Participation and Professional Team Sports
- New Horizons in the Economics of Sport series
Edited by Wladimir Andreff
Chapter 5: The Effect on Player Transfers of a Luxury Tax on Club Payrolls: The Case of Major League Baseball
5. The effect on player transfers of a luxury tax on club payrolls: the case of Major League Baseball Joel G. Maxcy INTRODUCTION The 1997 collective bargaining agreement (CBA) between the Major League Baseball (MLB) owners and the players’ union introduced a luxury tax on club payrolls. The purpose of the tax was to restrain spending by the highest revenue-producing clubs, for the purpose of enhancing competitive balance. The 2003 CBA extended the luxury tax, which was renamed the competitive balance tax, through the 2006 season, with some modifications. The 2007 CBA extends the tax system virtually unchanged through the 2011 season. Concurrently, also under the pretext of improving competitive balance, the 1997 CBA also introduced an innovative system of sharing local revenue, considerably altering MLB’s system for collecting and redistributing club-generated revenues. Under the previous system, the sharing of club-generated income in MLB consisted of primarily a small, fixed percentage, of gate receipts due the visiting club.1 A crosssubsidization system where all locally produced revenue was taxed and shared replaced a simple gate-sharing method. Conventional wisdom holds that payroll constraints, in the form of a rigid payroll cap or a less rigid luxury tax on club payrolls, will diminish problems of competitive imbalance in a professional sports league. The economic effects of payroll constraints in professional sports leagues have been examined by a number of writers. Included are Fort and Quirk (1995), who showed that payroll caps improve balance and also depress player salaries. Vrooman (1996) and Rascher (1997)...
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