MLB Luxury Tax Explained

Rob Manfred
There are several teams in MLB currently striving to get under the league's luxury tax threshold. | Billie Weiss/Boston Red Sox/Getty Images

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.

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.

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.

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

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!