Report From The Fort: A Market Squeezed
Image courtesy of © Gregory Fisher-USA TODAY SportsThat narrative is that luxury tax is having a huge effect and it is, but “not as much as everyone seems to be pointing too,” says Clark. “The resetting provision that most are now aware of has been in the CBA [Collective Bargaining Agreement] for last three CBAs now.”
Clark is talking about some specific parts of the agreement between MLB and the Players Union which is mean to create competitive balance. In MLB, there is a “luxury tax.” If a team surpasses a certain number in overall team salary, they need to pay a tax for every dollar they go over. Last year that number was $196M and five teams were over it.
But the percentage taxed gets higher every consecutive year a team exceeds that level. The first year a team pays 20%, the second, 30%, and the third they pay 50%. The “resetting provision” is another way of saying that if a team can get back below the luxury tax threshold, they can reset back to year one of that escalating scale.
This year, three of the teams that were over the luxury tax (the Yankees, Dodgers and Giants) worked hard to get back under the threshold for a simple reason: next year there will likely be some VERY good free agents on the market. For instance, if the Yankees want to sign Bryce Harper next year for $40M per year, and almost all of that will be over the luxury tax threshold, they want to pay him $48M ($40M + 20% tax) instead of $60M ($40M + 50% tax). That strategy eliminated at least a few of the most free-spending teams in MLB.
Clark is right that the provision has been in the CBA for years. But there are two important caveats. First, payroll has grown faster than the luxury tax level has increased, so what used to affect one or two teams now affects as many as five. The second is that the most recent CBA added some additional penalties for going more than $20M or $40M over the threshold. For $20M, there is a 12% surcharge on amounts over $20M to $40M. There is also a 45% surcharge on amounts over $40M for repeat offenders. Plus, if any team goes over $40M, they can also have their top amateur draft pick dropped back 10 slots.
“If teams are treating the luxury tax as a cap, that’s a different world than we ever have been in before,” says Clark. He’s right, and there is a good deal of evidence that for this year at least, there are several teams that are doing exactly that.
But Clark doesn’t see it as a major affect for a couple of legitimate reasons. First, even if you count the two teams over the cap (which one might, considering how damaging those new surcharges are), it’s only five teams. Second, two of those teams – the Yankees and the Red Sox – acquired very expensive players this offseason, which suggests only three teams were frozen.
Far more damaging in Clark’s mind is the opposite end of the spectrum. He sees as many as three times that many teams cutting salary and not seriously competing in 2018. His reasoning is solid, but this is also a result of provisions in the CBA to enhance competitive balance.
There are two very good reasons for MLB teams to slash payroll even if it means being uncompetitive. The first, is that being a bad team returns good draft picks and those picks can fuel a high-level resurgence in the future. This method was popularized most recently by the (World Champion) Houston Astros. And that doesn’t even count prospects a team might receive from trading away their veteran talented players.
But the second reason might be even more compelling. Those teams with the lowest payroll and least revenue tend to receive more money from revenue sharing. It is extremely profitable for a team to stink. And after stinking, hopefully they have accrued enough talent to not just make the postseason but be favored.
This has two big impacts, both of which hurt the market for free agents. The obvious one is that it reduces the demand in the marketplace. Between the teams that are passively (or actively – I’m looking at you Miami) tanking and the teams being careful of the luxury tax, there are really only 17 or so of the 30 teams that are trying to sign free agents.
The second impact is that selling off players to reduce payroll increases the supply of players in the market. A prime example was the Marlins shopping slugger Giancarlo Stanton at the beginning of the offseason. He ended up being the one big salary the Yankees took on this year, and then they were no longer in the market for free agents.
So the tanking philosophy creates a double-whammy to the market, affecting both the supply and demand side. It’s no wonder the prices on free agents dropped precipitously. “That’s why this is different,” says Clark. “That’s why when you take the talent that’s being moved, when you take the revenue sharing dollars that are being accessed, and you flood the system [with players] while removing a number of teams that appear to not being interested in winning today … it creates some challenges.”
When you look at those forces, it is not clear that this is a one-year blip only due to next year’s free agent market and a few high-end teams shedding payroll. “When there are concerns across multiple levels to the competitive integrity of our system and how it’s manifesting itself – that’s not going to go away overnight,” warns Clark.
And the forces that drive it are not likely to change until the next Collective Bargaining Agreement is negotiated. That’s four seasons away. The market that produced Logan Morrison might not be as short-lived as it appears.
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