DETROIT – Detroit Tigers owner Chris Ilitch was reportedly one of four MLB owners who opposed the league’s offer to raise the luxury tax threshold by just a few million dollars during negotiations with players.
In other words, Ilitch might very well be one of the owners most responsible for the mess the league is in.
What is the luxury tax threshold?
Baseball, unlike other professional sports, does not have a hard salary cap. Teams can technically spend as much money as they want on player salaries.
That’s a feather in the cap of the players because there’s theoretically no limit to how much money they can earn as a group. For example, in the NFL, when the salary cap was around $200 million, the most money the players could collectively make was $6.4 billion. Sure, that’s an incredibly high number, but you get the point -- no limit is even better than a high limit.
The absence of a salary cap is one of the few financial aspects of MLB’s old collective bargaining agreement that actually favored the players.
But here’s the problem: The majority of MLB teams treat the luxury tax threshold as if it *is* a salary cap. Any team that exceeds the threshold has to pay hefty tax penalties, so while exorbitant spending is allowed, it gets expensive in a hurry.
For example, the first luxury tax threshold in 2021 was $210 million, so if a team’s payroll rose to $220 million, that team would be taxed on the extra $10 million. The penalty for a team over the first threshold was 20%, so that team would have had to pay an extra $2 million on the $10 million overage.
The tax rate increases for teams above the threshold in consecutive years, and surpassing the second and third thresholds -- $230 million and $250 million, respectively -- becomes even more costly.
What’s the point of luxury tax?
You might have heard the luxury tax referred to as the “competitive balance tax,” and that’s a name that better describes why MLB instilled these thresholds in the first place.
Everybody knows baseball is not an even playing field. The New York Yankees make much more money than the Oakland Athletics. There are several rules to try to address competitive balance across the league -- revenue sharing, draft pick compensation, the reverse standings draft order and, yes, luxury tax thresholds.
If MLB opened the floodgates and allowed teams to spend unlimited money without penalty, the concern is that smaller market teams such as Tampa Bay and Oakland would get completely priced out of contention.
Uncompetitive franchises are bad for business, because fans in those markets would lose interest and fans as a whole would get bored of watching the same script play out year after year.
So it’s in the best interest of the owners to keep the game competitive. That’s why they implemented steep financial penalties for teams that surpass the luxury tax threshold. Like I said, it basically acts as a salary cap.
How is Chris Ilitch involved?
On Friday morning (March 4), The Athletic’s Evan Drellich published a report that four MLB owners opposed an offer to the players that involved a small increase to the luxury tax threshold. Drellich has been covering the lockout and CBA negotiations extensively since they began.
On Tuesday, less than two hours before MLB’s self-imposed deadline to get a deal done without canceling regular-season games, the owners sent a proposal to players that included a $220 million luxury tax threshold. That would be a $10 million increase from 2021, and a $6 million increase from previous MLB offers.
Now, we aren’t going to do a deep dive into the current financials of MLB, but long story short: since the last CBA was signed in 2016, revenue has soared for the league, while the average player salary dropped. In other words, the game is generating more revenue than ever, but players are making less on average than they did a few years ago.
That doesn’t seem to make much sense, right?
Players want the luxury tax threshold to increase on par with how revenue has increased so that teams -- which are making more money than ever before -- spend some of that additional money on players. The $220 million offer fell far below what the players want -- a $238 million threshold.
It was still too much for Ilitch, though. According to Drellich’s report, Ilitch objected to offering the players a $220 million threshold, along with Bob Castellini of the Cincinnati Reds, Ken Kendrick of the Arizona Diamondbacks and Arte Moreno of the Los Angeles Angels.
MLB only needs 23 of 30 votes to approve a new CBA, so four owners isn’t enough to stop a deal, but Ilitch and the others are still being heard, and that could be a problem as the two sides try to find middle ground.
Commissioner Rob Manfred has already canceled the first two series of the regular season -- a move that will hurt the players much more than the owners. If a deal isn’t reached soon, even more games will be lost.
The terms of the luxury tax thresholds remain one of the biggest issues between players and owners, and Ilitch appears to be a vocal opponent of compromise.
Chris Ilitch as an owner
When Mike Ilitch owned the team, the Tigers often had one of the higher payrolls in the league. In 2017, the year he died, Mike Ilitch’s Tigers had the fourth-highest payroll.
Since Chris Ilitch took over, the Tigers have ranked 19th, 20th, 22nd and 23rd in total payroll. They finally paid up for free agents Eduardo Rodriguez and Javier Baez this offseason, but did so by passing up on more expensive options.
Here’s what I’m getting at: By opposing this small increase to the luxury tax threshold, Chris Ilitch isn’t exactly silencing those who view him as a cheap owner.
Fans in Detroit already believe their owner cares more about money than winning games. But according to this report, he cares more about money than having games at all.