Baseball’s luxury tax might finally be working

During my adolescence, if you would have asked me what the biggest problem with baseball was, I would have said “competitive balance” (this was before the steroid scandals broke, of course). In those mid-to-late 1990s seasons, when free agency was viewed as the paramount way to improve a squad, it was clear that without the presence of a salary cap, teams in larger markets had a distinct advantage in luring or keeping players to build better ball clubs.

Only simple math and common sense are needed to understand that areas like New York, Boston, Los Angeles, Chicago, and perhaps even Texas have a severe population advantage over Kansas City, Tampa Bay, Milwaukee, or even Minnesota. Not only does that surplus of bodies make it easier to fill stadium seats from a simple population-density perspective, but it also increases the value of television deals (more eyeballs on ads = more $$$). Thus, the Yankees, Sox, Dodgers, and Angels of the world should be able to out-resource other teams to garner the best players, and for awhile that is exactly what happened.

Twins fans know this pain well, having seen the team lose the likes of Chuck Knoblauch, Torii Hunter, and Johan Santana to greener (money-wise) pastures. Not coincidentally, both Knobby and Johan ended up in New York markets, while Torii went west to LA. The Twins of 1995-2010 rarely made any free agency splashes, usually citing a lack of funding. When Kirby Puckett, Brad Radke, & Joe Mauer decided to stay in Minnesota when—presumably—more money could have been had elsewhere, it was a big deal.

In 2002, MLB finally decided to address its competitive balance issues by instituting a luxury tax system. Without getting too bogged down in the nitty-gritty details, the luxury tax penalizes teams for going over a league-specified dollar threshold each season. The more a team exceeds that threshold, especially in consecutive years, the more the club is penalized monetarily. That money is then distributed among the teams that didn’t hit the threshold.

At first, the luxury tax was mostly laughed off as a “slap-on-the-hand” sort of measure. “The big markets will simply pay the fine” was a common refrain, and for a while that is exactly what happened. But recently, teams have started reacting in seemingly more direct ways. In 2018, the Yankees made a concerted effort to get below the luxury threshold and reset their tax status. This past off season, Astros owner Jim Crane cited the luxury tax as a potential stumbling block in keeping Gerrit Cole. From what it sounds like, Boston’s dumping of Mookie Betts & David Price was largely due to the BoSox also wanting to come in below the 2020 threshold.

What’s slightly humorous about the entire situation is that the dollar-amount penalties aren’t even that big in the grand scheme of things. It would be absolutely no problem at all for the big markets to continue whizzing past the threshold and paying the piper. But I guess it is unwise to underestimate billionaire owners’ reluctance to share. Simply the fact that a compounding fine system exists seems to be somewhat of a deterrent in its own right. I won’t quibble. To quote cinematic mad scientist Emmitt Brown: “It works!”.

Of course, the luxury tax is nowhere near a cure-all for competitive balance in MLB. Betts & Price were moved because of it—and promptly picked up by an LA club. There’s no guarantee that Boston won’t try to re-acquire Mookie after they hit the reset button in ’20 and he hits the FA market in ’21. Free agency isn’t necessarily seen as the smartest/fastest way to improve overall performance anymore either. With the rise of player-evaluation and analytics, teams are realizing that slight improvements to each individual player are just as valuable as acquiring one super-talent. Baseball is also certainly not modeling its salary cap structure like the NFL, where “cap hits” are pervasive and heavily factor into payroll decisions.

But thinking back to how I viewed baseball’s competitive landscape in the mid-90s and comparing it to today, I’m pleased with the changes. While not perfect, the luxury tax seems to have—over time—steered large-market owners away from rampant, out-of-control spending relative to the “rest of the pack”.

There’s certainly no guarantee that more money equals more championships. Hoisting that flagged trophy at the ended of October is a much more complicated mix than that. But there is now hope that small- and mid-market teams can at least throw their hat in the ring for top free agents, as well as have a chance to sign and retain their homegrown talent.

To quote another cinematic figure: “Hope is a good thing…maybe the best of things.”