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June 4, 2012

Bizball

Inside the 2012-16 MLB CBA: Minimum Salaries, the Luxury Tax

by Maury Brown

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In Part One of this series on MLB’s new Collective Bargaining Agreement, the focus was on the changes to the draft system. Today, we look at changes to minimum salaries and the soft-cap via a luxury tax on total player payroll.

Each time a new labor agreement is reached in professional sports, there is invariably the question of, “Who came out on top?” You might be able to say the needle swung slightly one way or the other, but in the end the only real winner is “compromise.”

Such is the case with MLB’s latest CBA (read here). While one might say that there are certain aspects that were clear wins for the league, the players got some concessions as well. How big some of those concessions were, however, is debatable.

Increases In Minimum Salary
While there has been constant chatter about the need for a salary floor as much as a salary cap in baseball, the sides have settled the matter with the idea of the minimum salary ostensibly being that “floor.” The latest CBA defines the minimum amount a player can be paid in the majors and in the minors. From page 11 of the latest Basic Agreement:

2012—at the rate per season of $480,000;

2013—at the rate per season of $490,000;

2014—at the rate per season of $500,000;

2015—at the 2014 rate per season plus a cost of living adjustment, rounded to the nearest $500, provided that the cost of living adjustment shall not reduce the minimum salary below $500,000;

2016—at the 2015 rate per season plus a cost of living adjustment, rounded to the nearest $500, provided that the cost of living adjustment shall not reduce the minimum salary below the 2015 rate per season.

So how does this compare to historical increases in minimum salary? Based on data from the MLBPA’s annual report, the jump from $414,000 in the old CBA to $480,000 in the new CBA is an increase of 16 percent, the highest increase since (you guessed it) the first year of the last CBA which began in 2007. But from there, the increases are less than what was seen in the preceding years of the prior CBA. From 2013 to 2014, the minimum salary increases 2 percent compared to a 3 percent increase in 2008 and 2009.

The following table shows the major league minimum salary over the life of the prior CBA running into the newly agreed upon CBA:

Year

Min
Salary

Diff

% of
Increase

2007

$380,000

$53,000

16%

2008

$390,000

$10,000

3%

2009

$400,000

$10,000

3%

2010

$400,000

$0

0%

2011

$414,000

$14,000

4%

2012

$480,000

$66,000

16%

2013

$490,000

$10,000

2%

2014

$500,000

$10,000

2%

2015

??

??

??

2016

??

??

??

Note: 2015-2016 will be at least $500,000 plus a cost of living adjustment (COLA)

How do the increases stack up against overall inflation? Based on data that uses the Current Consumer Price Index published monthly by the Bureau of Labor Statistics (BLS), the minimum salary for the players at the major league level will increase 7.7 percent more than the projected rate of U.S. inflation but could potentially be below the rate of inflation in the following years:

For minor league salary, it gets a little tricky based upon whether a player is signing a deal that covers his first or second major league contract. Here is how the CBA defines how those salaries are structured:

For all Players (a) signing a second Major League contract (not covering the same season as any such Player’s initial Major League contract) or a subsequent Major League contract, or (b) having at least one day of Major League service, the minimum salary shall be as follows:

(i) for Major League service—at a rate not less than the Major League minimum salary;

(ii) for Minor League service—at a rate not less than the following:

2012—at the rate per season of $78,250;

2013—at the rate per season of $79,900;

2014—at the rate per season of $81,500;

2015—at the 2014 rate per season plus a cost of living adjustment, rounded to the nearest $100, provided that the cost of living adjustment shall not reduce the minimum salary below $81,500;

2016—at the 2015 rate per season plus a cost of living adjustment, rounded to the nearest $100, provided that the cost of living adjustment shall not reduce the minimum salary below the 2015 rate per season.

(3) For all Players signing a first Major League contract who are not covered by paragraph (2) above, the minimum salary for Minor League service shall be as follows:

2012—at the rate per season of $39,125;

2013—at the rate per season of $39,900;

2014—at the rate per season of $40,750;

2015—at the 2014 rate per season plus a cost of living adjustment, rounded to the nearest $100, provided that the cost of living adjustment shall not reduce the minimum salary below $40,750;

2016—at the 2015 rate per season plus a cost of living adjustment, rounded to the nearest $100, provided that the cost of living adjustment shall not reduce the minimum salary below the 2015 rate per season.

Note that if you’ve reached a major league contract more than once, your pay in the minors is substantially higher—double what you make with your first major league contract.

The Luxury Tax Gets a Bump
Now that we’ve talked about how the minimum salary works as a floor, what changes have been made to baseball’s soft-cap? The Competitive Balance Tax (CBT), otherwise known as the luxury tax, continues in the latest agreement (the prior agreement had a provision by which it could potentially be retired), and with it, the league got a bump at the top for those clubs that could be best described as habitual offenders of breaking the tax thresholds (read: New York Yankees).

Here is how the system is defined in the agreement (see beginning page 98):

A Club with a final Actual Club Payroll that exceeds the Tax Threshold applicable in that Contract Year (“Tax Threshold”) shall be assessed a Competitive Balance Tax on the difference between its final Actual Club Payroll and the Tax Threshold. AClub with a final Actual Club Payroll at or below the Tax Threshold shall incur no Competitive Balance Tax for that Contract Year.

Those thresholds shall be as follows over the life of the latest agreement:

  • $178 million in the 2012 contract year
  • $178 million in the 2013 contract year
  • $189 million in the 2014 contract year
  • $189 million in the 2015 contract year
  • $189 million in the 2016 contract year

Looking at the numbers, the ceiling remains pretty tight. Over the five-year agreement, clubs will receive just an extra $10 million worth of breathing room. Overall, in the 10 years that comprise the prior labor agreement and the one just reached, the CBT threshold grows $40 million ($148 million in 2007 to $189 million by 2016). Here is what the thresholds looked like across the life of the prior agreement:

  • $148 million for 2007
  • $155 million for 2008
  • $162 million in 2009
  • $170 million in 2010
  • $178 million in 2011

But when you think about this from a practicality standpoint, the ceiling is really targeted at no more than five clubs, and in reality, only two (the Red Sox and Yankees) have really had to contend with it repeatedly, with the Yankees doing so in every year that there has been a CBT in place. Here are the top five clubs by end-of-year player payroll, which is used to measure clubs against the CBT thresholds:

Rank

Club

Division

2011 EOY Payroll

1

Yankees

AL East

$216,044,956

2

Red Sox

AL East

*$174,116,280

3

Phillies

NL East

$165,313,989

4

Angels

AL West

$143,099,729

5

Mets

NL East

$142,244,744

* After final adjustments, the Red Sox broke the threshold thus paying $3,430,810. The Yankees saw a $13,896,069 CBT bill for the 2011 season

All told, from 2003 to 2011, just four clubs have broken the CBT threshold. The following numbers show the total amounts paid in tax over that time with the number of times that the club has broken the CBT threshold in brackets (see the yearly breakdown here):

  • Yankees (9) - $206,109,142
  • Red Sox (6) - $18,777,738
  • Tigers (1) - $1,305,220
  • Angels (1) - $927,057

Here’s how the tax rates will look over the life of the latest agreement:

(a) For a Club that has an Actual Club Payroll above the Tax Threshold in the 2012 Contract Year, the applicable Competitive Balance Tax rate shall be:

(i) 20% if the Club did not exceed the Tax Threshold in the 2011 Contract Year;

(ii) 30% if the Club’s Competitive Balance Tax rate in the 2011 Contract Year was 22.5%;

(iii) 40% if the Club’s Competitive Balance Tax rate in the 2011 Contract Year was 30%; and

(iv) 42.5% if the Club’s Competitive Balance Tax rate in the 2011 Contract Year was 40%.

(b) For a Club that has an Actual Club Payroll above the Tax Threshold in the 2013, 2014, 2015, or 2016 Contract Year, theapplicable Competitive Balance Tax rate shall be:

(i) 17.5% if the Club did not exceed the Tax Threshold in the preceding Contract Year;

(ii) 30% if the Club’s Competitive Balance Tax rate in the preceding Contract Year was 17.5% or 20%;

(iii) 40% if the Club’s Competitive Balance Tax rate in the preceding Contract Year was 30%; and

(iv) 50% if the Club’s Competitive Balance Tax rate in the preceding Contract Year was 40, 42.5%, or 50%.

That 50 percent rate is an up-tick from the rates in the prior labor agreement and something that the Yankees are surely aware of. What’s the target for the Bronx Bombers? That $189 million threshold number that tops out at the end of the labor agreement.

"I'm looking at is as a goal,'' Steinbrenner said to ESPNNewYork.com, "and my goals are normally considered a requirement.''

That still means the Yankees could potentially be over the threshold for 2012 and 2013, and it’s possible that the Red Sox could be there again as well.

What’s It All Mean?
According to the MLBPA’s annual report, the average salary increase in MLB’s labor agreement ranged from 4 percent to 1 percent, something that should be seen as a wholly manageable increase for ownership based on revenue increases that the clubs have seen over the same period.  Here’s the breakdown:

Year

Average
Salary

Diff

% of
Increase

2007

$2,820,000

$120,708

4%

2008

$2,925,679

$105,679

4%

2009

$2,996,106

$70,427

2%

2010

$3,014,572

$18,466

1%

2011

$3,095,183

$80,611

3%

Source: MLBPA

One could make a case that the luxury tax is really the “Yankees and Red Sox Tax”, but truth be told, the CBT is really all about trying to keep the Yankees under control. The league will quibble with that by saying that the system keeps others in line as well, but detractors of the system will say that there’s no way 95 percent of the clubs in the league could dream of hitting the threshold even if they wanted to, given the revenues they pull in.

What’s funny is that the notion of a salary cap is something that the league and union for the players won’t even say. The term “salary compression” is often used instead, as “salary cap” is often considered a dirty word. The increases in the CBT and growth in the minimum salary that really only mirrors the rate of inflation (and that could be pushing it) shows that, when coupled with the luxury tax now associated with the draft process (see details of that in Part One of this series), the league is finding a way to increase “salary compression” without having to get into the nasty labor implications of a “salary cap” and “salary floor.” If there’s a case to be made that the league gets to have their cake and eat it too, it’s that without the salary cap battle that hovered over matters in the 1990s, there are now cost control mechanisms in place that will allow for 21 uninterrupted years of labor peace when this latest CBA expires on December 1, 2016. If it allows for low-revenue makers to be competitive in the standings (which one could say has happened, albeit very difficult for them to sustain), then the league should continue to prosper.

Maury Brown is an author of Baseball Prospectus. 
Click here to see Maury's other articles. You can contact Maury by clicking here

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