MLB desperately needs a salary floor- just don’t call it that

Teams are tanking all around major league baseball, and it’s a big problem for the game. The list of baseball teams that are not making a sincere effort to field a competitive team grows each season, affecting the competitive balance of the game, suppressing player salaries, and causing a loss of interest among fans in those markets.

Twelve of the 30 major league baseball clubs had opening day payrolls under $100 million entering the 2021 season. Ten of those teams have a 40 man payroll that is less than half of the threshold of $210 million for “competitive balance tax” purposes. Just one team, the Los Angeles Dodgers, is over the tax threshold. Payrolls are plummeting all around the game, even as new television contracts continue to bring in more and more revenue.

One big reason, as we discussed here, is that it doesn’t pay many teams to pay players to win games, financially. As teams pay higher salaries to improve their teams, almost half (48 percent) of the increased revenues produced at the gate must be shared with the 29 other teams. At the same time, smaller market teams can subsidize their gate losses through the revenue sharing formula that gives them an equal share of the shared local revenue from all teams.

What is Revenue Sharing?

Major league baseball currently has three forms of media revenue sharing.

National TV revenue– MLB equally divides more than $1.5 billion per season in revenue from national TV contracts with ESPN, Turner Broadcasting and Fox Sports. This includes coverage of some regular season and almost all post season games.

MLB’s central fund– Revenues from “out of market” TV offerings such as Extra Innings, MLB.tv’s streaming service and other league run broadcasts gets divided unequally with a greater share going to lower revenue teams. MLB is careful not to step on the profits of local teams, giving them a monopoly on profits generated within their local markets. The result? Blackouts.

Local Revenues– which include local TV contracts, gate receipts, concessions and parking revenues are partially shared, with 48 percent going into the revenue sharing pool to be divided equally between 30 clubs. Big market teams contribute more than they receive, while smaller market teams are net revenue recipients. Forbes pegged local revenues at $7.29 billion and Central fund revenues at $2.76 billion in 2018.

While other sports rely more heavily on national TV revenues (all NFL broadcasts are national and shared equally among teams), baseball’s disparity in revenues comes primarily from local TV contracts. The Dodgers take in $250 million per season while the Marlins get $20 million from local broadcasts. The redistribution of these revenues is MLB’s primary method of revenue sharing.

But it’s not as simple as all that. MLB shares “net local revenues” which allows teams to exclude stadium costs including debt service, post season revenues, and receipts from the commissioner’s discretionary fund. Also, profits that clubs make from ownership interests in regional sports networks (RSN’s) are excluded from revenue sharing. A majority of teams- mostly in larger markets, now own a stake in their local RSN’s.

What is “tanking”?

For purposes of this article, tanking is when a team does not use it’s best efforts to put a winning team on the field. It doesn’t necessarily mean that they’re going for higher draft picks, or that they see no benefit in improving from 65 to 75 wins. The motive is profits, not winning. If those two things were interdependent, fewer teams would be tanking and more would be trying to win to make money.

While the Detroit Tigers slashed payroll by 55 percent over five seasons, attendance plummeted by over 50 percent from 2013 to 2019. Meanwhile, national and shared local TV revenues have soared and Detroit’s local TV revenue remained steady. Both local and national TV revenues will increase again after the 2021 season with new contracts and franchise values continue to climb.

The fact that teams can share lost attendance profits with 29 other clubs provides a strong disincentive to paying players to win games. The result? Tanking.

Aren’t teams required to spend revenue sharing money on players?

Article XXIV of the collective bargaining agreement requires clubs to use revenue sharing funds to boost their winning percentage, not their profits. The MLBPA has filed grievances against several clubs, and the growing number of teams tanking supports their position. This is probably the biggest issue in the upcoming CBA negotiations.

The other Revenue Sharing discussion

Another type of revenue sharing that isn’t covered above is sharing revenue between teams and players. The National Basketball Association, National Hockey League, and the National Football League all have a form of revenue sharing in their collective bargaining agreements. These deals require that a percentage- typically between 48 and 51 percent of revenues as defined by their CBA, is shared with players in the form of salaries. Thus, when profits increase, salaries increase.

The mere mention of “revenue sharing” has understandably sent the MLB players’ association into a frenzy. The cancellation of the 1994 season was caused by feuding over MLB owners’ demands for a salary cap- which is tied to revenue sharing. The two things go hand in hand. And along with the salary cap, there is a salary floor. Whenever MLB owners mentioned revenue sharing, or a salary floor, the MLBPA would erupt in opposition.

MLB’s big bluff

Last summer, MLB owners reportedly approved a proposal to share revenues they had for the season with players on a 50/ 50 basis. Commissioner Manfred got the enjoyment of tossing a molotov cocktail into the media pit, watching the players and less informed media members react like a Doberman on a t-bone steak. The proposal was never presented to the players,

Manfred knew that the players would never agree to share revenues in lieu of pro-rated salaries which had already been bargained for, especially in the one season where MLB revenues were going to sharply decline. Owners would have had to open their books and disclose their revenues, which they have been unwilling to do since before the Dodgers left Brooklyn.

De-Facto Salary Cap

Ironically, the MLBPA has gradually given ground in each successive CBA to the point where they have a de-facto salary cap, under the guise of the “competitive balance tax”. While teams can theoretically spend on salaries above the tax threshold, the penalties for doing so are a powerful deterrent. Teams not only pay up to a 95 percent tax on salaries above the threshold, but they now forfeit draft picks and revenue sharing dollars as well. Penalties are most severe for repeat “offenders”.

Six teams paid a luxury tax in 2016, the year before the current CBA took effect. All those teams have since reduced payroll to get under the limit to at least reset the tax rate.

As MLB’s revenues have soared, taking in a record $11 billion in 2019, player salaries not only did not keep pace, but declined in seasons prior to the pandemic, as explained here at Forbes.com

The knee jerk reaction from the MLBPA is to oppose any mention of revenue sharing or a salary cap. They don’t trust MLB owners to be forthcoming about revenues. There are issues in MLB that other sports don’t have. Most MLB teams now have an ownership stake in their regional sports networks, generating profits that are not on the books for purposes of sharing local revenues. Those cans of worms needn’t be opened.

Reforming the “Competitive Balance Tax”

Any competitive balance formula should include increasing spending on salaries, by setting a lower limit for team payrolls. A de-facto salary floor can be implemented in the same manner as the competitive balance tax has crept in on the upper end of the pay scale. It doesn’t have to be called a salary floor, but would have the same effect on spending.

Taxing teams that fail to spend on player salaries would help to restore competitive balance as much as a tax on teams that spend above the upper threshold. If the MLBPA agreed to convert the “luxury tax” at the top of the scale to a dollar for dollar tax on the overage, they might be able to do the same at the bottom of the scale. Teams would be paying the minimum regardless.

Picture the Tigers’ roster with an additional $ 20 to $ 45 million in veteran player salaries, paid for by increased revenues and inspired by tax incentivized spending.

Here’s how a new Competitive Balance Tax structure might look:

Tax thresholds would be indexed to keep pace with defined gross revenues through the term of the next CBA. For tax purposes, payrolls include the average annual value of all contracts on the 40 man roster plus about $15 million in player benefits.

By comparison, the current tax kicks in at $210 million at 20 percent for first time payors and increases to 50 percent for third time offenders, with surcharges from 12 to 45 percent or up to 95 percent total for teams over $250 million. The tax threshold has increased little in successive agreements by comparison with soaring revenues.

This proposed formula picks up where the current scheme leaves off, simplifying and stiffening the tax on the upper end while balancing that with performance requirements on the lower end.

This tax should be sufficient to induce immediate corrective action. If not, other penalties such as adjusting draft position or limiting international bonus pools could be assessed to repeat offenders.

Other ways to incentivize spending:

• Distribute some revenues unevenly on a sliding scale, rather than dividing it evenly among 30 teams. This may not be necessary if the above measures are taken to incentivize winning.
• Let smaller market teams keep a higher percentage of their ticket revenues, rather than putting almost half into the revenue sharing pool. Local media revenues can still be shared.
• Narrow the gap between mid-tier free agents and minimum salaried players by gradually increasing the minimum salary to $1 million per season over five years, and lowering the service requirement for arbitration. The cost of increasing salaries from the current minimum to $1 million for half of an MLB roster would be about $5 million per team.
• Implement a lottery for at least the first three draft picks. Evidence shows marginal benefit in amateur draft slots after the first few picks.
• Yes, measures need to be taken to prevent clubs from gaming the system by stashing revenues to be excluded from the revenue sharing formula. Ownership shares in regional sports networks should be valued to ascertain the actual value of the local television contracts to the major league clubs, and using gross- rather than net local revenues would disincentivize the revenue shell game.

MLB owners will want more than just a hardening on the upper end of the tax scale in return. Playoff expansion is the MLB owners’ fondest desire. It would bring a cash windfall, is high on Manfred’s wish list, and could pay for some or all concessions on the low end of the pay scale. Owners have proposed playoff expansion in exchange for a universal DH, but that was a non starter. An international draft remains on MLB’s wish list, although the hard bonus limits have satisfied much of that desire.

Although the MLBPA has not fared will over the past few collective bargaining sessions, and the players are understandably frustrated with salaries not nearly keeping pace with MLB revenues, Manfred and the owners will be looking to the bottom line in any new agreement. If the players want a share of growing revenues, the surest way to achieve that is through revenue sharing. If the term is too offensive, perhaps a luxury tax on the lower end of the payroll scale, just as there is a tax on the upper end of the scale, would be more palatable, just as effective, and better for the players, the fans, and the game of baseball.