The Cohen Tax

The primary goal of the CBT is to encourage a competitive balance amongst teams while allowing big spending on players.  Does it work?  Probably not as much as the fans or MLBPA want it to.

The first agreement (1997) stated that the top five salary teams in each year would pay a 34% surtax on each dollar a team spent beyond halfway between the salaries of the fifth and sixth teams.  For the next three years, only 8 teams paid a surcharge, with only the Orioles (yes Orioles) and NYY paying it each of the three years.  Meaning the O’s and NYY were amongst the top 5 payrolls for all three years.

After a three year hiatus, the luxury tax returned in 2003.  The new CBA called for a universal threshold instead of an average between the 5^th and 6^th highest payrolls.  The new CBA called for escalating tax rates depending on the number of years a team exceeded the threshold.

• 2003 – $117MM threshold – 17.5% tax rate
• 2004 – $120.5MM threshold – 22.5% tax rate first time; 30% second time
• 2005 – $128MM threshold – 22.5% tax rate first time; 30% second time; 40% third time
• 2006 – $136.5MM threshold – 22.5% tax rate first time; 30% second time; 40% third time

The 2006 CBA kept most of the previous concepts intact, except it introduced a wrinkle, allowing teams to slip under the threshold and start the penalties over again.

• 2007 – $148MM threshold – 22.5% rate first time; 30% second consecutive time; 40% third consecutive year
• 2008 – $155MM threshold – 22.5% rate first time; 30% second consecutive time; 40% third consecutive year
• 2009 – $162MM threshold -22.5% rate first time; 30% second consecutive time; 40% third consecutive year
• 2010 – $170MM threshold -22.5% rate first time; 30% second consecutive time; 40% third consecutive year
• 2011 – $170MM threshold -22.5% rate first time; 30% second consecutive time; 40% third consecutive year

The 2012 CBA kept the same basic structure, but added a 4^th tax tier.

• 2012 – 2013 Threshold – $178MM

• 2014 – 2016 Threshold – $189MM

• 2012 Tax rates – 20% first time; 30% second consecutive time; 40% third consecutive time; 42.5% fourth consecutive time

• 2013-2016 tax rates – 17.5% first time; 30% second consecutive time; 40% third consecutive time; 50% fourth consecutive time

The 2017 CBA continued to tweak the system.  The new CBA eliminated the 4^th tier, but increased the 3^rd tier tax rate.  They also introduced surtaxes in addition to the tax rates.  The first surcharge is allocated once a team surpasses $20MM over the threshold, and the second surcharge kicks in when a team surpasses $40MM over the threshold.

• 2017 Threshold – $195MM

• 2018 Threshold – $197MM

• 2019 Threshold – $206MM

• 2020 Threshold – $208MM

• 2021 Threshold – $210MM

The tax rates are consistent throughout the CBA: 20% first time; 30% second time, and 50% third or more.

As mentioned, this CBA has added a surtax.  There is a 12% surtax when a team passes the threshold by $20MM.  The surtax increases to 45% for anything that exceeds $40MM over the threshold.

• $0 – $20MM over threshold – Tax rate calculated on the overage.
• $20MM – $40MM over threshold – Tax as calculated above, plus 12% for any salaries between the $20MM and $40MM range.
• $40MM and above over threshold – Same as above two, plus 45% tax on every dollar over $40MM threshold.

Only ten teams paid a competitive balance tax for 2003-2021.

In September 2020, Steve Cohen reached an agreement with Fred Wilpon, Jeff Wilpon (son) and Saul Katz to purchase 95% of the NYM.  MLB knew that bringing in Steve Cohen was going to be a problem with many owners, but as a group, their feared the publicity about the Wilpon’s and Bernie Madoff that they approved the Cohen purchase.

From the beginning, Cohen made it very clear that he was not going to let payroll become an obstacle in running his organization.  Thus when the owners met to negotiate the new CBA, they wanted to send a financial message to Cohen to try and keep him in check.

Part of the new CBA will include a new penalty threshold in the luxury tax, a fourth tier that some are referring to as the “Steve Cohen Tax” meant to deter owners from blatantly outspending the competition.

The threshold for penalties begins at $230 million in 2022 and rises incrementally to $244 million by 2026. The second threshold is $20 million above the first ($250M), the third threshold is $40 million above the first ($270M), and the new fourth threshold is $60 million above the first ($290M).

There’s also a surcharge threshold for clubs that exceed the base threshold by $20 million or more.

$20 million to $40 million: 12 percent surcharge

$40 million to $60 million: 42.5 percent surcharge for first year; 45 percent for each consecutive year after that

$60 million or more: 60 percent surcharge – AKA, the Cohen Tax

Since the Dodgers are more than 3 consecutive years exceeding the threshold, they are already at the 50% tax rate for every dollar in excess of the threshold.

$0 – $20MM over threshold – Tax is 50%

$20MM – $40MM over threshold – Tax is 62%

$40MM – $60MM over threshold – Tax is 95%

$60MM and over – Tax is 110%

The Dodgers 2024 payroll was $353,015,360, resulting in a record luxury tax of $103,016,896.

The Steve Cohen overall tax for the first three years with the Cohen Tax is $228,671,560 (2022-2024).  The taxes as imposed do not seem to have had an impact on what Steve Cohen did.  However, even after the Juan Soto contract, NYM payroll is at $252,376,033, so they have a long way to go to catch LAD with $335,473,540 (current).

The current 2025 LAD tax sits at $79,320,894.  The Dodgers are now firmly entrenched in the 4^th tax tier (110%), thus for every dollar of salary, the Dodgers will pay an additional 110% tax on that salary.

The luxury tax payouts go to:

• 1^st $3.5MM to partially offset MLBPA Benefit Plan Agreements.
• 50% of the balance goes to fund contributions to the MLBPA individual retirement accounts.
• The remaining goes to the Commissioner’s Office to be distributed to the revenue sharing teams, who are “working to increase attendance, fan engagement and improve the marketing and promotions”.

Until the MLBPA can push penalties onto teams that do not look to improve their rosters through increased payroll, that last emphasized section is not going to punish any team that will not push to put a competitive team on the field.  I look for this to be a big issue for the next CBA.

Even with the increased threshold amounts and the Cohen Tax, 2024 saw a record nine teams reach the luxury tax.  The nine teams:

LAD

NYM

NYY

Atlanta

Texas

Houston

Philadelphia

San Francisco

Chicago Cubs

That is nearly 1/3 of the MLB teams that at least reach the threshold.  $cott Bora$ is proving to be more right than wrong in his assertion that teams have the $$$ to spend, they just choose not to.

I do not think that the Cohen Tax in and of itself is a deterrent to teams like LAD, NYM, and NYY.  But each team has a budget, including the Dodgers.  When the teams who are paying the Cohen tax, they now appear to be curtailing those costs the closer they get to that budget.  The Dodgers are now one Clayton Kershaw contract away from reaching last year’s CBT payroll.  Is that their budget?  From here on, every contract agreed to, add 110% to the payroll costs.

Why do the Dodgers defer?  Because it gets that AAV down, thus the tax amount drops.  The Dodgers have no problem living within the MLB rules and regulations funding the deferred amounts into an escrow account, and knowing they can invest those $$$ to fully fund the contracts.

Even though Teoscar Hernández deferred a portion of his 1 year deal for 2024, he does not want to defer any for 2025. That is his right.

While I have no report to confirm, I am guessing that Blake Snell had zero problems deferring as much as he did was because of the large signing bonus.  Maybe the Dodgers are not willing to fund a large signing bonus for Teo.  Regardless, the Dodgers have an amount of total AAV payroll they are willing to commit to Teo, and if he is not willing to accept whatever level that AAV payroll is, they are willing to walk away and look elsewhere.

The Cohen Tax – It is not the first $301MM payroll that the Dodgers are concerned with, but every dollar after that is going to get the Cohen tax scrutiny.

Recently Commissioner Manfred was quoted:

“Deferrals at some point can become problematic. Historically, we did have one franchise, Arizona, that got itself into financial difficulties as a result of excessive deferrals. We’ve strengthened our rules in terms of the funding of deferred compensation in order to avoid that kind of problem. But, you know, look, obviously the bigger the numbers get, the bigger the concern.”

Look for Manfred to push the Owners into changing the rules regarding deferrals in some capacity.  Look for MLBPA to push back.