Major League Baseball (MLB) has a luxury tax called the Competitive Balance Tax (CBT). In place of a salary cap, the competitive balance tax regulates the total sum of money a given team can spend on their roster. Salary caps are common across professional sports leagues in the United States. Without these measures, teams would not be restricted on the amount of money spent on players' salaries. Therefore, teams with greater funding or revenue would possess a competitive advantage in their ability to attract top talent via higher salaries.
MLB first implemented the competitive balance tax in 1997 to reduce anti-competitive behavior in the league. The collective bargaining agreement (CBA) between MLB and the Major League Baseball Players Association (MLBPA), the labor union representing the players, sets the competitive balance tax thresholds for its duration. Unlike some other professional sports leagues, MLB allows teams to go over the threshold; however, doing so results in the team being charged a penalty on all overages.
Currently, the luxury tax increases based on the number of consecutive seasons above the CBT threshold, but this was not always the case. If a club "dips below the luxury tax threshold for a season, the penalty level is reset." In addition to the luxury tax, teams also must pay surcharges for exceeding certain thresholds starting with the 2016 CBA.
The primary goal of the CBT is to encourage a competitive balance amongst teams while allowing big spending on players. The CBT threshold/tax rates have undergone several changes since 1997.
History 1997–1999 The 1994 Major League Baseball season was cut short due to the Major League Baseball strike. A primary source of conflict leading up to the strike was the tremendous power club owners had over the salaries of players on their respective teams. Small market teams felt handcuffed by their relatively anemic budgets while players from larger market teams were unwilling to accept the substantial pay cuts that a salary cap would likely have imposed. This resulted in a compromise in the 1996 collective bargaining agreement, which imposed Major League Baseball's first luxury tax.
The first agreement stated that the top five salary teams in each year would pay a 34% fine on each dollar a team spent beyond halfway between the salaries of the fifth and sixth teams. For example, if the fifth-highest salary team had a payroll of $100 million and the sixth-highest salary team had a payroll of $98 million, the top five teams would pay 34% on each dollar they spent over $99 million. Following is the amount each team paid from 1997 to 1999, when this system was in place:
Team199719981999TotalBaltimore Orioles$4,030,228$3,138,621$3,475,048$10,643,897New York Yankees$4,431,180$684,390$4,804,081$9,919,651Los Angeles Dodgers$0$49,593$2,663,079$2,712,672Boston Red Sox$0$2,184,734$21,226$2,205,960Cleveland Indians$2,069,496$0$0$2,065,496Atlanta Braves$1,299,957$495,625$0$1,795,582New York Mets$0$0$1,137,992$1,137,992Florida Marlins$139,607$0$0$139,607Total$11,966,468$6,552,963$12,101,426$30,618,857
2003–2021 After being temporarily eliminated from 2000 to 2002, the luxury tax returned under a new system with the passing of the 2002 collective bargaining agreement (and thus became effective with the 2003 season) and continued from then on with various tweaks with each CBA, such as increasing the thresholds and changing the tax rates. Instead of putting a level between the fifth and sixth teams, the 2002 CBA set a universal threshold that a team could not pass without a fee. Thus teams would only get punished if they surpassed this threshold, rather than if they were in the top five in the year for salary, which meant any number of teams could pay the luxury tax each year. Additionally, the 2016 CBA introduced surcharge thresholds.
Thresholds
YearThreshold2003$117 million2004$120.5 million2005$128 million2006$136.5 million2007$148 million2008$155 million2009$162 million
YearThreshold2010$170 million2011$178 million201220132014$189 million20152016
YearTax thresholdFirst surchargeSecond surcharge2017$195 million$215 million$235 million2018$197 million$217 million$237 million2019$206 million$226 million$246 million2020$208 million$228 million$248 million2021$210 million$230 million$250 million
Tax rates Just as with the old system, teams would have to pay a percentage of every dollar their payroll exceeded the set threshold. The 2002 CBA introduced a progressive taxation system. The 2006 CBA continued to refine the system, introducing the concept of needing to surpass the threshold in consecutive years for the penalty to increase, meaning if a team falls below the threshold one year the penalty resets the next year to the first-level penalty. The 2012 CBA, after seeing teams go over more than three times, added a fourth taxation level when teams went over the limit four or more times. The 2016 CBA removed this fourth tier, opting instead to raise the third tier's tax rate. The 2016 CBA also added two surcharge thresholds, with teams paying surcharge rates on top of the luxury tax owed. The surcharge rate for teams over the threshold from 2017–2021 was 12% for the first threshold, and 45% (or 42.5% if a first-time CBT payer) for the second.
+ Tax rates by year, 2003–2011 Year Seasons over threshold 1 2 3+ 2003 17.5% 2004 22.5% 30% 2005 22.5% 30% 40% Consecutive seasons over threshold 1 2 3+20060%30%40%2007–201122.5%30%40%
+ Tax rates for teams over CBT threshold 2012 Consecutive seasonsover threshold Tax rate120%230%340%4 or more42.5%
+ Tax rates for teams over CBT threshold 2013–2016 Consecutive seasonsover threshold Tax rate117.5%230%340%4 or more50%
+ Tax rates for teams over CBT threshold 2017–2021 Consecutive seasonsover threshold Tax rate120%230%3 or more50%
Tax paid per team From 2003 to 2021, at least one team surpassed the tax threshold each year; only ten different teams passed the threshold in that period. Below is a breakdown of how much each team paid for that period:
TeamYears surpassedTotal tax paidNew York Yankees2003–2017, 2019–2020$348 millionLos Angeles Dodgers2013–2017, 2021$151.7 millionBoston Red Sox2004–2007, 2010–2011, 2015–2016, 2018–2019$51.1 millionChicago Cubs2016, 2019–2020$14.0 millionDetroit Tigers2008, 2016–2017$9.0 millionSan Francisco Giants2015–2017$8.8 millionWashington Nationals2017–2018$3.84 millionHouston Astros2020$3.1 millionLos Angeles Angels2004$927,059Philadelphia Phillies2021$865,906
2022–present The 2022 CBA introduced three separate surcharge thresholds that increased on an annual basis. Additionally, any team with a payroll above the second surcharge threshold has its first draft pick moved back 10 places in the draft order, although if the team's first pick is among the top six picks, the penalty will apply to the team's second-highest pick.
Thresholds YearTax thresholdFirst surchargeSecond surchargeThird surcharge2022$230 million$250 million$270 million$290 million2023$233 million$253 million$273 million$293 million2024$237 million$257 million$277 million$297 million2025$241 million$261 million$281 million$301 million2026$244 million$264 million$284 million$304 million
Tax rates and surcharges
+ Tax rates for teams over CBT threshold Consecutive seasonsover threshold Tax rate120%230%3 or more50%
+ Surcharges for teams over surcharge thresholdsFirstSecondThird12%45% (42.5% if first-time CBT payer)60%
Teams From 2022 onwards, at least one team surpassed the tax threshold each year. 2023 saw a then-record-breaking eight teams exceed the luxury tax threshold, which was then surpassed the following year when nine teams exceeded the luxury tax. Nine teams again exceeded the luxury tax threshold in 2025. Below is a breakdown of how much each team paid during the 2022 through 2025 seasons.
Team2022202320242025Los Angeles Dodgers$32,397,344$19,423,297$103,016,896$169,375,768New York Mets$30,773,938$100,781,932$97,115,609$91,637,501New York Yankees$9,681,093$32,399,366$62,512,111$61,774,820Philadelphia Phillies$2,882,657$6,977,345$14,351,954$56,062,903San Diego Padres$1,524,638$39,693,954$0$6,992,447Boston Red Sox$1,229,936$0$0$1,496,828Texas Rangers$0$1,827,142$10,807,196$190,483Toronto Blue Jays$0$5,535,492$0$13,609,719Atlanta Braves$0$3,159,536$14,026,496$0Houston Astros$0$0$6,483,041$1,497,438San Francisco Giants$0$0$2,421,788$0Chicago Cubs$0$0$570,309$0
Allocation of taxes paid On December 2 in each contract year, the Commissioner's Office notifies every team that exceeded the tax threshold that they must pay their tax by January 21 of the following calendar year. The Commissioner's Office then redistributes this money according to a process defined by the CBA.
2002–2016 The first $2,375,400 is used to fund player benefits under the Major League Baseball Players Benefit Plan Agreements. Half of the remaining proceeds collected, with accrued interest, will also be used to fund player benefits under the Major League Baseball Players Benefit Plan Agreements. A quarter of the remaining proceeds, with accrued interest, will be contributed to the Industry Growth Fund and used for the purposes set out in Article XXV. The last quarter of the remaining proceeds, with accrued interest, shall be used to defray clubs' funding obligations arising from the Major League Baseball Players Benefit Plan Agreements.
2017–2021 The first $13 million will be used to defray clubs' funding obligations under the MLB Players Benefits Agreements. Half of the remaining sum is then used, with accrued interest, to fund the players' individual retirement accounts under the MLB Players Benefits Plan Agreements. The other half of the remaining sum is then distributed to clubs that did not exceed that year's tax threshold.
2022–present The first $3.5 million funds player benefits. Half of the remaining sum is then used to fund contributions to MLBPA players' 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. This incentivizes clubs to increase ticket sales, fan engagement, and other revenue generators that most likely rely on increasing payroll, rather than under the old system which allowed teams to not increase payroll and still collect from tax payers.
Other revenue sharing policies With the 2002 CBA, the MLB introduced revenue sharing in an attempt to further level the playing field. Each team sends in 31% of their local net revenues into a putative pool. Local net revenue is described as gross revenue from ticket sales, concessions, etc. minus central revenue from television and radio deals minus actual stadium expenses. This pool will then be distributed equally to all 30 teams, regardless of how much each paid. Teams that paid more than they were distributed are labeled as payors, and teams that received more than they contributed are labeled as payees. This system is a direct way for poorer teams to get more money from the richer teams to level the competitive balance.
The 2017 CBA increased this percentage from 31% to 48%. The 2022 CBA added draft penalties. Revenue-sharing payees cannot receive a top six pick three years in a row and revenue-sharing payors cannot receive a top six pick twice in a row. Teams that fall into either of these two categories cannot have a draft pick better than tenth in their affected year.
Reception