MLB luxury tax: Breaking down baseball's Competitive Balance Tax and how it affects hot stove season
Here's what you need to know about baseball's luxury tax
Major League Baseball's offseason is here, which means it's that time of the year when every sizable signing and/or trade is accompanied by talk about the Competitive Balance Tax (CBT). Because so many of baseball's roster-related rules and mechanisms are arcane in nature, we decided to write the following primer to make the CBT easier to understand.
What is the CBT and what purpose does it serve?
In theory, it's a luxury tax. In practice, baseball's owners have made the CBT into an unofficial salary cap. Do note there isn't much evidence supporting the notion that salary caps and/or luxury taxes encourage parity or competitive balance. As such, the top feature of the CBT seems to be providing owners with a legitimate-sounding excuse for saving money.
The CBT threshold is set at $208 million for the 2020 season.
How is the CBT calculated?
The CBT is not based on year-to-year payroll. Rather, it's based on each player's average annual value. That can lead to some notable disparities between how much a player counts against a team's CBT as opposed to how much they're actually making in a season.
Consider Philadelphia Phillies right-hander Jake Arrieta, who is entering the final season of his three-year deal worth $75 million. Arrieta will make $20 million in 2020. But, because of how the CBT is calculated, will count for $25 million against the Phillies' CBT payroll. Of course, the effect sometimes plays out in the inverse, too. For instance, Arrieta made $30 million in 2018, all the while counting as a $25 million charge on the Phillies' CBT payroll.
This is all to say that backloading or frontloading contracts can be an effective strategy when it comes to actual cash outlay, but that those techniques are toothless as it pertains to the CBT. Additionally, there is no loophole when it comes to signing bonuses or player options, as those are factored into the AAV calculations.
Oddly, this isn't the case for club options. They're excluded from the multi-year calculations, and are treated as essentially one-year deals. This too can work for or against a team, depending on the example. Nelson Cruz's CBT number will be less than what the Minnesota Twins will have paid him on average in 2019-2020, whereas Anthony Rizzo's will be more for the Chicago Cubs.
The CBT calculations for each team also include a base "player benefits" amount.
What are the penalties for exceeding the CBT?
For the most part, the penalties for exceeding the CBT are fine-based. A first-time exceeder has to pay a 20 percent fine on its overage; a two-time exceeder has to pay a 30 percent fine; beyond that it's a 50 percent fine. There are also surtaxes for exceeding by $20 million (12 percent); $40 million (42.5 percent); and repeating over $40 million (45 percent).
A team that goes more than $40 million over also has its highest draft pick moved down 10 spots provided it isn't picking in the top six. In those cases, which would seem to be rare, the team's second selection would be dropped 10 spots.
For a real-world example of how trifling the penalties are, the 2018 Boston Red Sox paid less than $12 million despite exceeding the CBT number by more than $40 million.
What teams are in danger of the CBT?
According to Spotract's calculations, three teams were over the CBT in 2019: the Red Sox, the Cubs, and the New York Yankees. Everyone else was at least $5 million below it.
As of the start of free agency, only the Houston Astros and Red Sox are projected to be over the threshold in 2020. The Cubs (less than a million) and Colorado Rockies ($38 million) are the only teams projected within $60 million of the threshold heading into the winter.
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