SoSH Glossary: Competitive Balance Tax

0
345
SoSH Baseball Glossary

Baseball is filled with statistics, rules, and archaic terms that can often form what sounds like a foreign language. Sons of Sam Horn’s glossary provides a better understanding of these terms through straightforward definitions, clear explanations, and examples pulled straight from the baseball world. If there is anything you would like us to add to our glossary, please contact us.

Competitive Balance Tax

The Competitive Balance Tax (CBT), commonly referred to as the luxury tax, is assessed to teams that have an Actual Club Payroll (ACP) that exceeds the tax threshold stated in the Collective Bargaining Agreement (CBA). The portion of the ACP that exceeds the tax threshold is taxed at a rate based on that club’s situation the previous year.

What Are The Tax Rates?

  • The rate is 17.5% if the club was not assessed a tax the previous year,
  • The rate increases to 30% in the second consecutive year a team surpasses the threshold.
  • The rate increases to 40% in the third consecutive year a team surpasses the threshold.
  • The rate increases to 50% in the fourth consecutive year a team surpasses the threshold.

What Counts Towards The ACP?

The ACP is the sum of the following:

  • The value of all players signed to a one-year Uniform Player Contract.
  • The Average Annual Value (AAV) of all multi-year players’ contracts on the roster.
  • All other money or compensation provided by the club to players during the year.

How Is AAV Calculated?

AAV is calculated by dividing the total value of a contract by the guaranteed years. The total value of a contract includes signing bonuses and deferred payments.

  • Club options are treated as separate one-year contracts, and thus not included in the calculation.
  • Player options count as guaranteed years, unless there is a buyout that is 50% or more of the highest annual salary from the contract.
  • Mutual options are treated as player options, unless one of the mutual options exceeds 122.5% of the highest annual salary from the previous guaranteed years.
  • Buyouts are counted as bonuses and added to the total value of the contract.

Where Does The Money Go?

  • The first $2,375,400 collected goes to the MLB Players Benefit Fund

The remainder is then distributed as follows:

  • 50% goes directly to the MLB Players Benefit Fund
  • 25% goes to defraying all teams’ obligations to the MLB Players Benefit Fund
  • 25% goes to the Industry Growth Fund

Odds And Ends

  • If a player declines an option and a team paid the CBT during one or more of the years during that contract, the team will receive a rebate if the declined option reduces the AAV.
  • Clubs must update the MLB on their current ACP twice a year: 14 days after Opening Day, and 14 days after the All-Star Game.
  • MLB will notify clubs and the MLBPA on December 2 if any teams will be assessed a CBT and the amount to be paid.
  • There is no scheduled CBT for the 2017 season, but the new CBA could include a CBT.

Pete Hodges has written about the call up of a top prospect, an odd tradition, and Leo the Lip.

Follow Pete on Twitter @PeterWHodges.

LEAVE A REPLY