Luxury tax (sports)

A luxury tax in professional sports is a surcharge put on the aggregate payroll of a team to the extent to which it exceeds a predetermined guideline level set by the league. The ostensible purpose of this "tax" is to prevent teams in major markets with high incomes from signing almost all of the more talented players and hence destroying the competitive balance necessary for a sport to maintain fan interest. The money derived from the "tax" is either divided among the teams that play in the smaller markets, presumably to allow them to have more revenue to devote toward the contracts of high-quality players,^[1] or in the case of Major League Baseball, used by the league for other pre-defined purposes.

In North America, Major League Baseball has implemented the luxury tax system. The National Basketball Association also has a luxury tax provision; its utility is somewhat limited by the fact that the league also has a salary cap provision. The "hard" salary cap of the National Football League and the National Hockey League has prevented any need for a luxury tax arrangement.^[2]

Methods for limiting payroll

In the Big 4 North American sports leagues (Major League Baseball (MLB), National Basketball Association (NBA), National Football League (NFL), and National Hockey League (NHL)), there are three different methods employed to limit individual teams payroll: hard salary cap, soft salary cap with luxury tax, and luxury tax.

Hard salary cap

A hard salary cap is where the league sets a maximum amount of money allowed for player salaries, and no team can exceed that limit.

Soft salary cap

A soft salary cap has a set limit to player salaries, but there are several major exceptions that allow teams to exceed the salary cap. For example, in the case of the NBA, teams can exceed the salary cap when keeping players that are already on the team.

Luxury tax

A luxury tax system does not have a limit to how much money can be spent on player salaries. However, there is a tax levied on money spent above a threshold set by the Collective Bargaining Agreement (CBA) between the players union and the owners. For every dollar a team spends above the tax threshold, they must also pay some fraction to the league. This system is used to discourage teams from greatly exceeding the tax threshold, with the goal of ensuring parity between large and small market teams.

Luxury tax rules by league

Major League Baseball

Luxury tax

National Basketball Association

Soft salary cap + luxury tax

National Football League

Hard salary cap

National Hockey League

Hard salary cap

Major League Soccer

Hard salary cap + Designated Player Rule exception (making it effectively a soft cap)

Major League Rugby

Hard salary cap

Major League Lacrosse

Hard salary cap

National Lacrosse League

Soft salary cap

Major League Baseball (MLB)

Main article: Major League Baseball luxury tax

As explained by Fangraphs: "Technically called the 'Competitive Balance Tax', the Luxury Tax is the punishment that large market teams get for spending too much money. While MLB does not have a set salary cap, the luxury tax charges teams with high payrolls a considerable amount of money, giving teams ample reason to want to keep their payrolls below that level."^[3]

The threshold level for the luxury tax will be $189MM in 2014 (up from $178MM from 2011 to 2013) and will remain at $189MM through 2016. From 2012 through 2016, teams who exceed the threshold for the first time must pay 17.5% of the amount they are over, 30% for the second consecutive year over, 40% for the third consecutive year over, and 50% for four or more consecutive years over the cap.^[4]

Only eight teams have ever exceeded the luxury tax threshold: the San Francisco Giants, the Boston Red Sox, the Los Angeles Angels of Anaheim, the Detroit Tigers, the Los Angeles Dodgers, the New York Yankees, the Chicago Cubs for the first time in 2016 and the Washington Nationals for the first time in 2018. Only the Red Sox, Dodgers and Yankees have exceeded it more than once. The LA Dodgers have exceeded it four times. Boston has exceeded it six times. New York has exceeded it fourteen times, or, every year since it has been in enforcement. In aggregate, the Yankees have paid out some $325.00 MM, 73.78% of the total fines assessed since the luxury tax began.

In 2016 a record six teams were issued the luxury tax by MLB. The Los Angeles Dodgers ($31.8 million), the New York Yankees ($27.4 million), the Boston Red Sox ($4.5 million), the Detroit Tigers ($4 million), the San Francisco Giants ($3.4 million) and the Chicago Cubs ($2.96 million).^[5]

In 2017 the same six teams from 2016 were issued the luxury tax by MLB. Against the $195 million threshold + $13 million for player benefits, payrolls for the Los Angeles Dodgers ($244 million), New York Yankees ($209.3 million ), Boston Red Sox ($187.9 million), Detroit Tigers ($190.4 million), San Francisco Giants ($186.4 million) and Chicago Cubs ($199.5 million) were in excess. This was the 15th straight year the New York Yankees paid the luxury tax.^[6]

In 2018 only two teams met the luxury tax by MLB: The Boston Red Sox ($9.4 million) and The Washington Nationals ($1.2 million). Several teams came just under the $197 million tax threshold: The San Francisco Giants ($196.66 million), The Chicago Cubs ($183.9 million), Houston Astros ($182.4 million), Los Angeles Dodgers ($181.99 million) and New York Yankees ($178.8 million).^[7]

The luxury tax is separate from revenue sharing, which is a system to balance out the income distribution between large and small market teams by dividing money from merchandise sales and media contracts. The money generated from the luxury tax is not distributed to the rest of the league, as is the case with the NBA, but rather is used for other purposes. The first $2,375,400 and 50% of the remaining total are used to fund player benefits, 25% goes to the Industry Growth Fund, and the remaining 25% is used to defray teams' funding obligations from player benefits.^[8]

Luxury tax paid per year by team (in millions of $)^{[9][10][11][12][13][14][15][16][17][18][19]}

Team	2003	2004	2005	2006	2007	2008	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018	2019	2020	2021	Total
Luxury tax threshold	117	120.5	128	136.5	148	155	162	170	178	178	178	189	189	189	195	197	206	208	210	-
Yankees	11.80	25.96	34.05	26.01	23.88	26.86	25.69	18.03	13.90	18.92	28.11	18.33	26.1	27.4	-	-	-	-	-	325.04
Dodgers	-	-	-	-	-	-	-	-	-	-	11.42	26.62	43.6	31.8	-	-	-	-	-	113.44
Red Sox	-	3.15	4.15	0.50	6.06	-	-	1.49	3.43	-	-	-	1.8	4.5	-	9.4	-	-	-	34.48
Tigers	-	-	-	-	-	1.31	-	-	-	-	-	-	-	4	-	-	-	-	-	5.31
Giants	-	-	-	-	-	-	-	-	-	-	-	-	1.3	3.4	-	-	-	-	-	4.7
Angels	-	0.93	-	-	-	-	-	-	-	-	-	-	-	-	-	-	-	-	-	0.93
Cubs	-	-	-	-	-	-	-	-	-	-	-	-	-	2.96	-	-	-	-	-	2.96
Nationals	-	-	-	-	-	-	-	-	-	-	-	-	-	-	-	1.2	-	-	-	1.2

National Basketball Association (NBA)

Main article: NBA salary cap

The NBA utilizes a soft salary cap, meaning there is a salary cap but there are a variety of exceptions that allow teams to exceed that cap. For example, teams can re-sign players already on the team to an amount up to the maximum salary allowed by the league for up to five years regardless of where their payroll is relative to the cap. This provision is known as the "Larry Bird" exception, named after the former Boston Celtics player who was retained by that team until his retirement under the provisions of this rule. The result is that the majority of teams are over the cap at any given time.

In addition to the soft cap, the NBA utilizes a luxury tax system that is applied if the team payroll exceeds a separate threshold higher than the salary cap. These teams pay a penalty for each dollar their team salary exceeds the tax level. From 2002 to 2013, if a team exceeded the luxury tax threshold, they must pay one dollar to the league for every dollar that they are over the limit. For the 2013–14 season and onward, teams paid an incremental rate based on their team salary. They also have to pay a repeat offender rate, which is an additional dollar for every dollar over. For 2014–15 teams pay the repeater rate if they also were taxpayers in all of the previous three seasons. For 2015-16 and all subsequent seasons, teams pay the repeater rate if they were taxpayers in at least three of the four previous seasons. The table of rates is shown below.

Current tax levels

Amount over tax threshold	Standard tax per excess dollar	Repeat offender tax per excess dollar
$4,999,999 or less	$1.50	$2.50
$5 million to $9,999,999	$1.75	$2.75
$10 million to $14,999,999	$2.50	$3.50
$15 million to $19,999,999	$3.25	$4.25
Over $20 million	$3.75 + $0.50 per $5 million	$4.75 + $0.50 per $5 million

The resulting total is then distributed to the remaining teams that are under the tax threshold.

There was no luxury tax implemented in the 2004–2005 season due to insufficient basketball-related income. ^{[citation needed]}

Luxury tax paid per year by team (in millions of $)^[20] (NBA Champ)

Team	2002–03	2003–04	2004–05	2005–06	2006–07	2007–08	2008–09	2009–10	2010–11	2011–12	2012–13	2013–14	2014–15	2015-16[21]	Total Paid
Luxury Tax Threshold	52.88	54.56	N/A	61.7	65.42	67.86	71.15	69.92	70.31	70.31	70.31	71.75	76.83	84.74	N/A
Knicks	24.37	39.87	-	37.25	45.14	19.72	23.74	5.20	-	-	9.96	36.35	6.95	-	248.54
Mavericks	19.5	25.03	-	17.33	7.20	19.61	23.61	17.58	18.92	2.74	-	-	-	-	150.53
Nets	5.73	9.39	-	-	-	-	-	-	-	-	12.88	90.57	19.78	-	138.55
Lakers	9.75	6.44	-	-	-	5.13	7.19	21.43	19.92	12.56	29.26	8.96	-	-	122.64
Trail Blazers	51.97	28.85	-	-	-	-	5.899	-	-	-	-	-	-	-	89.05
Heat	5.18	-	-	-	-	8.32	-	3.04	-	6.13	13.35	14.43	-	-	50.44
Cavaliers	-	-	-	-	-	14.01	13.71	15.41	-	-	-	-	6.96	54	104.09
Celtics	-	1.60	-	-	-	8.22	8.29	14.93	5.69	7.37	1.18	-	-	-	47.28
Magic	-	-	-	7.76	-	-	-	11.05	20.18	-	-	-	-	-	38.95
Kings	17.38	13.14	-	-	-	-	-	-	-	-	-	-	-	-	30.52
Timberwolves	6.03	17.63	-	-	1.00	-	-	-	-	-	-	-	-	-	24.66
Nuggets	-	-	-	-	2.02	13.57	-	5.56	-	-	-	-	-	-	21.16
Sixers	12.76	5.10	-	-	-	-	-	-	-	-	-	-	-	-	17.86
Suns	1.89	-	-	-	-	3.87	4.92	4.96	-	-	-	-	-	-	15.63
Spurs	0.19	-	-	0.90	0.20	-	-	8.81	-	2.52	-	-	-	4.9	17.5
Grizzlies	7.55	-	-	3.74	-	-	-	-	-	-	-	-	-	-	11.30
Pacers	0.89	3.32	-	4.67	-	-	-	-	-	-	-	-	-	-	8.89
Jazz	-	-	-	-	-	-	-	3.11	5.00	-	-	-	-	-	8.10
Raptors	2.68	4.09	-	-	-	-	-	-	-	-	-	-	-	-	6.77
Clippers	-	-	-	-	-	-	-	-	-	-	-	1.33	4.80	19.9	26.03
Bucks	4.73	-	-	-	-	-	-	-	-	-	-	-	-	-	4.73
Hawks	3.72	-	-	-	-	-	-	-	-	0.67	-	-	-	-	4.38
Bulls	-	-	-	-	-	-	-	-	-	-	3.93	-	-	4.2	8.13
Thunder	-	-	-	-	-	-	-	-	-	-	-	-	2.79	14.5	17.29
Rockets	-	-	-	-	-	-	-	-	0.76	-	-	-	-	4.5	5.26
Pistons	-	0.76	-	-	-	-	-	-	-	-	-	-	-	-	0.76
Warriors	-	-	-	-	-	-	-	-	-	-	-	-	-	14.8	14.8
Hornets	-	-	-	-	-	-	-	-	-	-	-	-	-	-	0
Pelicans	-	-	-	-	-	-	-	-	-	-	-	-	-	-	0
Wizards	-	-	-	-	-	-	-	-	-	-	-	-	-	-	0

Canadian Football League

The Canadian Football League has a luxury tax. Penalties for teams that breach the salary cap regulations are:

Amount involved in breach	Penalty for each $1	Draft picks forfeited
First $100,000	$1	None
$100,000 to $300,000	$2	First Round
More than $300,000	$3	First and Second Round

^[22]

Other leagues

The National Football League (NFL) and the National Hockey League (NHL) both have hard salary caps, making it unnecessary to utilize the luxury tax.

Several other leagues in the United States and abroad use salary caps, but the luxury tax is uncommon.

See also

Sports portal

References

1. Dietl, H., Lang, M. and Werner, S. (2010): "The Effect of Luxury Taxes on Competitive Balance, Club Profits, and Social Welfare in Sports Leagues", forthcoming in International Journal of Sport Finance.
2. Andreff, Wladimir; Stefan Szymański (2006). Handbook on the economics of sport. Edward Elgar Publishing. p. 656. ISBN 978-1-84376-608-7.
3. "Luxury Tax | Sabermetrics Library".
4. Luxury Tax" Fangraphs
5. "Record 6 MLB teams to pay luxury tax". Metroland News. 6 December 2016. Retrieved 20 December 2016.
6. "6 teams will pay the luxury tax this year, and yes, of course, one of them is the Yankees". SBnation. 14 November 2017. Retrieved 20 November 2018.
7. "Red Sox, Nationals only teams on track to pay MLB's luxury tax". ESPN. 23 April 2018. Retrieved 20 November 2018.
8. "MLB CBA" (PDF). pp. 132–133. Retrieved 18 October 2016.
9. CHART OF THE DAY: The MLB Luxury Tax Should Really Be Called "The Yankees Tax"." Business Insiders April 6, 2011.
10. Yankees Assessed Luxury Tax." mlb.com 12/29/2009.
11. MLB players, owners announce 5-year deal." ESPN.com October 25, 2006.
12. New York Yankees cut the amount they spend on Major League Baseball luxury tax by over $7 million." NY Daily News December 22, 2010.
13. Breaking Down MLB's Luxury Tax: 2003-2007." The Biz of Baseball December 25, 2007 Archived June 7, 2013, at the Wayback Machine.
14. Baseball Luxury Tax." Juliettes Interiors.
15. Report: Yanks hit with luxury tax:" ESPN December 14, 2012
16. Yankees, Dodgers hit with luxury tax penalties" sbnation.com September 11, 2013
17. Dodgers lead MLB with record $43.6 million paid in luxury tax" ESPN December 18 2015
18. Competitive Balance Tax"
19. Red Sox, Nationals only teams on track to pay MLB's luxury tax"
20. "ShamSports | Complete History Of NBA Luxury Tax Payments, 2001-2015". 9 July 2015.
21. "NBA luxury tax payments by team 2012-2016 | Statistic". Statista. Retrieved 2017-06-14.
22. "The Game | CFL.ca | Official Site of the Canadian Football League". Archived from the original on 2015-01-21. Retrieved 2014-12-27.