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.
A Cleveland native, FanGraphs writer Travis Sawchik is the author of the New York Times bestselling book, Big Data Baseball. He also contributes to The Athletic Cleveland, and has written for the Pittsburgh Tribune-Review, among other outlets. Follow him on Twitter @Travis_Sawchik.
I’ve never understood why Tony Clark is head of the MLBPA. Wouldn’t you pick someone with experience in labor negotiations?
What’s most depressing is that the MLBPA, in an effort to keep the peace and the money flowing to its members, have almost assuredly and unknowingly laid the groundwork for a future strike when they attempt to claw back what they negotiated away.
Virginia Seitz is the MLBPA’s lead outside counsel on CBA/labor negotiations. You should look up her credentials – Rhodes Scholar, Supreme Court clerk, current partner and GC for Sidley Austin, etc. She has lots and lots of experience in labor negotiations.
Do you actually think Tony Clark, by himself, sits and negotiates the CBA? Comments like this about Tony Clark’s inexperience are throwaway lines which do little but show the commenters’ unfamiliarity with how these things actually work.
Have you paid any attention to what has happened since Tony Clark became head of the MLBPA? They have basically negotiated a floating cap into the last CBA, something the MLBPA has GONE ON STRIKE TO AVOID, multiple times too. They did this while receiving almost nothing in return, no less years of team control, no significant bump in cash flowing to the players, no fixing whats happening in the minors, no fixing player playing time manipulation, no piece of BAM and so on and so forth.
If Psychic… Powerless… is ignorant in anything it’s that he/she didn’t also spread the credit for incompetence around to Virginia Seitz among others. At one point the MLBPA was considered one of the best Unions in North America and certainly the best and most powerful sports union, they almost always came out ahead of MLB in negotiations and now every time they sit down at the table they come out with less. Tony Clark’s lack of involvement certainly isn’t a boost to the argument that his lack of negotiating ability isn’t hindering the MLBPA’s bargaining strength.
Meh. This is the same BS, question-begging narrative I’m pointing out.
lol how’s that kool-aid?
It actually started under Weiner and Clark was his protege. Weiner of course was battling brain cancer.
I dont see a lot of experience in actual labor negotiations for unions outside MLBPA whom she has been with as outside counsel for 20 years. She is not full time at MLBPA and has coauthored a paper staying strikes are not an option when economic stakes are high. She may be part of the problem since its been almost 20 years of decline for MLBPA. In the end she works for Tony and not the either way around. If he is willing to accept lesser deals its on him, she gets paid either way
She is also the DOJ leader that approved drones against citizens and recess appointments
College bargaining system?
The unintended consequence of the latest CBA deal is that the Yankees will now be stronger than ever.
I am going to go out on a limb and say this take is not going to age well. We have a lot of teams cutting down on salary to reset their tax penalties this year before there is massive bidding on Bryce Harper, Manny Machado, and maybe even Clayton Kershaw and Josh Donaldson. Big but inefficient contracts like Matt Kemp’s and Hanley Ramirez’s will expire, and new big but inefficient ones will be handed out. Even beyond that, part of the reason why we’re seeing so much waiting is because Boras has so many clients and he likes to wait. And losing $1 million in international bonus money is what, the equivalent of a FV40 prospect?
The repeater penalties are tough, but the special $40-million-above penalty sounds worse than it really is. Only the Dodgers were above that this year, and that’s because they were busy digging themselves out of a bunch of dead money. And even if they did go over by a bit, the tax is only on salary above that amount. Meanwhile, moving 10 spots back is probably enough to dissuade conservative GMs like Friedman, but the bolder ones like Cashman have never been shy about giving up picks to sign guys on qualifying offers.
Keep in mind, this all literally only applies to about six teams: Dodgers, Giants, Red Sox, Cubs, Nationals, and Angels. They, plus the Tigers (who did it because of Mike Ilitich) are the only teams to ever exceed the luxury tax. The Blue Jays, Cardinals, Braves, and others were unlikely to even exceed the “soft” luxury tax (although maybe the Blue Jays would under new ownership).
Yeah, the players union should have obviously pushed harder for a salary floor or (ideally) shorter service time commitments/more time in arbitration instead of changing the qualifying offer, but this luxury tax is going to look like the old luxury tax.
I appreciate you laying out this perspective. I don’t think I agree, but it’s interesting. I really feel like this free agency period is going to be a catastrophe for the players, and I’m interested to see how that’s dealt with, if at all.
Given the way things have been going, my guess is that it will be dealt with, if at all, by the current major leaguers further bargaining away the rights of minor league and international players.
If this is true, that a big part of this is positioning for next winter, should we expect to see some of the current free agents take one-year deals? I know why Moustakas wouldn’t want to do that, but why not, say, Hosmer and Martinez? Not everybody gets to land Harper, and you’d certainly rather have those other guys than Marwin Gonzalez or Nelson Cruz. They’re probably right about even with Daniel Murphy, given the age difference. If you know some teams with specific positional needs are going to miss their target player, and you’re still young, why not wait?
Now that you can’t get a QO a second time it might be worth it for some of them. Hosmer is young enough to make it worth it. Could also see Lance Lynn or Alex Cobb doing this if the offers aren’t what they expect.
Martinez actually doesn’t have the QO this year so he may have to negotiate something to avoid it next year. He’s also a little older. I’m also not convinced he’s going to fall as short as Hosmer is. Boras has basically been targeting a $200 million contract for both. That seems more attainable for Martinez than for Hosmer.
With both of them, there would be a risk they wouldn’t hit as well as last year (they were both in top form at the plate last year). But Boras practically invented the term “pillow deal” so the fact that he has so many guys on the market this year probably makes it more likely.
I think you forgot the Yankees in your list. Even they want to avoid too much tax these days, as it’s beginning to bite even their deep pockets (which was the whole point, I guess).
It affects all teams, as it makes some talent cheaper than expected for the other teams.
Losing out will be, again, the aging veterans who are not superstars. Young players still lose out in money while playing the brunt of the games. Pre-arb should be considerable shortened to get those players a more deserved share of the pie.
I agree with a lot of this comment, and think it’s a very thoughtful take.
I’ll add that the young minimum salary talent for the Yankees (Judge and Severino) and Dodgers (Seager and Bellinger) presents a rare opportunity for those teams to stay below the tax and reset their penalties. Put those players at even Arb2 salaries and the math is much more difficult for both teams.
If the MLBPA messed up anything, it’s the tax level. $189 in 2016 goes up only to $210 by 2021. Add about $20 million to the latter and the player situation looks quite a bit better, I think.
I was most surprised at the tax level. After holding steady for several years, I thought for sure the MLBPA would push to get it up into the $240 million range.
I think the bigger argument is that in the last round of negotiating the MLBPA received nothing in return but gave into the biggest thing they have platformed themselves on. The immediate results of this wont be quickly seen (other then the moving around of dead money) but I think you missed the point of the taxes which isn’t to penalize one time offenders, so much as to hit the multi year offenders hence the reason all these luxury tax offenders are doing everything they can to get under it and have been working towards it for years now. Furthermore to point to a historic free agent class as proof that spending will go up or stay the same is not the best argument, no one ever received a 200 million dollar contract till A-Rod received 250 and that was because he was a generational talent, as it is we have a couple of them coming up for free agency at once, they will get generational contracts. These types of economics are not designed to suppress the upper class of players just the ones in the middle and below.
Like I said above, the issue is not so much that they basically introduced a ridged cap which is very anti MLBPA but that they received nothing in return, they didn’t fix the labor issues in the minors, they didn’t fix arbitration, they didn’t get the team control years dropped, they didn’t get any of BAM, teams are still free to manipulate service time, no salary floor, ect.. The last CBA took the player back 25 years in revenue shares, the luxury tax is designed by its nature to suppress free agency.
Agreed horrible deal for MLBPA, great deal for owners, tremendous deal for small market owners who can make money with reduced pressure to produce, relatively good deal for small market fans(cheaper tickets albeit for mediocre teams) and expensive deal for major market fans who continue to face double digit ticket price increases.
I think the “hardening” cap and smarter front offices are combining to constrain salaries of the middle tier veteran free agents. This is the consequence of the MLBPA’s goal of protecting the maximum salaries of the stars, which isn’t necessarily a bad thing. The stars, Trout, Kershaw, Harper (soon), Machado (soon) will always get paid. While the smarter front offices are more reluctant to hand out long-term deals to players in their 30’s. Why commit $100M to a player when you can get similar production from someone younger and cheaper? The middle tier gets squeezed out, see Buster Olney’s list above. The players need to negotiate some type of salary floor to protect the middle tier. Currently, there isn’t an incentive for a team to spend over $100M in payroll and finish in the middle. They are better off cutting payroll and receiving a higher draft pick.
Compare this to the NBA, where there is a maximum contract and role players are now receiving $20M per year. Is it fair for Lebron James and Steph Curry to have their earnings limited so that lesser players can receive more?
” Why commit $100M to a player when you can get similar production from someone younger and cheaper?”
Club will always want this- has nothing to do with cap or not, improved information analysis has given clubs a better understanding of these values and they are always going to prefer to get 1. WAR from a player ona minimum with 6 years or cost control than a to get 1.3 WAR from a $16m over 6 years guy. Clubs are simply making this choice with more accuracy recently.
I don’t understand why the conventional wisdom seems to think the MLBPA flubbed the last CBA (perhaps it’s partly predicated on the erroneous belief that the players’ share of revenue has been declining significantly), but, when the events of this off season are viewed in context, the arguments, many of which are made above, weaken considerably. For starters, you can’t ignore the strength of next year’s free agent class…or even mention it as an aside. That teams are reducing payroll to gear up for a spending spree is an important consideration. Also, forgotten are the inflated deals for middle relievers that have become common. It’s easy to see red flags when the big names are slow to find a home, but the money given to less prominent players is a better indicator of overall spending.
Also, it’s important to consider the degree to which having a few teams spend a lot depresses investment throughout the league. Intuitively, it might seem better for the players if the Yankees, for example, spend $250 million, but if that causes the Rays, Jays and Orioles to retrench, then the gain is mitigated or lost entirely.
Finally, I don’t quite follow why the Yankees/Padres trade ushers in a worrisome era of NBA style trades. By the Padres taking Headley off the Yankees books, it not only enabled them to spend more this year, but next year as well. Does it matter if the Padres spent $13 million on a free agent instead of Headley, or if the Yankees use the savings to sign Todd Frazier, for example? Also, if that trade makes the Yankees a big player in 2019, when they otherwise might not have been, the benefit compounds. The same is true of the Dodgers/Braves trade. The money offsets in 2018, but having another big bidder next year could have a big impact on salaries.
The bottom line is it’s way too early in the CBA to conclude that the MLBPA erred, especially when their track record has been so good. Anecdotes from the first few months of one off season are not enough to make that pronuncement.
There is a strong PR push that Tony Clark needs to go and someone like Scott Boras needs to come. I agree that the current CBA is more mixed and early days than this PR push pretends- especially, as you’ve mentioned, the unsupported articles that player revenue share has decreased.
I’ll all for the players getting more, particularly with a higher minimum, a 50 or 60 man roster, more minor league options, and fewer years of team control. I’m just not convinced this ESPN/Fangraphs narrative about Clark and the current CBA being terrible, Boras and mediocre free agents being wronged, is in anyone’s interest but big money.
Blah blah blah PR push blah blah blah Fangraphs/ESPN blah blah blah narrative blah blah. Got it.
If we have a soft cap, can we have a soft floor? Spend less than a certain amount, and you lose something – maybe a part of your revenue share, maybe a bit of your draft pool or international pool. Nothing terribly heavy, but just enough that going under becomes a less attractive proposition.
Raise the minimum. If you want a $90m salary floor to help players with 19th century employment conditions and restrictions, then how about a 60-man roster, $1.5m minimum, more minor league options and fewer years of cost control?
That would help baseball’s real middle class. Boras represented mediocre 30-something 1-2 WAR players are not baseball’s middle class, they are mega millionaires already looking to get overpaid – partially because agents like Boras are pushing for it.
Or maybe even 1 year at the minimum and then all arb years based on standardized projection standards reviewed every 5 years.
If you don’t spend $100M, you don’t get a chance at a competitive balance pick. If you weren’t going to get a chance, you get bounced 10 spots.
Its something. But this discussion got me thinking about MLB awarding of the Marlins. How the _____ did that happen? And is the small market financial situation a bigger problem? I can’t imagine the Marlins doing a Padres type deal to help a major avoid a tax hit. Is it really in the interests of fans to have a flailing franchise in the league?
Have any of Boras’ clients been signed yet?
There absolutely should be a floor, it’ll help those marginal players get a bit more owner cash
Also, I don’t think that Pedro Alvarez, Stephen Drew, Carlos Gonzalez, Jeremy Hellickson, Matt Holliday, Mike Pelfrey, and Jayson Werth are terribly good barometers of the free agent market.
MLB already has a salary floor. It’s 25 x the minimum player salary.
A team could field a team of less than 25 players if they wanted, so it’s not exactly a salary floor. More akin to a soft floor. Plus it’s absurdly low for a ‘floor’: $13.6m ($545k*25).
I don’t like this. Soft caps should be made out of felt.
End the anti-trust exemption. End the draft. It’s anti-competitive collusion. Free market baseball salaries, please.
This headline makes me think we aren’t doing phrasing anymore
I just want to point out that this headline could also be used for an update on pitchers’ protective headwear.
I think the cap getting more rigid is a factor for the soft free agent market and reduced spending, but not really the biggest reason. I think three things are playing a bigger role:
1. Waiting for next year- While there are a few good talents definitely in this free agent market (and they will eventually get signed), but next year has the potential for some truly elite talents, including some who won’t even have hit the prime of their career. Teams could spend $45M a year for 5-7 years to get a pair of the best hitters this yr, who may combine for a 5-6 WAR projection, vs spending that for one of Harper, Machado, Donaldson, guys who have gone over the 6 WAR number on their own, and in the case of Harper/Machado project for a far steadier outcome over the length of their contract.
2. Too few teams are in a position to contend this year- There are what maybe 8-9 legit contenders this year, with maybe another 3-5 who could make a run if everything goes right. Even on the high end that is just under half the league who has any sort of case for spending big on multi-year deals. Sure maybe there are a couple non-contending teams who can do what the Phillies did with Santana or the Padres might do with Hosmer and jump into the market before their contention window opens up, but few teams really feel like they are ready to jump into contention. In fact more teams feel like they are ready to start a 2-3 year rebuilding plan (Orioles, Pirates, Rays, etc.) Not only does it take them out of the top and mid-tiers of the FA market, but it also means they are potentially dealing a number of cheaper alternatives to the current crop of FAs.
3. Few contenders or near contenders have major needs- The top 10-15 teams have very few major holes either in their line-up or rotation (or at closer for anyone targeting Wade Davis). And even if they do have a need at a particular position, is it worth spend a massive 5-7 year deal for one of the top FAs? In some cases maybe, but those are very few. As for the 2nd tier of FAs there is even less of a case for contenders to be on these guys.
Well in certain company, you pay enough surcharges, your cap can go from soft to rigid pretty quickly.
Re: the minimum player salary — The previous 3 CBAs all resulted in a higher minimum as a share of team average. Not so thus far for the latest CBA.
Here is average team payroll as a multiple of the minimum, in the first and last years of the last 5 CBAs:
1997-2002 — 263, 328
2003-2006 — 229, 231
2007-2011 — 214, 221
2012-2016 — 195, 237
2017-2021 — 237, ???
Salary data from Baseball-Reference.
CBA dates from Cot’s and these Hardball Times articles:
https://www.fangraphs.com/tht/a-history-of-the-mlbpa-collective-bargaining-agreement-part-2/
https://www.fangraphs.com/tht/a-history-of-the-collective-bargaining-agreement-part-3/
The Union completely lost its way. It focused on small-bore issues such as the QO and missed the bigger pitcher on the drafts and the luxury tax. They need a real strategic thinker there, someone who either could have negotiated for a floor, shortened the number of years of control, raised salaries at the bottom etc.
More question begging from a Sawchik article about the CBA. Honestly, if you’re going to try to tackle issues like this, maybe interview a labor economist and/or a labor lawyer, so you can be informed on the relevant issues.
You keep using the word “problem” without actually showing the existence of any problems. If anything, what is clear from your last two articles is that MLB players’ salaries are a higher % of revenues than other major sports and that “players’ average salaries are at an all-time high.”
At best, all you’ve done is hypothesize (by use of anecdote, not empirical evidence) that baseball salaries are being re-distributed from your subjective concept of middle-class FA players to team-controlled and/or high-end FA players. Putting aside that you haven’t shown this to be true in fact, you haven’t put forward any reason why this alleged re-allocation is bad for baseball players overall, baseball itself, or baseball fans.
To your point, one category of “middle-tier free agents” appears to be doing quite well relative to their historical contracts: namely non-closer relief pitchers such as Pat Neshek, Luke Gregerson, Steve Cishek, Tommy Hunter, etc.
Tony Clark better start polishing his resume. Should have started long ago. Probably has a job waiting for him in the MLB FO. Well done Tony