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Wednesday, November 20, 2013

Luxury Tax

Luxury tax is a tangled web and probably very different from what most of us thought.  Here is part of the story.


The luxury tax is separate from revenue sharing, which is a system to balance out the income distribution between large and small market teams by dividing money from merchandise sales and media contracts. The money generated from the luxury tax is not distributed to the rest of the league ...

The first $5 million is withheld to cover potential refunds, and is contributed to the Industry Growth Fund (IGF) if no refunds are forthcoming. The remaining money is divided as follows: 50% funds player benefits, 25% funds developing baseball in countries without high school baseball, and 25% goes to the IGF.

MLB Industry Growth Fund

is a pool of money collected by Major League Baseball. The purpose of the Industry Growth Fund (IGF) is, essentially, to promote Major League Baseball. Specifically, there are three goals; to enhance fan interest in the game, to increase baseball's popularity, and to ensure industry growth into the 21st century. It was created as part of the Major League Baseball (MLB) Collective Bargaining Agreement (CBA) in 1997.

Technically called the “Competitive Balance Tax”, the Luxury Tax is the punishment that large market teams get for spending too much money. While MLB does not have a set salary cap, the luxury tax charges teams with high payrolls a considerable amount of money, giving teams ample reason to want to keep their payrolls below that level.

April 19, 2010

how revenue-sharing and the Competitive Balance Tax (Luxury Tax) functions in Major League Baseball ... confusion between revenue sharing and the competitive balance tax ... even your most avid baseball fan doesn't generally know or understand the difference.

Revenue sharing and the luxury tax (which, by the way, was renamed the “competitive balance tax” in the 2002 CBA, which covered 2003-2006) are two completely separate concepts. Aside from the Yankees having to pay both, they have very little in common.

Revenue sharing was first approved by the owners in 1994 and included in the 1996-2000 Collective Bargaining Agreement, presumably as an alternative to a salary cap, which was ruled out by the MLBPA. Revenue sharing is based on a club’s Net Local Revenue for a given year. ...  Net Local Revenue is Local Revenue (gross revenue from all revenue areas like ticket sales, concessions, etc. minus Central Revenue, which is national television and radio, etc.) minus Actual Stadium Expense (which is exactly what it sounds like, the actual monies paid out by a club for its stadium)...

Split Pool Plan: each club put in 20% of their Net Local Revenue. Those monies were then divided 75/25, with 75% being split evenly amongst all clubs and 25% being split only between those clubs with a Net Local Revenue below the mean for all clubs. The 25% was not split evenly between those clubs below the mean, but based on their distance from the mean...

the Net Local Revenue calculation ... is easily manipulated ...

After the infamous strike of 1994, the owners also managed to introduced the luxury tax after being defeated on the salary cap by the MLBPA. Most people think it was aimed directly at Steinbrenner and his seemingly endless wallet, and most people are right...

The distribution of funds also evolved, no longer providing for funding to low revenue clubs, thus distinguishing it entirely from revenue sharing...

trend towards funding player benefits with the tax money. The first $2.5m is set aside for refunds, then 75% for player benefits and 25% to the Industry Growth Fund. Thus, the tax is not distributed to low revenue clubs...   The Yankees have not paid 92% of the total amount of revenue sharing distributed. They have, however, paid 92% of the luxury/competitive balance tax over the years. They are the only club to have paid the tax each and every year since its inception.

The Luxury Tax is also called the 'Competitive Balance Tax'. Ironically, the money from the tax isn't distributed to smaller market teams to promote competitive balance. Instead, it goes into an 'Industry Growth Fund' that MLB uses for player benefits and to promote the growth of baseball around the world. Money is distributed to smaller revenue teams, but that money comes from MLB's revenue sharing program, which is entirely separate and independent of the luxury tax.

By Luis Delgado on February 5, 2013 [Updated: October 23, 2013]

Major League Baseball uses the Competitive Balance Tax, which is commonly called the Luxury tax, as a method to discourage teams from having huge payrolls that could result in the league being imbalanced.

The Luxury tax is different from other methods for limiting payroll as it doesn’t really prohibit big payrolls, as would be the case of a salary cap. What it does is imposing a penalty on the teams whose total payroll exceeds a certain amount previously defined on the Collective Bargaining Agreement (CBA)...

The tax rate is completely dependent on the team’s tax history. Teams that have been “repeat offenders” - hello New York Yankees - are subject to paying a higher tax rate.

This is how the tax rate will be calculated for clubs above the threshold in 2013 through 2016:
17.5% if the team didn’t exceed the tax threshold in 2012
30% if the team exceeded the tax threshold in 2012 and paid 20%
40% if the team exceeded the tax threshold both in 2011 and 2012, meaning they paid 30% in 2012
50% if the team exceeded the tax threshold in the last few years and they paid anything over 40%

Interestingly, though, avoiding the luxury tax for just one year resets the team’s tax rate. This is the main reason why the Yankees have been so quiet in the 2012-2013 offseason. They are pushing to lower their payroll below the threshold by 2014. After that, if they go again over the luxury tax threshold, instead of paying a 50% tax rate, they’d only pay 17.5%. That is a huge difference for any team...

Only four teams have exceeded the luxury tax threshold (by the end of the 2012 season): the New York Yankees, the Boston Red Sox, the Anaheim Angels and the Detroit Tigers. The Yankees have paid it every single year since its inception in 2003, which has led people to call it the ‘Yankees tax’...

The money that is generated through this luxury tax is not distributed among the other teams in the league (which is what happens in the NBA). The first $5 million is kept for potential refunds. If there are no refunds, then that amount is contributed to the Fund. The rest of the money is used as follows:
50% is used to fund player benefits
25% is used to fund baseball development in countries that don’t have high school baseball
25% goes to the Industry Growth Fund

Labor Agreement

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