Although Major League Baseball does not have a hard salary cap, the competitive balance tax (CBT) is in place to both deter bigger market teams from consistently spending at higher rates while also benefiting the smaller market clubs.
Commonly referred to as the luxury tax, teams pay a penalty for their total payroll over thresholds set by MLB and the Players Association as part of the collective bargaining agreement (CBA).
For the 2024 season, the number was set at $237 million, so any salary over that figure has a tax on it, which is determined by how many consecutive seasons the club is over the threshold and by how far they went over.
Teams in just their first year over pay a 20% tax on all overages, and that increases to 30% in the second year and 50% in following years.
For clubs over by $20 to $40 million, they pay a 12% surcharge, for those $40 to $60 million over, they pay a 42.5% surcharge for the first year and 45% for each year after, and those $60 million or more over have a 60% surcharge.
In addition, clubs that are $40 million or more above the threshold have their highest selection in the next draft moved back 10 places unless the pick falls in the top six. In that case, the team has its second-highest selection moved back 10 places instead.
This is all relevant to the Los Angeles Dodgers because they were charged a significant luxury tax fee, in addition to their MLB-leading payroll, according to Bill Plunkett of the Southern California News Group:
The World Series champions topped Major League Baseball with a $353 million payroll and a $103 million bill for exceeding the Competitive Balance Tax threshold.
It is the fourth consecutive season the Dodgers have been over the luxury tax threshold and the ninth time since the Guggenheim Baseball Management Group took control of the club.
The Dodgers were $116 million over the luxury tax threshold with their payroll, and because of being over more than three seasons, they were charged at the highest base level of 50%.
However, because they were also over the threshold by more than $60 million, they ended up paying the extra surcharges, which results in a 50% rate on the first $20 million above the threshold, a 62% rate on the next $20 million, a 95% rate on the amount from $277 million to $297 million and a 110% on the total above $297 million.
That brings their total tax to $103 million, making their total payroll paid for the 2024 season $456 million. In addition, their penalties of $103 million is an MLB record, surpassing the previous record set by the New York Mets at about $101 million.
The Dodgers total would have been higher if not for their unprecedented deferrals, which have saved them significant amounts and thus allowing them to continue spending.
In addition, eight other teams joined the Dodgers in paying a luxury tax bill, marking another record with nine teams owing a penalty.
The New York Mets, New York Yankees, Atlanta Braves, Texas Rangers, Houston Astros, Philadelphia Phillies, San Francisco Giants and Chicago Cubs were all taxed for a total of just over $311.3 million. Six of the nine teams made the 2024 postseason.
Where does MLB luxury tax money go?
The luxury tax funds are distributed based on the agreements in the CBA.
The first $3.5 million funds player benefits. Half of the remaining sum is then used to fund contributions to Players Association individual retirement accounts.
The other half of the remaining sum is then distributed by the commissioner to payee clubs that have grown their non-media net local revenue over a multi-year period.
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