Grow: MLB’s evolving luxury tax

From SABR member Nathaniel Grow at FanGraphs on May 1, 2015:

A few weeks ago I took a look at Major League Baseball players’ declining share of overall league revenues, noting that the players have gone from receiving just over 56% of MLB’s revenues in 2002 to around 38% today. That post went on to identify a variety of factors that have converged to reduce the percentage of league revenues going to the players, including increased revenue sharing, MLB’s growing television revenues, and more efficient front office decision-making.

One factor that I touched upon briefly in my prior post, but that probably merited a more extended discussion, is MLB’s luxury tax. As I explained the last time around, the luxury tax has helped dampen many of the larger market franchises’ willingness to spend on payroll, as teams will now incur a fine ranging from 17.5% to 50% – depending on how many years in a row the club has exceeded the luxury tax threshold – for every dollar they spend on player salaries over $189 million per year.

Because most clubs will only raise their payroll when they anticipate that each additional dollar spent on player salary will generate more than that in added revenue, the luxury tax provides a natural disincentive for most teams to cross the payroll threshold. Now, rather believe that an extra dollar in payroll will generate at least $1.01 in added revenue, teams must instead anticipate that any increased salary obligations above $189 million will generate anywhere from $1.18 to as much as $1.51 per dollar in new revenue in order to justify the expenditure. As a result, the luxury tax has caused most of MLB’s largest market franchises – the teams that the Major League Baseball Players Association has historically relied on to help drive the free agent market – to become more financially prudent in recent years.

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Originally published: May 1, 2015. Last Updated: May 1, 2015.