More money, more problems. The rich get richer. The more you have, the more you get. All of these idioms have one thing in common: They perfectly reflect Major League Baseball’s current payroll model. Let’s explore the history of the existing model, its pros and cons, and whether or not it should be changed.
Image courtesy of © Brad Penner-Imagn Images
The objective here is to consider the different possible solutions to the major financial problems that the MLB will face in the years to come. To do this, we would do well to start by looking at the history of the current system, to see how we got here.
Believe it or not, Major League Baseball has had some form of revenue sharing since its inception. Until 1995, teams had to share a fixed dollar amount entering that season. Then, over the next five years, they experimented with different revenue sharing models, before adopting the current model in 2002, in which teams are required to contribute a large portion of their local revenue to a pool which is then distributed equally among the league’s 30 teams. This model was slightly modified in the 2007 Collective Bargaining Agreement (CBA), when the share increased from 34% to 31%, before returning to 34% in the 2012 CBA. However, in the latest CBA, this figure is quite huge, at 48%.
This article is part of a four-part collaboration across three DiamondCentric sites. To learn more about the possible future of a salary cap in sports, see the article by Brandon Glick at North Side Baseball today. Meanwhile, over at Brewer Fanatic, Jake McKibbin makes the case for more complete revenue sharing. Later this week, we’ll share a panel discussion between Matthew Lenz, Glick and McKibbin, on what they’ve learned from this process and what they think needs to be done moving forward.
If we go back to 1997, we see the creation of the Competitive Balance Tax (CBT), also known as the “Luxury Tax”. The CBT has undergone some revisions during its existence, but has remained the same since the 2022 CBA. Currently, teams face the following penalties when exceeding the tax threshold:
- They are taxed according to four progressive supplement thresholds ($)
- Their highest draft pick drops 10 spots if they are above the third threshold; And
- Tax rates increase for consecutive seasons beyond the lowest threshold
Aside from the obvious call from the Los Angeles Dodgers, it hasn’t even really slowed down other teams, as MLB has seen a record number of teams exceed luxury tax thresholds in consecutive seasons (eight in 2023, nine in 2024). The benefits of CBT are then distributed in different ways:
- First $3.5 million per team funds player benefits
- 50% of remaining profits are donated to players’ retirement accounts
- The remaining 50% goes to the Commissioner’s Discretionary Fund, where they distribute funds “to teams working to increase attendance, fan engagement and improve marketing and promotions.”
Advantages and disadvantages
While it may be difficult to see any benefits for this model at this time, we can at least agree that it’s better than nothing. Revenue sharing helps balance financial disparities between small and large market organizations. This allows small-market teams to compete (if they choose) with large-market teams when bidding on high-priced players, if only because many of these bigger spenders are effectively paying 50% more for these players than small-market, low-budget clubs. Whether we think it works or not, CBT is intended to discourage teams from overspending and hoarding the league’s best players.
While revenue sharing is a start, big-market teams that have signed massive deals with local TV still have a leg up on the competition. The Dodgers’ TV deal earns them nearly $200 million a year, meaning that even after sending 48 percent of their local broadcast gross revenue to the league, they could pay the payroll of one of the eight lowest-spending teams in the league before clicking through a turnstile. After paying their 48%, the Twins’ local broadcast money for 2025 might not cover Byron Buxtonthe salary.
Do we need change or do we just want it?
Simply put, we need change. Unfortunately, it won’t be that simple. Ultimately, there is no perfect plan that can appease owners and players. Future articles will address larger changes, but at a minimum, there will need to be restrictions on carryovers (an easier financial tool to deploy for teams with wealthier ownership groups and more revenue flowing in each year) and harsher penalties for exceeding CBT thresholds. For deferrals, this could be something as simple as capping deferrals at a certain percentage of the contract value, or limiting the number of years you can defer full payment.
Whatever changes may (or may not) occur will not be established until the current collective bargaining agreement expires after the 2026 season. Keep in mind that the owners and players’ union must reach an agreement, and ultimately each group will likely prioritize its own outcomes. Due to the challenges of aligning two parties with very different outlooks and financial goals, many people are already assuming there will be a lockout that could potentially delay the start of the 2027 season. While that sounds good in theory, it’s not as simple as doing what’s best for the league. Maybe Notorious BIG was right: “It’s like the more money we encounter, the more problems we see.” »
