Tanking, the luxury tax, and the slow offseason

If you’ve read anything about baseball this winter, you’ve probably read about baseball’s second consecutive brutally slow offseason. In an era of record-high revenue, teams are eschewing large free-agent contracts, leading to lower payrolls and a record number of unsigned veterans. Everyone is mad, tensions are high, and people have started to seriously discuss the possibility of a strike in the near future. It’s a crisis, according to some—or at least it’s going to be soon.

By the numbers, the last two offseasons have been remarkably slow. In 2011, major-league teams spent a total of $3.2 billion on player salary, adjusted for inflation. That number grew to a high-water mark of $3.9 billion in 2017—a healthy growth rate of about 4% a year—until the latest Collective Bargaining Agreement (CBA) took effect. Since then, total salary expenditures have plummeted. Last year, player salary dipped by 2%; this year, salary is down 9%.

If player salary had continued to grow at its pre-2017 rate of 4%, you’d expect to see the red line in the above graph. Instead, player salary looks like the blue line. The difference between the two, $4.3 billion in “projected” salary vs. $3.5 billion actual spending, is $812 million of “unspent” money in free agency. That’s two and a half Bryce Harper contracts, or a dozen Desmonds, the official Rockies fan unit of contract measurement.

All this has led to a familiar scapegoat: tanking. JD Martinez blamed the “embarrassing” free agent market on teams engaged in “a race to the bottom now [more] than a race towards the top.” Similarly, Justin Verlander blamed the slow offseason on “the tanking teams with super low payrolls.” Rob Manfred took the time to look up from his pitch clock and deny those claims—lightly suggesting that this is all the result of teams who “analyze players differently”—prompting Tony Clark, the head of the Major League Baseball Players Association (MLBPA), to fire back:

Players’ eyes don’t deceive them, and nor do fans’. As Players report to Spring Training and see respected veterans and valued teammates on the sidelines, they are rightfully frustrated by a two-year attack on free agency. Players commit to compete every pitch of every at-bat, and every inning of every game. Yet we’re operating in an environment in which an increasing number of clubs appear to be making little effort to improve their rosters, compete for a championship or justify the price of a ticket.

The line between “tanking” and “rebuilding” is a bit semantic, but the implication here is clear. Some teams aren’t even trying to win, and it’s putting players out of work. As a media strategy for the MLPBA, this makes sense. Nobody likes a team that doesn’t bother to put a competitive product on the field.

The problem is that it isn’t true. The primary driver of the two-year dip in player salary isn’t the low-market teams (arguably) trying to lose. It’s the big-market teams, most of whom are trying to win. More specifically, as a result of increased luxury tax penalties, big-market teams are spending far less than they were spending prior to 2017. They’re also spending far less than they would have if it weren’t for the luxury tax.

But first, some history. Fans and small-market owners alike have clamored for a salary cap for years, arguing that some restriction on spending is necessary to create parity. Baseball first instituted a luxury tax in 1996, eliminated it from 2000-2002, and then instituted the tax threshold system we have today in 2003. That system was effective in generating revenue—for instance, the Yankees paid a total of $319 million in taxes from 2003-2017—but it didn’t deter spending. So, as part of the latest CBA, baseball finally gave the luxury tax some teeth. Teams now face taxes between twenty and fifty percent on spending above the threshold, and if a team exceeds the limit by $40 million, their first pick in the next draft drops ten spots.

Nobody seems to be celebrating baseball’s new luxury tax, but it’s proving to be ruthlessly effective. In the last two years, the Dodgers, Yankees, Nationals, Red Sox, Giants, and Cubs have heavily curtailed their spending to avoid racking up steep luxury tax penalties. Had their payrolls continued to grow at previous rates, the Tigers, Phillies, Angels, and Rangers would have been up against the luxury tax as well. Comparing teams’ 2019 payrolls with their previous “projected” growth (the red line on the original graph), it’s the big-market teams who are spending far less, not the small-market ones:

There are lots of numbers on here, so I’ll break it down. On the left are the teams, ranked by the total amount of money they’ve spent on salary since 2011. Next is their payroll in 2019. The “projected” payroll column shows the amount that each team would have spent if they had continued to raise their payroll at previous, league-average rates. The final column is the difference—or the amount by which each team cut their payroll after the CBA was implemented. If a team is spending more than they would be projected to otherwise spend, you see the number in brackets.

The takeaways here are striking. The top half of teams account for 84% of the unspent free-agent money, while the bottom half of teams account for only 16%. Of course, that includes some teams who probably aren’t influenced by the tax at all, but even if we isolate ourselves to only those teams affected by the luxury tax—the Yankees, Dodgers, etc.—they account for well over half the unspent money.

These numbers aren’t perfect. They reflect historical spending and not market size (the Astros, who call the fourth largest city in the United States home, show as a bottom-half spender), and some of the spending decline is clearly tied to competitive windows (e.g. the White Sox, Royals, and Orioles). But broadly, the trends stand out. For instance, seven of the ten teams that have increased their spending over projections are small or medium-market teams. Only three are big-market teams, and two are the Nationals and Cubs, who have both indicated that they would have spent more if the tax hadn’t been in place.

And what about the tankers? Since 2011, only five teams have never been in the top half of spending in any single year. I present to you, the no good, very bad tankers:

Yep, the usual suspects. The Padres, the Pirates, the A’s, the Marlins, and the Rays. And yes, they have spent less money than they would have without the CBA—but not by much. Together, they account for about 15% of the unspent money in free agency, which is exactly the same as the team topping this list, the New York Yankees.

That the tanking teams haven’t had much to do with declining free-agent spending makes sense. Baseball has always had a small-market lower class that doesn’t spend much money. That part isn’t new. What’s new is the frugality shown at the top of the market, where we’re used to seeing a free-agent arms race. The Dodgers could have signed Manny Machado to a one-year, $100 million-dollar contract, and they still wouldn’t have come close to touching their 2015 payroll.

So, besides the fact that tanking teams aren’t the main issue here, what does this all mean?

I’ll start by saying what I don’t think this means. This doesn’t mean that the luxury tax is the only factor at play. I would place a lot of blame on the salary structure that artificially depresses wages before players hit free agency, enabling many teams to load up on young talent at below-market rates. This also doesn’t mean that the owners are right. The Rays, Marlins, A’s, Pirates, and Padres could all spend more money. None of them are run by paupers.

What I think this means is that baseball fans should understand the equities of the two sides, and be a little suspicious of them, too. Both the players and the owners have a vested interest in swaying public opinion. Salary caps are popular and tanking teams aren’t, so of course the players are going to blame it all on the Marlins. But make no mistake: players have always fought the luxury tax, and they’re going to push for its repeal in 2021. The owners, meanwhile, are going to highlight how much players make (“millions to play a kids game!”), compare Scott Boras to Imelda Marcos, and bury any mention of how much they might be profiting off this system. Wherever your sympathies lie, neither side is being entirely faithful to the truth.

I think this also means that baseball fans should fiercely guard the luxury tax when contemplating what changes to make during the next round of negotiations. Like many non-Yankees fans, I spent years dreaming of a salary cap, and I think the luxury-tax-with-teeth we now have is fantastic. Without it, Manny Machado would be a Yankee and Bryce Harper would be a Dodger, and I am very happy that’s not the case. But I also think the luxury tax is contributing to the steep decline in player salary, and I think the steep decline in player salary is bad. We should make some serious changes to ensure that player salary keeps pace with revenues while being mindful not to forget about the progress we’ve made.

Tanking isn’t the problem, and the luxury tax is working. But additional changes to the system are needed (Earlier free agency? A salary floor?) to ensure that the luxury tax’s unintended consequences don’t lead to its demise.