MLB’s Competitive Balance Tax Is Anything But

One of my favorites paintings is René Magritte’s The Treachery of Images. Basically, it’s a painting of the pipe with “this is not a pipe” written on it in French. While interpretation is in the eye of the beholder, one can argue that it makes two points. First, there’s the wordplay; a painting is not a pipe. But there’s a double-meaning you can take, too: the frequent incongruity between what a word says and what a word actually is. (If you’d like to read a lot more about this painting, Michel Foucault has just what you need!)

MLB’s competitive balance tax has a lot in common with Magritte’s pipe. It says it’s about competition, but without any mechanism to ensure that the proceeds improve competition. It says it’s about balance, but it has no way to ensure that balance. It’s described widely as a luxury tax, but it’s not that either. Luxury taxes, historically, have been directed at what economist Fred Hirsch termed “positional goods,” or goods that are highly prized based on their scarcity and prestige value. Labor costs in a labor-intensive field, though, aren’t really a luxury good, and MLB’s business is mainly putting teams of baseball players on the field. Everything MLB does stems from those games; if the teams didn’t exist, there wouldn’t be as much clamor for t-shirts with cardinals sitting on a wooden stick or ice cream served in a small plastic helmet with a creatively spelled abbreviation of “stockings” on it. Players are no more luxuries for a baseball team than leather is for a shoe company.

But let’s get to the competitive balance side of things. MLB’s argument is that the CBT is needed to increase competitive balance. Yet there’s very little evidence that it actually has increased competitive balance, and if anything, teams are farther apart since the CBT was implemented, not closer together. From 1984 to 2001, leaving out shortened seasons, the standard deviation of winning percentage was about 67 points. From 2002, the first year of MLB’s modern CBT, to ’21 (excluding the shortened 2020 season), that increases to 74 points; since the start of 2016, when salaries have been static, it’s 80 points.

Having more money, naturally, is better than having less money, but there’s a limited relationship between winning and total salary. Again, going back to 1984:

Only about 14% of the variance of team winning percentage has been explained by the variance in team payroll. Now, 14% isn’t zero, but you want there to be some relationship; it would be odd if there were absolutely no relation.

How big is this effect? The model is only robust enough to say that a standard deviation above or below league mean is worth about 26 points in win percentage. To put that in layman’s terms, the standard deviation for team winning percentage in 2021 was $51.5 million, with a mean of $119.7 million. If a team’s payroll were all you knew going into the season, you’d expect one with a $171 million payroll to win 85 games instead of 81. How a team is run is still a much better gauge of success than how much money it spends.

If the fundamental design of a payment scheme doesn’t have a mechanism for competitive balance and it actually hasn’t increased competitive balance, it’s hard to say it has much to do with competitive balance. To put it bluntly, the CBT is more designed to function as a soft salary cap — one with no floor and that’s tied not to any league revenue but simply what players are able to negotiate out of owners at the bargaining table. With MLB’s proposals generally increasing the soft cap by 0.9% a year and initially proposing far harsher penalties, you can see why players are mad; by having most of the elements of a salary cap with none of the downside, the owners get to eat their cake and have it, too.

Another clue to competitive balance being a pretext is the design of baseball’s revenue-sharing system. As with the competitive balance tax, there are no teeth in the mechanism to ensure that revenue-sharing dollars are being invested in teams. The CBA says that “each Club shall use its revenue-sharing receipts (including any distributions from the Commissioner’s Discretionary Fund) in an effort to improve its performance on the field.” The commissioner is given authority on teams that fail to do this, and the burden in a grievance is on players to demonstrate that the team did not. As with cases of service time manipulation (e.g. Kris Bryant), that’s a very high bar to pass, and it’s not as if Rob Manfred has shown any willingness to enforce this mechanism aggressively.

Over at The Athletic, Ken Rosenthal discussed baseball’s luxury tax with Manfred and former MLBPA COO Gene Orza. Orza made it clear that there was no intent to design a system that serves as a faux-salary cap:

“It was always intended to have three or four teams go over the level. That would be a bootstrap on salaries, notwithstanding the fact they were paying the penalty. They couldn’t go over as much as they otherwise would. But they could go over. And they would go over. And if they’re not going over, it’s a salary cap. And they know they’re not entitled to a salary cap.”

Manfred, meanwhile, does not feel the CBT acts as one either:

“Gene is certainly correct that the competitive-balance tax thresholds were not intended to operate as a cap. And I do not believe that they have,” Manfred said.

Each team pools 48% of its local revenue. For teams on the receiving end of the scale like the Marlins and Rays, there’s no real incentive to plow revenue-sharing dollars back into their team; why turn a $20 million subsidy into $30 million if you’re going to have to pool half of it anyway? It works out better for large market teams, too; if the Yankees have to throw $100 million into the pool, they’d rather it go into the pockets of Stuart Sternberg or Bruce Sherman than be paying the same amount to bid against themselves.

The increased decoupling of wins and revenue further disincentives investing in wins. Winning doesn’t get the Rays more in shared revenue. National TV contracts, international revenue, MLB merchandising revenue, and internet revenue are also shared with no connection to wins. The Rays haven’t even been successful at bringing in more fans when they’re winning than when they’re losing, one of the few things that’s still directly connected to wins around baseball these days.

Yes, the Rays can afford to invest more in player salaries. It would be nice if they would, but teams make investments because they’re incentivized to. The Rays would rather win 95 games than 65 games, but they’re not going to use money aggressively to make that happen. From the point of view of their ownership, investing, say, $150 million a year on team payroll is objectively a poor idea, because the whole system is designed to make it a poor idea for the Rays to do so.

MLB said the quiet part loudly during the negotiations by refusing to entertain any changes in revenue sharing. But we’re not bound to that here, as we have the power of imagination. What would a system that financially incentivizes smaller market teams to win actually look like?

Here’s a quick one that I put together. Instead of paying teams based on market characteristics, I imagined a $400 million pool that’s given out on the basis of wins over 60, with smaller markets, as defined in the expired CBA, receiving larger bonuses for those wins. The exact formula and results don’t matter; the idea is to demonstrate a framework of what a system actually designed to increase competitive balance could look like. In any real-world scenario in which this happens — fat chance — you’d also adjust for things like strength of schedule.

In any case, I defined the win bonus as market rank to the 1.5th power times $9,300, with everything re-scaled at the end to match the $400 million. So while the Yankees and Mets get $9,300 from the pool for every win over 60, the Reds get $1.53 million and the Brewers $1.45 million for their additional wins.

The smaller-market teams that win get a sizable subsidy; teams like the Orioles and Pirates do not. And while a system like this does not force the Rays to win, it increases the value of a marginal win to their bottom line, providing an incentive to do so that doesn’t currently exist in a meaningful sense.

Any plan to incentivize small-market teams to put financial value in winning has to reward winning and punish losing. Subsidize investment, tax tanking. That’s not the system MLB actually has, and it’s not a system that MLB actually wants.