It’s a term that we hear thrown around in baseball  a bit, but like Rule 5 pick or Waivers, we may not always know the details.  With that, lets take a look at what the “Luxury Tax” is in Major League Baseball.

First off, the luxury tax is not a salary cap, but a way for the MLB to try and keep competitive balance among big, medium, and small market teams.  The tax is a penalty imposed by the MLB when they pass a threshold for total payroll which is defined in the Collective Bargaining Agreement (CBA).

In 2016, the threshold is set at $189 million and has not moved since 2013 when it was $178 million.  Things start to get complicated here…

If you are a first time offender, you are taxed at 17.5% of what the team is over the threshold.  Second time jumps up to 30%, third time to 40%, and four or more caps at 50%.

Something to be noted as well, if you are a luxury tax offender, you can reset the teams tax rate by missing keeping the team payroll under the threshold for the a season.

The tax money collected by the MLB is than divvied up by banking $5 million in case of a team refund, then 50% goes to fund player benefits, 25% to fund baseball development in countries that do not have high school baseball, and 25% goes in to an industry growth fund.

Currently, the Los Angeles Dodgers and New York Yankees are over the threshold for 2016, with Boston within $2.5 million.  Then there is a large gap with the San Francisco Giants at $153mm and Detroit Tigers at $151mm.  This is still with free agents on the board and with arbitration set to happen in the coming months.

In 2016, the Yankees will be capped out at 50%, the Dodgers are looking at their 4th year over and will be at 50%, with the Red Sox resetting their tax rate in 2014, being below the threshold and will only be dinged for 30% in 2016.