The Competitive Balance Tax (CBT), also known as the luxury tax, is a tax imposed on teams whose payroll exceeds a certain threshold for a season. If a team exceeds the threshold for the first time, they face a 20% tax on the overages. If they exceed it a second time, they are hit with a 30% fine.
During the 2023 season, nine teams, including the Mets, Yankees, Padres, Phillies, Blue Jays, Braves, Dodgers, Angels, and Cubs, were hit with the luxury tax.
For the 2024 season, the CBT threshold has been set at $237 million, with incremental increases for the following seasons. The Dodgers’ signing of Shohei Ohtani to a record-breaking 10-year, $700 million deal, with a portion of it deferred annually, will push them over the threshold but also minimize their penalties.
Ohtani’s deferral of his contract allows the Dodgers to continue spending and signing players, extending their championship window. The team is set to be a major player in the league for years to come, especially with their strong core and potential improvements in their starting rotation.
Overall, the CBT serves as a mechanism to promote competitive balance in Major League Baseball by discouraging excessive spending by certain teams.