising the three tax thresholds significantly and eliminating non-financial penalties related to design choices . There is an opportunity to change the culture around the Competitive Balance Tax by encouraging ball clubs to invest in talent, but it starts with a willingness to listen and think differently.

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