April 24, 2024

Common Wealth Geography

Exploring the World

Uncovering the Impact of MLB’s Luxury Tax Regulations in the Wake of Shohei Ohtani’s Record-Breaking Contract

The Competitive Balance Tax (CBT), also known as the luxury tax, is a tax for teams that exceed a set payroll threshold for a season. The first time a team exceeds the threshold, they are subject to a 20% tax on all overages. If they exceed it for a second time consecutively, they face a 30% fine.

During the 2023 season, nine teams were hit with the luxury tax: Mets, Yankees, Padres, Phillies, Blue Jays, Braves, Dodgers, Angels, and Cubs.

For the 2024 season, the CBT threshold is set at $237 million, a $4 million increase from the previous season. It will further rise by $4 million for the 2025 season and $3 million in 2026.

Shohei Ohtani’s record-breaking 10-year, $700 million deal with the Los Angeles Dodgers has implications for the team’s CBT. Ohtani’s decision to defer a significant portion of his contract allows the Dodgers to minimize penalties and continue signing players, extending their championship window.

The Dodgers are now poised to be a dominant force in Major League Baseball for years to come. With one of the best cores in the league, they seek to solidify their starting rotation for sustained success.

While the team’s spending may exceed the CBT threshold, the strategic move with Ohtani’s contract allows them to maintain financial flexibility.