MLB owners propose salary floor, but with lower tax threshold

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Major league players and owners sat down to discuss the next collective bargaining agreement (CBA) for the first time on Monday. According to Evan Drellich and Ken Rosenthal at the Athletic, MLB owners put forth a proposal that includes a salary floor of $100 million, but also includes a proposal to lower the competitive balance tax threshold to $180 million. The proposal contains other terms which are not yet known, and there has been no public comment from players or owners.

The proposal as it stands is dead on arrival, as the idea of lowering the tax threshold’s lowest tier from the current $210 million to $180 million for the lowest tier is a complete non starter with players who want to see the tax threshold increased, not lowered. $180 million, less $15M in player benefits, would leave a maximum $165M for the 40 man payroll before a tax kicks in. That’s not a serious offer.

The threshold has not come close to keeping pace with soaring MLB revenues, which is a failure of previous bargaining by the MLBPA.

The current competitive balance tax structure imposes a tax on payrolls above $210 million. The tax rate is 20% for first-time payors, 30% for second-time payors, and 50% for payors for 3 or more consecutive times. The rate resets if payroll falls below tax threshold for a season. MLB’s proposal is for three tiers with a 25 % tax kicking in at $180 million. When it would take effect and how much the tax would be is not known.

All six teams that had payrolls above the tax threshold had reset their tax rates within a year after the latest tax table went into effect, leading players to believe that clubs treat the tax threshold as a de-facto salary cap. As of opening day, 2021, only the Los Angeles Dodgers had a payroll above the tax threshold, although six other teams were within $5 million of the tax trigger.

The proposal is presented as a salary floor with the taxes on higher payrolls as a way to pay for it. But reality is that it’s a way of lowering salaries overall. Teams are much more likely to reduce payroll than to pay taxes to support those below the salary floor.

If the threshold were lowered to $180 million, nine teams would be above the threshold as of opening day. Eight teams are below the current $220M threshold and above the proposed $180M threshold by a total of $176.9MM. If there was a floor set at $100 million, seven teams, including the Tigers would have been below the floor by a total of $145.7 million.

The Tigers, with a 26 man opening day payroll of $80.8 million, had a payroll for tax purposes of $98.7 million, which would likely exceed $100 million by the time replacements were called up to fill in for others on the injured list. Payrolls for tax purposes include about $15 million in each team’s share of player benefits.

The fact that MLB is open to the idea of a salary floor is a positive sign, although they will want to fully offset any additional spending with increased revenues. No doubt, they will want to expand the number of teams in the playoffs as a way to increase revenue. It is their fondest wish in this round of CBA talks.

We have written about the need for a salary floor, and the history of why the players have opposed the concept, as it is invariably paired with a salary cap, just as this proposal is constructed. In the process, the MLBPA has essentially agreed to a de-facto cap in the form of the competitive balance tax, while more than a handful of teams are allowed to collect revenue sharing dollars while not spending any more on player salaries.

I proposed a 50 percent tax on payrolls under $125 million and a 100% tax on payrolls under $100 million- the tax applying to the shortfall. I also proposed that the upper end tax apply 50 percent to payrolls above $225 million and 100 percent above $250 million. The Dodgers will pay a 92 percent tax on their payroll above $250 million as a third time payor, so the jump isn’t so huge.

The players association made an opening proposal to owners back in May, 2021, and this is the owners’ first proposal to the players. The current CBA expires on December 1, 2021. The owners also reportedly proposed extending the current CBA for another season, but players are anxious to deal with the growing disparity between MLB revenues and player salaries- a trend that has been interrupted by the pandemic.

The MLBPA proposed, among other things, making it easier for players to qualify for arbitration before accruing three years of service time, according to Drellich and Rosenthal.

Other items that the players put on the table could include the players’ share of revenues especially postseason dollars, increasing the tax threshold, the minimum salary, service time manipulation, competitive balance issues including a potential salary floor, and the gap between highly productive younger players and veteran free agents. The major league minimum salary would come into play in that discussion

There is also an issue of the grievance filed the the MLBPA against MLB seeking $500 million for bad faith negotiating in shortening the2020 season to 60 games, claiming that they did not use best efforts to play as many games as possible as they agreed to do in March in the March, 2020 agreement.

Owners will want the players to dismiss their grievance as part of any new CBA. That seems a likely outcome unless talks get bogged down it will come at a cost, as the players have few bargaining chips in this round of talks.

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