Summer 1996: Labor Peace At Last?

As this issue went to press, the players and owners had agreed on virtually all details of a new labor agreement except the players' entitlement to service credit for the period of the strike. The players received service time in past strikes, but a small group of hard-line owners, led of course by Jerry Reinsdorf, would prefer to blow apart the entire settlement rather than yield on the issue. Acting Commissioner for Life Selig is believed to have the 21 votes necessary to approve the agreement, but one should never under-estimate the owners' capacity for self-destructive behavior.

The proposed deal will run through at least the year 2000, with the MLBPA pushing to extend it through 2001. While the agreement hands management a major symbolic victory in the form of a "luxury tax" on high-payroll clubs, the structure of the proposed tax suggests it will have little practical effect.

The luxury-tax threshold will be $51 million in 1997, rising to $55 million in 1998 and an estimated $58 million in 1999. There will be no luxury tax in 2000, nor in 2001 if the agreement runs that long. In 1997 and 1998, teams over the tax threshold will pay a 35% tax on the excess payroll, with the tax rate falling to 34% in 1999. If the 1997 tax system had applied in 1996, only four teams -- the Yankees, Orioles, Indians and Braves -- would have paid the tax, contributing a total of $10,930,500. Assuming that these teams would have reduced their payrolls by the full amount of the tax, total player compensation would have fallen less than 1%.

Looking ahead to 1997, only the Cardinals have a 1996 payroll within 5% of the 1997 tax threshold, while many large-market clubs remain far under the cap. For example, the Cubs, Dodgers, Angels, Phillies and Marlins could increase their payrolls by at least $10 million next season without owing the tax, while the Mets and Tigers have more than $20 million to spend. Nor should the luxury tax significantly reduce salaries in future years. The threshold rises by 8% in 1998 and at least 6% in 1999, even as greater revenue sharing leaves the high-revenue teams with less to spend. Moreover, the tax-free year in 2000 affords any competent GM a way around the tax -- look for lots of back-loaded multiyear contracts with balloon payments that season -- and will force the owners to engage in meaningful labor negotiations before the contract expires, since they'll be operating without a luxury tax until another agreement is reached

Of longer-term significance, labor peace means that the owners will finally phase in the revenue-sharing agreement adopted in 1994. This plan will ultimately boost revenues of MLB's smallest-market clubs by an estimated $10 million/season. Economic theory suggests that greater revenue sharing will be more effective than a luxury tax in checking the increase in player salaries, by reducing the funds available for high-revenue teams to outbid others for coveted players. To help fund this revenue-sharing agreement, the players have agreed to pay a two-year, 2.5% tax on their salaries, estimated to raise about $50 million. Three-fourths of this sum will be used to fund revenue sharing, the other 1/4 for a joint labor-management fund.

The new agreement provides for three-person panels to hear all salary arbitrations -- a victory for management insofar as it reduces the risk of "freak" results. The minimum salary will rise from $109,000 to $150,000 for 1997, with additional increases to follow. The players will reduce their share of ticket revenue from first-round playoff games from 80% to 60%, and have authorized the owners to extend the first-round playoffs from best-of-five to best-of-seven games. Interleague play will begin in 1997, with the DH used in American League parks. In a victory for the players, the owners have committed to expand to 32 teams before the end of the century, selecting two more franchises in 1999 to begin play by 2002

So was this agreement worth disrupting two seasons and destroying the 1994 World Series? Arguably for the players, who lost 2-1/2 months' pay and suffered a PR black eye, but fought off proposals which would have permanently reduced their collective income by about 15%. Not for the owners, who sustained long-term damage without winning significant restrictions on player compensation. And certainly not for the fans, many of whom remain hurt, alienated and distrustful of a business whose key division -- between large- and small-market owners -- has left it virtually incapable of governing itself.

Copyright © 1996 Doug Pappas. All rights reserved.
Originally published in the Summer 1996 issue of Outside the Lines, the SABR Business of Baseball Committee newsletter.

Back to Doug's Outside the Lines feature index

Back to Doug's Business of Baseball menu

To home page