THE END OF THE LUXURY TAX

As the calendar year comes to a close and the holiday season is setting in, most teams will be considering what unanswered questions are left for their respective teams. After New Year’s, signings are generally considered “late” signings, and teams start to feel the pressure to be ready for the start of Spring Training. The one factor that more and more teams have to consider is the cost of adding players, primarily around the luxury tax threshold. This year, with four teams over the threshold for the first time ever, and the current Collective Bargaining Agreement set to expire next winter, it makes you wonder whether or not it will survive the next CBA negotiations.

The four teams which will pay a luxury tax this year are the Dodgers, Yankees, Red Sox, and for the first time, the San Francisco Giants. Notably, the Dodgers are the biggest contributors this year and have set a new record - $43.6M. That’s 28% more than the previous record ($35.04M in 2005 by the Yankees), more than everyone else combined this year, and helps set a record combined $72.8M for any given season. Unless things change, they'll top $50M next year.Giants CEO Larry Baer made an interesting observation. Many have reported this, but we’ll cite US News: "We don't have to get that deep in but we need to pay the tax. Versus not improving the team, we'll pay the tax and improve the team." Did you notice the word “need”? When the perception is that spending more is a need, they are only a step away from declaring the tax either unfair, or the amounts unfair. And if the amounts aren’t punitive, it’s not a disincentive to paying more. It doesn’t stop the big market teams from outspending and overwhelming small market teams.

Baseball purists tell us that this is a good thing. The concept that every team, regardless of their revenue or market size, can compete to go to the playoffs and win the World Series is a fair one. It wasn’t fair before when only big market teams could afford the best players. They would be right. They would also point to the fact that ever since 2003 when the luxury tax kicked in, more small market teams have made it to the playoffs and the World Series, which is proof that it’s working. They would be right on that as well. The luxury tax is the perfect solution. That is, unless you’re in the business of making money.

Major League Baseball, like all sports leagues, is in the business of making money. Besides player contracts, MLB and teams  engage with media outlets to maximize viewership, they engage with sporting good outlets to license trademarked goods, and they engage in a bunch of other sales and marketing activities all to make as much money as they can. The problem with putting small market teams on par with large market teams is that small market teams do not generate the kind of revenues that the large market teams do.

Take a look at World Series viewership. Viewership represents fan interest and baseball’s ability to charge media companies for broadcasting games. The 2015 World Series had the highest ratings/share and viewers since 2009. Let me translate that – the most recent World Series, which had a New York team playing in it, had the highest viewership since the last time a New York team played in the World Series. Coincidence? I don’t think so. In fact, between 1995 and 2004, the TV ratings for the World Series averaged at about 15, with the lowest at 11.9 in 2002. Since 2004, no World Series has reached 11.9, the highest being 2009 which hit 11.7. Again, that being the last time the Yankees made it to the World Series. In fact, ratings haven’t hit double digits since 2011. The fact is that most fans are most interested in seeing their team play, and that means more quantifiable interest is generated when large market teams play.

So, is having more small market teams competing at these levels a good thing for baseball? Maybe it is and maybe it isn’t. Baseball needs to have a level playing field when it comes to teams’ abilities to acquire good players. At the same time, large market teams will always have a stronger showing in the playoffs simply because they have a stronger pull power. When more teams need to pay more to stay competitive and salaries sky-rocketing the way they are, expect some push back at the next CBA negotiations. When luxury taxes were enacted, the Yankees were the sole objectors. Now they have some new friends. While the tax may not go away completely, expect that they will ease up on the limits and the penalties. For those of us cheering on the best big-market team out there, this should be a welcome relief.

--Ike Dimitriadis, BYB Senior Staff Writer
Twitter: @KingAgamemnon







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