Research-Harp03

Adding a Hard Salary Cap in MLB Would Improve League Parity, Increasing Fan Attendance and TV Ratings

Major League Baseball has struggled to achieve parity ever since the implementation of the luxury tax in 2002. The hard cap for equality movement would effectively create competitive balance in the league, increase fan attendance and tv ratings, and expand the league’s economy. However, and understandably so, there are many sports fans who believe that the hard salary cap is negatively affecting leagues that use it, and they would likely be opposed to introducing the hard cap to America’s favorite pastime. For example, the New England Patriot’s dominance over the past decade is a reasonable reason for “Luxury Tax Fans” to assume that the hard cap fails to effectively create competitive balance. The Patriots have made the playoffs in eleven consecutive seasons (dating back to the 2009-2010 season), earned a ticket to the Super Bowl in five of those seasons, and won it all three times.

With that situation in mind, Luxury Tax Fans are probably thankful that they do not have to watch similar dominance in baseball. But the hard cap is not meant to prevent elite organizations, ones that make intelligent trades and signings, draft players efficiently, and make coaching staff adjustments, from competing year after year. Teams should not be penalized for being run exceptionally well, but they should be penalized for breaching a spending limit! However, a competitively balanced league should severely limit the number of dynasties, and it should also involve teams of all markets making the postseason as often as possible.

In the NFL, the hard salary cap does just that, for only 3 teams: the Cleveland Browns, Tampa Bay Buccaneers, and the New York Jets, have not made postseason appearances since 2014. Meanwhile, 8 teams in Major League Baseball, which is more than ¼ of the league’s teams, have experienced postseason droughts since 2014. Not only has the NFL’s use of the hard salary cap helped achieve parity regarding postseason appearances, but there have also been a healthy number of small market teams winning the entire postseason (the Super Bowl).

Teams such as the Yankees, Red Sox, and Dodgers are classified as big market teams due to their worldwide popularity, media market size/outreach, and city-based population. Big market teams are also some of the most valuable organizations in all of baseball. Oftentimes, these are the organizations that have the financial power to dominate their respective divisions and leagues for years. Meanwhile, the opposite of big market teams is, unsurprisingly, the small market teams. Teams like the Tampa Bay Rays, Seattle Mariners, and Pittsburgh Pirates are lesser-known teams with small city populations, a poor media market, and/or a shared media market with rival clubs. Due to their overall unfavorable markets, they typically struggle to compete with the big market teams whose owners can easily afford to exceed the luxury tax so that they can acquire more talent.

As a result, small market teams practice a concept termed “tanking” more often than big market teams. Tanking teams discuss losing intentionally, behind closed doors, in order to receive higher draft picks in the following year’s draft. Tanking for draft picks only ends successfully when teams draft well, but judging young talent is one of the most challenging tasks to accomplish in baseball. Small market teams that rely on tanking defy the odds and make great picks every so often, but many times high draft picks are “busts,” and teams enter a cycle of tanking that lasts for years. Tanking hurts the baseball economy tremendously because it negatively affects league parity, and fans do not want to invest their time or hard-earned money into watching a subpar team.

The only small market team to win the World Series in TWO DECADES under MLB’s luxury tax is the Kansas City Royals, while NFL teams from small markets such as Kansas City, New Orleans, Denver, Seattle, Baltimore, Green Bay, and Pittsburgh have all brought home a championship in the past decade alone. Although the Patriots were dominant for many years, their success was not largely dependent on tanking teams, for the league still saw a plethora of teams from different markets make, and win, in the postseason while enforcing a hard salary cap. The NFL uncovered gold when they developed their hard salary cap system because it discouraged tanking, and in the process, it improved the game’s economy and parity.

Major League Baseball is the only league of the four major American professional sports leagues: National Basketball Association (NBA), National Football League (NFL), and the National Hockey League (NFL), to not have a salary cap on spending. Major League Baseball’s salary tax, also known as the Competitive Balance Tax, is an outdated model from 2002 that sets teams to a specified limit on spending. The luxury tax boundary is declared in the Collective Bargaining Agreement each year, which is constituted by the Major League Baseball Players Association and Major League Baseball’s commissioner. As Corey Seidman notes in his NBC Sports Philadelphia article “Explaining MLB’s luxury tax in relation to 2020 Phillies,” the luxury tax is a boundary that causes teams to pay a tax if they exceed the payroll threshold. For the 2020 season, the threshold sits at $208 million, and first-time offenders pay a 20% tax on overages.

The penalties become increasingly harsh if a team’s payroll is over the luxury tax threshold for consecutive seasons. For second-year offenders, that tax rate rises to 30%. If a team remains over the luxury tax threshold for three consecutive years, they are taxed 50% on all overages. However, surtaxes are appended when teams exceed specific “milestones” past the luxury tax threshold, regardless of whether they are repeat offenders or not. If a team exceeds the tax by $20 million at any point, they are automatically issued a 12% surtax, while organizations that are more than $40 million over are penalized with a 42.5% surtax, and their top draft pick is lowered by 10 spots.

To put the luxury tax further into perspective, Mike Trout is nearly ubiquitously accepted as the best player in baseball. Per Spotrac, Trout will earn $37,666,666 in 2020, making him the highest paid player in the sport next season. Hypothetically, a baseball team that is already at the $208 million luxury tax threshold could sign a free agent player of Mike Trout’s caliber to a one-year contract, hand that player the largest contract in all of baseball for the 2020 season ($38 million average annual value), and then lose the player to free agency the following year. Under the current luxury tax system, the assumed first time-offending organization would be permitted to sign that hypothetical elite player, and they would be fined a measly $9.6 million (pocket change to big market team owners). In essence, staying below the luxury tax is only a recommendation, and it is a recommendation that is often disregarded by richer teams.

The luxury tax in Major League Baseball fails to create competitive balance because it does not set a finite limit for spending, inviting big market teams to exceed it and gain an advantage. More importantly, the luxury tax is not punishing enough which is why rich teams are so capable of flaunting the penalties and fines. Mike Axisa reviews the significant decrease in teams paying luxury tax penalties after the 2018 season in his CBS Sports article, “Only Red Sox, Nationals owe luxury tax in 2018 as MLB teams combine for smallest bill in 15 years,” but he fails to recognize that 2018 was an outlier season. With hindsight, it is revealed that teams have not altered their mindset regarding the luxury tax. In 2019, three teams paid luxury tax penalties, and as it stands, four teams are set to exceed the threshold in 2020.

One reason for the sudden decrease in teams paying luxury tax penalties in 2018 is that two MLB teams had been paying the fines for many years. Big market teams reset the luxury tax threshold by going under the threshold for one year in order to avoid the repeat-offense surtaxes. In Axisa’s article, he explains that the Yankees had paid the luxury tax every year during a 13-year span from 2003-2017. They paid upwards of $340 million dollars in penalties for their excessive spending. Meanwhile, the Dodgers also remained over the luxury tax threshold for several years before shedding salary and getting under in 2018. They paid the luxury tax from 2013-2017.

By going over the luxury tax, both the Yankees and Dodgers were able to dominate their divisions. In the 10-season stretch from 2003-2012, the Yankees won their division seven times, made the playoffs nine times (only in 2007 were they not a playoff team), and won a World Series in 2009. Meanwhile, the Dodgers had paid the tax and won their division every year from 2013-2017. They also advanced to Game 7 of the 2017 World Series before losing to the Houston Astros (who have since been persecuted for cheating in that series). The luxury tax penalties clearly do not phase big market teams, but smaller market teams do not have the financial means to exceed the luxury tax for fifteen straight years!

The Tampa Bay Rays are a beautiful example of a team succeeding while spending very little. In fact, the 2019 Rays had the lowest payroll in baseball, yet they won 96 games and earned themselves the second Wild Card spot in the American League. The Rays have been beating the odds for years. However, their success has been largely influenced by an elite general manager and coaches who consistently turn outcasts into some of MLB’s most productive players. Since the year 2000, there has only been one small market team that won the World Series: the Kansas City Royals, while the top five markets in MLB: New York City, Los Angeles, Chicago, Philadelphia, and Boston have combined for half of the World Series’ won in the past two decades. Simply put, teams that spend the most tend to win the most.

Teams can spend less money and still be successful, but a hard salary cap provides constant stability and competitive balance for the league, regardless of how much money is spent by small market teams. Hard caps, like MLB’s salary tax, are enforced by their respective leagues in order to maintain balance between all teams and to ensure that no team has a spending advantage. Preventing big market teams from “buying championships” by signing all the best available players is the primary reason why the caps and taxes are created. However, hard salary caps allow no leniency and are the strictest systems in modern American sports. Monica Charlton outlines the NFL hard salary cap penalties in “A Brief History of the NFL Salary Cap,” mentioning that any team that surpasses the hard cap is subject to any of the following: suspension or dismissal of team staff (typically the general manager or owner), forfeiture of games for the duration of a team circumventing the cap, loss of future draft picks, voiding of player extension contracts, and fines up to $5 million. In addition, any attempt to sign or extend a player’s contract, subsequently putting them over the salary cap, automatically issues the team a $25,000 fine.

The NFL is incredibly balanced due to the hard salary cap, and it encourages smaller market teams to spend money, thereby opening the door for them to compete on AND off the field with the bigger markets. In John Vrooman’s journal article, titled “A General Theory of Professional Sports Leagues,” he conducted a study regarding market size and revenue elasticity of winning within MLB, NFL, and NBA.

“The estimates of the revenue elasticity of winning are consistent with the hypotheses of the general theory of sports leagues. MLB has the highest winning elasticity (b=.6), the NBA has less (b=.5), while the NFL has the lowest revenue elasticity of winning (b=.12). These results are precisely what should be expected under the current institutional configuration of the three leagues. The large market revenue advantage is greatest in MLB, less for the NBA, and the least for the NFL.”

The large market revenue advantage is 2 times greater in Major League Baseball than in the NFL, and it shows. As stated earlier, only 3 teams: the Cleveland Browns, Tampa Bay Buccaneers, and the New York Jets, have not made a postseason appearance since 2014. On the other hand, a whopping 8 teams in Major League Baseball, which is more than ¼ of the league’s teams, have experienced postseason droughts since 2014! In addition, half of the World Series winners over the past 20 years have come from the top five MLB markets. Why is there such a difference? In large part it is directly due to the hard salary cap. Less incentive to tank and more (but limited) spending due to the regulations of a hard cap creates parity in the NFL. As a result, they are the king of competitive balance in American professional sports.

In addition, the use of a hard salary cap would also make attendance and TV ratings go up, which would in turn boost MLB’s economy, which would then raise the hard cap and allow general managers to hand out larger contracts to the players. For example, NFL’s attendance and TV ratings are thriving due to their consistently entertaining and drama-filled regular seasons, postseasons, and off-seasons. Meanwhile, Major League Baseball is experiencing a significant drop in their ratings. In the article “From Terrible Teams To Rising Costs: Why MLB Attendance Is Down Over 7% Since 2015,” author Maury Forbes outlines the severity of Major League Baseball’s fan attendance decrease since 2015. In the 2019 season, 14 teams out of 30 saw attendance declines from 2018. Altogether, MLB has not witnessed an attendance increase since the 2015 season, and fan attendance has dropped 7.14% which equates to 5,265,268 fans.

Admittedly, the NFL’s success is not entirely reliant on its hard cap system. But it certainly plays a role in increasing fan engagement, which is still vital for a sport’s success. Greater competition creates greater demand and intrigue from fans. The aforementioned drop in fan engagement seen in MLB is in large part due to widespread belief among general managers that their purchase(s) of players will not be enough to contend with the stacked big market teams in the playoffs. Revenues may be soaring, but the fans and popularity of the sport are more essential to the future of the game than revenue. And fans do not want to watch a league that lacks competitive balance, one where the current luxury tax rules benefit only a small percentage of teams while scaring the others away from improving the quality that they put on the field. The more fans that would watch and attend games, the more money Major League Baseball would make. The more money they would make, the more the salary cap would increase. A transition to using a hard salary cap would not only make fans happier, but it would also improve the attendance and tv ratings of the sport, and the average player salary would increase since baseball’s net worth would skyrocket!

Many people are led to believe that an altered agreement of revenue sharing in Major League Baseball would have a greater impact on competitive balance than the addition of a hard salary cap. The concept behind revenue sharing is sensible because one would expect that an even distribution of revenue would create competitive balance/equality regardless of where teams are located. However, MLB has already altered their revenue sharing agreement in the collective bargaining agreement (CBA) in 1996, 2002, and 2006, and 2017 to no avail. In author William Ryan Colby’s essay, “Revenue Sharing, Competitive Balance, and Incentives in Major League Baseball,” he analyzed the different approaches that Major League Baseball has used in order to achieve parity through revenue sharing. Colby concluded,

“The analysis also indicates that the effects of these systems are sticky; although MLB has begun to fix the problems, it will likely take more time for the improvements to take hold. Regardless, however, this research shows that MLB has tried and ultimately appears to have failed in their attempts to promote competitive balance through increased payroll balance.  They have failed because they have constructed institutions that create backwards incentives and because they have failed to draw a distinction between ‘good’ and ‘bad’ imbalance.”

In 2011, Colby predicted that conditions would improve; but the latest CBA rules for revenue sharing from 2017 indicate no progress in competitive balance. The teams that make the most money get less back in return, while the lower spending teams get more in return than what they paid. In the 2020 article “Looking Under the Hood of MLB’s Revenue Sharing Plan,” William Juliano of The Captain’s Blog says,

“…teams can pretty much guarantee a hefty profit by maintaining a low payroll. However, according to the collective bargaining agreement (CBA), clubs are supposed to use revenue sharing to enhance their winning percentage, not their bottom line. The MLBPA isn’t convinced that every team is operating in accordance with that stipulation, and the recent trend toward tanking seems to back up their claim.”

Essentially, MLB has no beneficial way to alter the revenue sharing agreement in order to improve competitive balance within the league.

Major League Baseball has played with increasing percentage of shares below 50% over the years. In the 1996 agreement, 20% of local revenue shares were subject to equal distribution among the 30 MLB teams. Since then, the CBA has continued to increase revenue sharing, and in 2020 Baseball Reference lists that the local revenue sharing has progressed to 48% distributed equally between teams. It appears there is no perfect percentage to avoid tanking teams because the larger the percentage, the more money tanking teams make (which inclines them to tank even more). The lower the percentage, the more money higher-profit teams get to keep, only encouraging them to overspend and go over the luxury tax. With a hard salary cap, those teams would not be permitted to over-spend or they would risk forfeiting games, losing draft picks, and even suspension or dismissal. Plus, the hard salary cap encourages small markets to spend and compete with the bigger markets, rather than changing the revenue sharing agreement which would make the tanking issue even worse (regardless of whether the league boosted or lowered the percentage).

In conclusion, although the notion that the hard salary cap movement could benefit Major League Baseball conflicts with common opinion, it is the most efficient recourse by far. Baseball desperately needs to change its tax system, and despite looking like one of the least successful methods for achieving parity, upon dissection NFL’s hard salary cap has actually revealed itself to be an incredibly effective taxing method to achieve competitive balance in sports. Many people believe that an alteration in Major League Baseball’s revenue sharing agreement under the CBA would be a more impactful way to create league parity. But history has shown that revenue sharing agreements tend to be counterproductive because they unintentionally promote the concept of tanking. Overall, MLB’s best opportunity to make the league better would be to employ a hard salary cap.

References

Axisa, M. (2018, December 15). Only Red Sox, Nationals owe luxury tax in 2018 as MLB teams combine for smallest bill in 15 years.

B-R Bullpen. (Baseball Reference, 2016). Retrieved April 14, 2020.

Brown, M. (2019, October 4). From Terrible Teams To Rising Costs: Why MLB Attendance Is Down Over 7% Since 2015.

Charlton, Monica. (2018, July 12). A Brief History of the NFL Salary Cap.

Colby, W. R. (2011). Revenue Sharing, Competitive Balance, and Incentives in Major League Baseball. How MLB Revenue Sharing Made the Yankees Better.

Juliano, W. Looking Under the Hood of MLB’s Revenue Sharing Plan. (2020, March 7).

MLB Rankings. (Spotrac). Retrieved April 14, 2020.

Seidman, C., Salisbury, J., & NBC Sports Philadelphia Staff. (2020, January 9). A refresher on MLB’s luxury tax in relation to 2020 Phillies.

Vrooman, J. (1995). A General Theory of Professional Sports Leagues. Southern Economic Journal, 61(4), 971-990. doi:10.2307/1060735

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