Technically called the “Competitive Balance Tax”, the Luxury Tax is the punishment that large market teams get for spending too much money. While MLB does not have a set salary cap, the luxury tax charges teams with high payrolls a considerable amount of money, giving teams ample reason to want to keep their payrolls below that level.

The luxury tax remained relatively unchanged in the new CBA. The threshold level for the luxury tax will be $178 million in both 2012 and 2013 (the same as it was in 2011), and will be raised to $189 million from 2014-2016. And offenders will be charged the following tax rates, depending on how many years in a row they have been above the threshold:

First time: 17.5%

Second time: 30%

Third time: 40%

Fourth time and higher: 50%

Any team that drops below the threshold will reset their luxury tax rate, dropping them back down to the first time rate (17.5%) if they should happen to go over the threshold again in the future.

Money raised through the luxury tax is set aside for industry development — not revenue sharing, as is commonly thought. It is distributed as such: the first $2.5 million is reserved for potential refunds, and then 75% is given to fund player benefits and 25% goes to the Industry Growth Fund (Biz of Baseball).

Links for Further Reading

Revenue Sharing, Luxury Tax Are Not The Same – Biz of Baseball

CBA Details – MLB.com