Anyone who follows baseball at a casual level or beyond has likely partaken in an argument about the need for a salary cap. For those who have been spared the indignity, the debate goes something like this. One person states that salary caps are important because they promote parity by limiting the resource gap between the teams with the league's biggest and smallest revenues. The other person, armed with hyperlinks and data, retorts that there's little evidence supporting the claim -- that salary caps, then, are just a socially acceptable method for wage suppression. And so on and so forth until aliens destroy the Earth and end the debate for good.
Aliens have not yet scored the fatal blow, but it does appear the debate has been won by those who implored Major League Baseball to adopt a salary cap.
You've probably heard of the Competitive Balance Tax (CBT). For those who haven't, consider this a primer. Basically, the CBT establishes a threshold that teams can spend up to; those who go over are taxed and/or penalized proportionally. Unlike with payroll, the CBT isn't determined based on yearly salaries. Rather, the player's average annual value is considered, as are benefits that add about $14 million to each team's number. Last season, the CBT threshold was $197 million. The number is up to $206 million for the 2019 season, and will increase to $210 million before the current Collective Bargaining Agreement expires following the 2021 season.
As for the penalties, here's what MLB.com itself offers:
A club exceeding the Competitive Balance Tax threshold for the first time must pay a 20 percent tax on all overages. A club exceeding the threshold for a second consecutive season will see that figure rise to 30 percent, and three or more straight seasons of exceeding the threshold comes with a 50 percent luxury tax. If a club dips below the luxury tax threshold for a season, the penalty level is reset. So, a club that exceeds the threshold for two straight seasons but then drops below that level would be back at 20 percent the next time it exceeds the threshold.
Clubs that exceed the threshold by $20 million to $40 million are also subject to a 12 percent surtax. Meanwhile, those who exceed it by more than $40 million are taxed at a 42.5 percent rate the first time and a 45 percent rate if they exceed it by more than $40 million again the following year(s).
Starting in 2018, teams could also lose draft position if they went more than $40 million over. A team picking outside of the top six would have their first pick dropped 10 slots, and teams within the top six would have their second pick docked 10 positions.
Those penalties may not seem like an effective deterrent on paper, and yet teams are treating them as if they were. Last season, three clubs finished either over the CBT or within $10 million of the mark: the Boston Red Sox, Washington Nationals, and San Francisco Giants. As of right now, there are only two teams who are estimated to be over the CBT: The Red Sox and the Chicago Cubs. The Red Sox -- the defending champions, mind you -- are reportedly looking to cut costs:
Every other team is at least $15 million off from the $206 million line. The Los Angeles Dodgers, Nationals, and New York Yankees are the only other teams within $40 million of the mark. Almost every team in baseball could add around $80 million to its tax figure before it would have its draft picks impacted -- and they could do it without fear of the repeater tax rate. Heck, three teams -- the Tampa Bay Rays, Chicago White Sox, and Oakland Athletics -- could add more than $100 million to their tax figure without risking any penalty, financial or otherwise. Each of those three could add significant talent to position themselves in a top-heavy American League.
Remember, Major League Baseball is awash in money: league-wide revenues exceeded $10 billion last year. There's no real reason for teams to be this scared of encroaching upon the CBT and perhaps even going over it. That they're all treating the CBT with the utmost seriousness, at a time when there's more playoff spots available than ever before, tells us that the owners are more concerned with maximizing profits than wins.
Hence baseball's informal salary cap; hence its commitment to honoring and maintaining it.