It’s easy to think that professional athletes have unlimited earning potential, and while they certainly make more than most people in other jobs, they are limited by what they can earn in salary from their team.
This happens due to a rule called a salary or wage cap. Different leagues have different ways that they structure the caps, but the MLB’s rulebook doesn’t include a salary cap.
Why doesn’t the MLB have a salary cap? The MLB doesn’t have a salary cap because they instead have a luxury tax, which was established in initially in 1997, abandoned from 2000 to 2002, and reinstated in 2003. It continues today, although no teams have had to pay the luxury tax in the last three seasons.
What Is a Salary Cap?
A salary cap is a limit that is imposed in sports leagues in order to try and make things more fair among all of the teams in that league. It essentially limits the amount of money that any one team can spend on the salaries of their players.
Many players aren’t the biggest fans of salary caps because it limits their negotiating power. If they’re performing well and their team is making a huge profit, they can’t simply ask for more money because of these salary caps.
They’re also less likely to be able to court other teams for more money, since those teams will have the same salary requirements as the other teams in the league.
Salary caps are also used in conjunction with salary floors, which is the minimum amount of salary expenditure that a team must spend on non-players.
This is done to ensure that organizations don’t eliminate other positions in order to get more room in their salary cap for higher-paid players.
What Does the MLB Have Instead?
Unlike the NBA, the NHL, and the NBA, the MLB doesn’t have a strict salary cap. Instead, they have what’s known as a luxury tax.
If teams exceed a limit set by the collective bargaining agreement, they have to pay a penalty to the league for every dollar that they spend above the limit.
The rules usually state that teams who exceed the limit in successive years pay higher penalties, but they can reset their rate if they drop back below the threshold for a season.
In the first iteration of a luxury tax, the threshold was determined by the average salary expenditure of the fifth and sixth-highest spending teams. Then the top five teams paid 34% tax on every dollar that they spent above that amount.
The rule changed in 2002 to set a threshold that is the same for every team, regardless of what the others end up paying out. The Collective Bargaining Agreements set the limits for the next few years.
Do Teams Pay the Tax?
In general, very few teams in the MLB exceed the threshold and have to pay out the fines. The team that has paid the most luxury tax on their player salary is none other than the New York Yankees. From 2003 (when the rule was first enacted) until 2016, the Yankees exceeded it every single season.
In those 13 years, the cap limit went from $117 million to $189 million. The Yankees have paid an immense sum to the league over the years—it totals more than $325 million. However, since 2017, the Yankees haven’t paid any luxury tax.
For the most part, teams don’t regularly violate the threshold and have to pay this tax. In almost 20 years, only eight of the MLB’s 30 teams have ever gone above the limit:
- New York Yankees
- LA Dodgers
- Boston Red Sox
- Detroit Tigers
- San Francisco Giants
- LA Angels
- Chicago Cubs
- Washington Nationals
After the Yankees, the Red Sox are next most-often offenders. They paid luxury tax for four straight seasons between 2004 and 2007, as well as in 2010, 2011, 2015, 2016, and 2018. Although they have paid out nine times, they don’t exceed the threshold by very much, and thus they have only paid a total of $34.48 million in luxury tax.
The LA Dodgers have only exceeded the limit four times, in the seasons between 2013 and 2016, but their total luxury tax expenditures sits at $113.44 million.
Remember, the tax is calculated as a percentage of the dollars a team exceeds the limit, so going just above the limits, as the Red Sox did, will lead to less tax overall than blowing the threshold out of the water.
Other than those three teams, only the San Francisco Giants have consecutively paid the tax, in 2015 and 2016. The Detroit Tigers paid twice, in 2008 and again in 2016. The LA Angels, Chicago Cubs, and Washington Nationals have all paid once, in 2004, 2016, and 2018, respectively.
No teams exceeded the threshold in 2019, 2020, and 2021.
Does It Make the League More Fair?
Some argue that all leagues need salary caps in order to make the game fairer, which would in turn make the league more money. But as Matt Snyder points out in an article that he wrote for CBS Sports, the MLB has more equity between teams than other leagues that have stricter salary caps.
He points out that since 2000, there haven’t been any back-to-back winners of the MLB World Series. The NBA, NHL, and NFL have all had repeating champions in that same time period despite their salary cap requirements.
He also states that there is much more variety in which teams win the championships and which teams make it to the postseason in MLB compared to other sports.
It seems that in the MLB, most teams have an honest shot every season. The luxury tax seems to be working for the MLB, if the metric for it working is to create equal opportunities between teams, regardless of their overall income.
Sporting leagues do a lot of things to try to make their games fair. This is more fun for the fans and leads to more revenue down the line. Fans will quickly lose interest in their local teams if the same two or three teams always win the championship.
A salary cap is one way some leagues do this, such as the NFL, NHL, and NBA. The league determines how much any team can spend on the salaries of their players.
In the MLB, teams simply pay a fee if they exceed an agreed-upon threshold. While some people think there should be a salary cap in the MLB, when compared to other sports, many more teams win the championship in baseball than in football, hockey, and basketball.