MLB Luxury Tax Explained
By Jerry Trotta
It's fair to say that the MLB's Winter Meetings, which concluded on Thursday, lived up to and exceeded expectations. Though no blockbuster trades materialized, a plethora of star free agents agreed to mind-boggling contracts.
Plenty more storylines could unravel, but some teams -- the Boston Red Sox, to name one -- might not be able to join in on the fun because they are working to get under the league's luxury tax threshold.
With the offseason's dramatics at its summit, let's dive into a closer examination of the MLB's luxury tax and its significance.
Why do the Red Sox want so badly to get under the luxury tax threshold this year? Doing so just this once - even if going back over in 2021-22 - could save them $90-100M. On the math - and an overlooked incentive to get under the threshold https://t.co/KKKM0fRfiy via @BostonGlobe
— Alex Speier (@alexspeier) December 10, 2019
How does MLB Luxury Tax Work?
Essentially, the luxury tax -- formally coined as a Competitive Balance Tax -- is a term referred to a predicament that organizations face when they exceed a prearranged payroll threshold.
Clubs that breach the payroll are subsequently taxed for each dollar that exceeds the predetermined quantity. In extremely rare cases, the tax rate will increase for each successive year a club has eclipsed the threshold.
The #Mets really now need to pivot towards the bullpen. It remains to be seen how much they want to spend now that they’re creeping close to that luxury tax. But they have to make some significant improvements in that area.
— Michael Baron (@michaelgbaron) December 12, 2019
A franchise that exceeds the threshold for two straight seasons will see a 30 percent increase. Three or more straight seasons of violating the mandate will be forced to pay a 50 percent tax on all overages.
Teams that exceed the Competitive Balance Tax threshold for the first time, however, are charged a 20 percent tax.
What's Steven Matz's future? Where are the Mets in relation to the luxury tax threshold?
— SNY (@SNYtv) December 12, 2019
The potential ripple effects of the Rick Porcello signing (via @d_abrianoSNY) https://t.co/RzQXctOIVp pic.twitter.com/DiE6wfolXp
MLB Luxury Tax Threshold 2020
From 2014-2016, the MLB's threshold was slated at $189 million, but the subsequent Collective Bargaining Agreement spanning 2017-2021 saw a spike in that number. For the 2020 season, that figure is set at $208 million.
Here's an outline of the tax threshold of recent seasons (per MLB.com).
2017: $195 million
2018: $197 million
2019: $206 million
2020: $208 million
2021: $210 million
Phillies' payroll update: Didi at $14 million pushes their projected 2020 luxury tax payroll to roughly $205 million. The threshold is $208 million.
— Devan Fink (@DevanFink) December 10, 2019
There you have it, folks.
Now you know why so many teams are unable to spend big in free agency and are desperate to orchestra trades to shed salary.
Hopefully the tax threshold isn't hindering your club!