MLB Lockout: The Big Issue? It's the Luxury Tax, Stupid

MLB lockout: The big issue? It’s the luxury tax, stupid originally appeared on NBC Sports Chicago

 

As if we didn’t already know what the single biggest issue holding up a baseball labor agreement was these last 10 weeks, commissioner Rob Manfred made it clear — if only unintentionally — during comments to the media Thursday.

It’s the economy, stupid.

And by that we mean it’s the luxury tax, stupid.

Actually, the only thing stupid about this whole situation is that it looks like the season won’t start on time because MLB imposed a lockout and — if reports the last few months are accurate — appears unwilling to budge substantively off that one issue that matters most.

Every other core economic issue runs like an unbroken thread through the Competitive Balance Tax thresholds that over the past decade have not only created not-so-soft payroll caps but also have lowered the players’ share of the industry’s revenue pie to such a degree that the average salary has dropped in recent years (pre-pandemic) for the first time since owners colluded to limit salaries in the 1980s.

So forget everything you’ve heard about a universal DH, service-time manipulation, free-agent compensation, or more flavors of bubble gum in the dugout.

They’re all red herrings or secondary items at best.

And both sides know it, the players with increasing awareness, if not anger.

Ahead of Saturday’s scheduled negotiating session, players rejected MLB’s proposal to involve a federal mediator in talks, accusing the owners of abdicating they’re responsibility to negotiate in good faith — many taking to Twitter with the same message: “A significant part of collective bargaining is … actually bargaining.”

Cardinals pitcher Andrew Miller, one of the union’s two association reps on its executive subcommittee, told ESPN the tone in recent sessions has been “all over the place. It can get hot because we’re passionate about this. … If that means someone raises their voice or uses a word that is four letters long, so be it.”

Whether you’re pro-management or pro-union on these things, you might be dropping a few heated four-letter words on this issue, too, if you were a player and did the math — not to mention then listening to the commissioner talk Thursday.

First, a glimpse at the math:

• Industry revenues through 2019 (pre-pandemic) rose for 17 consecutive years, reaching $10.7 billion in 2019, according to Forbes. That represents a 43 percent increase during the past two collective bargaining agreements (some business journals suggest an increase in that span as high as 54 percent). The year-over-year profits teams of all market sizes are experiencing during this era also has helped drive franchise values up by hundreds of millions of dollars each — billions in most cases — over the past decade or so.
• Meanwhile, the competitive balance tax (luxury tax) thresholds for team payrolls during those same two CBAs increased from $178 million to $206 million over that eight-year span — or 16 percent. In fact, with soaring national television revenues driving up industry profits during the most recent five-year CBA, the increases through 2021 to the luxury tax threshold were comparatively even lower: 3.2 percent, 1 percent, 3.6 percent, 0.97 percent and 0.96 percent.
• By comparison, active roster sizes were increased by 4 percent in 2021 (from 25 to 26 players per team) — more than four times the percentage increase of the available CBT payroll allowances before penalties.
• Not surprisingly, an Associated Press analysis of 2021 Opening Day salaries found that average salaries fell 4.8 percent compared to the previous full season of 2019 — and 6.4 percent since average salaries peaked in 2017, the first year of the most recent CBA.
• A more telling salary trend identified in the AP report: The median salary (midpoint between the highest and lowest salary) dropped 18 percent since 2019, to $1.15 million — and 30 percent since a record-high median of $1.65 million in 2015. In other words, salary disparity between the top-paid players and the vast numbers of those paid less than $1 million is trending more dramatically than the drop in the overall share of industry revenue.

It doesn’t take an advanced degree in smart-guy, front-office math to see how all of this is driven by the luxury-tax thresholds, which big-market teams such as the Cubs admit they use to help set payrolls.

When even the Yankees start talking about budgets and restrained spending during competitive windows as they have in recent years, you know the cap is effective — and so does Manfred.

That’s why the commissioner and the owners want no part of eliminating it or substantially raising it to anything close to levels that would reverse the above-mentioned trends — or even talking much about it, apparently.

When asked Thursday about the increased penalties MLB has proposed in relation to the luxury tax thresholds, Manfred instead talked about the “essentially status quo rates” along with a few other non-specifics — which MLB officials circled back to correct and clarify after Manfred’s media session.

In fact, a 1.9 percent increase in the primary luxury-tax threshold from 2021 and stiffer penalties for exceeding the various levels of thresholds — including losses of draft picks, up to a first-round pick — were part ownership’s recent proposal.

If the last iterations of the tax thresholds were considered soft caps, this would move them significantly closer to the kind of hard caps owners sought in a failed bid in 1994-95 that cost the sport its longest work stoppage and a World Series.

And this comes at a time that the league is about to start reaping the benefits in 2022 — assuming they play this season — of its $5.1 billion Fox national TV extension, which Forbes points out is worth 40 percent more than the last deal.

Again, this lockout is about one thing. It’s the luxury tax, stupid.

Make no mistake: Every other core economic issue runs through this one.

As long as the caps stay in place with similar, minimal increases, average salaries are all but certain to go down and median salaries even more so as the handful of premium free agents will still get their paydays.

Manfred pointed out Thursday that owners have agreed to a universal DH for 2022 — “which are higher paying jobs,” he said.

Big deal. That’s a no-cost offer if the thresholds remain stagnant because those larger salaries will just come from another player’s pocket.

Same goes for raising the minimum salaries, adding roster spots or anything else that purports to give players more, as long as that money remains subject to luxury-tax limits.

And as long as big-market teams are put in a position to fear the penalties that come with spending as they might otherwise choose, that will continue to incentivize periodic tanking by even the upper tier of the league in order to re-set payrolls to comply — and re-set whole rosters rather than pay to stay in the middle of the pack until losing core veterans to free agency (see: Cubs).

Bottom line, as always, is the bottom line.

And if you didn’t already feel pretty sure about Manfred’s message during the lockout he imposed — if not his intent in negotiations — listen to his answer Thursday a question about whether he considers owning a major league team a “good investment.”

“We actually hired an investment banker, a really good one actually, to look at that very issue,” Manfred said. “If you look at the purchase price of franchises, the cash that’s put in during the period of ownership and then what they’ve sold for, historically the return of those investments is below what you’d expect to get in the stock market, with a lot more risk.”

Wow.

This at a time of record annual profits for teams across the board, success at salary suppression owners haven’t experienced since they colluded to achieve it in the 1980s and skyrocketing franchise values for 30 teams measured in the billions of dollars.

In the context of today’s baseball economy and the performance of the stock market historically and now, it’s hard to imagine what granular level of data might back up that suggestion.

But it’s not hard to imagine what any given player’s reaction to it might be.

Or how many letters it might take to spell it.

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