MLB’s Soft Cap Is Becoming More Rigid

One of the changes to the most recent edition of the collective bargaining agreement between owners and players was the addition of a surcharge — a fancy way of referring to a second tax — to be levied upon those teams whose payrolls exceed the tax threshold by a certain amount. Specifically, teams that exceed the $197 million mark by $20-$40 million this season will be assessed a 12% surcharge. Clubs exceeding the threshold by $40 million or more, meanwhile, receive a 42.5% to 45.0% surcharge, depending upon whether a club is a multi-year taxpayer.

The surcharges occur on top of the luxury tax: 20% for a first-time payer, 30% for a second-time payer, and 50% for a third-time or greater offender.

Baseball essentially instituted a “soft” salary cap with the addition of the luxury tax, a vehicle adopted to curb spending at the top end of team payrolls, to protect owners from themselves. However, as I determined just before the Winter Meetings, that cap is becoming less soft and more rigid.

Baseball’s salary tax more and more resembles the NBA’s soft cap.

With the addition of more severe penalties for breaching the cap and with clubs perhaps also wanting to reset their tax clocks to avoid a multi-year violation before the arrival next offseason’s historic free agency class, the luxury-tax barrier has become more and more a defined line that teams are reluctant to cross.

This offseason, for instance, we’ve already seen the Yankees dump Chase Headley’s contract, opting to part with a young, cheap arm in Bryan Mitchell to do so. The Yankees have been the only club to cross the luxury-tax threshold every year of its existence. Yankees ownership has said a stated goal is to stay under the threshold in 2018.

Over the weekend, the Dodgers and Braves traded debt. Thanks to “Tom”, the Dodgers have a chance to remain below the 2018 threshold. Also over the weekend, the Giants moved Matt Moore and his $9 million 2018 salary to Texas in an apparent attempt to stay under the tax threshold.

Last season, six teams teams crossed the luxury threshold and were subject to tax. The Yankees have paid taxes 14 straight seasons, a tab totaling $325 million.

In 2018? At the moment, only the Red Sox project to open the season above the tax threshold, which increased from $189 million to $197 million this season.

While next year’s FA class is surely having an impact on some of these decisions, there is a powerful incentive for owners to keep payrolls below as many tax thresholds as possible. If you’re a large-market club that has crossed the tax threshold three or more consecutive years, and is $40 million or more above the threshold, those dollars above the top threshold are subject, essentially, to a 95% tax. That renders the $237 million threshold something akin to a hard cap.

The problem for the MLBPA is that this is targeting mostly large-market teams, the sort of organizations that are typically the suitors for top-of-the-market talent. Because of this, Eric Hosmer’s top suitor is the… Padres?

The Boston #Redsox sign 1B Mitch Moreland to 2-year contract, no longer in on Eric Hosmer. Hosmer seems destined more than ever to wind up with #Padres

— Bob Nightengale (@BNightengale) December 18, 2017

The Yankees, Dodgers — and maybe even the Red Sox — seem to be out on big-name items this winter.

That’s a problem for players and Scott Boras:

Scott Boras will man the steering wheel for the rest of MLB's winter. His unsigned clients:
Pedro Alvarez
Jake Arrieta
Stephen Drew
Carlos Gomez
Carlos Gonzalez
Jeremy Hellickson
Greg Holland
Matt Holliday
Eric Hosmer
J.D. Martinez
Mike Moustakas
Mike Pelfrey
Jayson Werth

— Buster Olney (@Buster_ESPN) December 17, 2017

The other problem for players is that this cap is creating an impetus for teams to pursue NBA-style deals like the one executed by the Yankees with the Padres recently. From the MLBPA’s perspective, this essentially takes away a job from a free agent. Instead of the Padres signing a veteran free agent, they elected to buy younger, pre-arbitration talent. This is not the type of musical-chairs game the union wants. We’re going to see trades like this become more and more common, I suspect. From the club perceptive, they are logical and rational.

And we haven’t even discussed the draft and international penalties for exceeding the tax threshold.

Yes, players’ average salaries are at an all-time high, but it seems that the MLBPA fumbled their latest CBA negotiation. While some minor victories were perhaps won in regard to the qualifying offer, the union agreed to an arrangement that is suppressing veteran players’ salaries while also reducing jobs available to veteran players. The players elected to strike and prolong the 1994-95 labor fight in part due to the prospect of a salary cap. Now, they’ve essentially agreed to one — without the benefit of a payroll floor to complement it.

Are there going to be teams that still go above the tax threshold? Yes. But they are likely to be fewer in number, particularly in the case of the $40 million-above-the-threshold mark. Perhaps fewer will be inclined to cross the threshold for multiple years, as well. Teams might increasingly be less willing to target the middle class of free agents.

The push down on spending has never been greater, and there’s still nothing to force spending on the bottom payrolls. In addition to the skyrocketing values of franchises and the dollars generated by MLBAM, it’s more difficult to spend money on players. It’s a good time to be an owner.