The Competitive Balance Tax and Revenue Sharing Explained

By 4Baseball Staff · November 5, 2026 · 12 min read

How Major League Baseball limits payroll without a salary cap: the competitive balance tax thresholds and tiers, how payroll is measured, how revenue sharing moves money between clubs, and what the system does and does not do.

Major League Baseball has no salary cap. A club may spend as much on players as its owner is willing to lose, and no rule forbids a payroll of any size. What the sport has instead is a pair of financial mechanisms that push against the biggest spenders and support the smallest-revenue clubs: the competitive balance tax, which charges a club for payroll above a set threshold, and revenue sharing, which moves money from clubs that earn a lot locally to clubs that earn less. Fans often call the first the luxury tax, which was its original name, and they often assume it works like the salary caps in the NFL or NBA. It does not.

This article explains both systems as they stood in the collective bargaining agreement in force through the 2025 season: how a club's taxable payroll is measured, how the tax rates climb for repeat payers, how the revenue-sharing pool works, where the draft and international-signing rules fit in, and what the numbers do and do not accomplish. The details are set by negotiation between the owners and the players' union, and the agreement was due to expire at the end of 2026, so readers should check the official source for anything that has changed since this was written.

A tax, not a cap

The central point is easy to state and often missed. A salary cap is a limit; a tax is a price. Under a cap, a club cannot exceed the number. Under the competitive balance tax, which is usually abbreviated CBT, a club can exceed the number as far as it likes, and the penalty is a payment to the league. A club that decides the players are worth the cost pays the tax and keeps the players.

That is a deliberate feature of the sport's labor history. Owners proposed a salary cap in the early 1990s, and the players resisted it so strongly that the dispute contributed to the strike that began in August 1994 and ran into the spring of 1995. The union's position has been consistent: it will accept mechanisms that raise the cost of high payrolls only if they stop short of a hard limit. The tax is the compromise that survived. It has been revised in each agreement since, but its basic shape, a threshold, a rate and escalating penalties, has been stable.

The history, briefly

The first version of the tax appeared in the mid-1990s and applied to a small number of the highest payrolls. The present form dates to the agreement reached in 2002, which created the competitive balance tax and put it into effect starting with the 2003 season. Each later agreement, including those signed after the work stoppage that ran from December 2021 into March 2022, adjusted the thresholds, the rates and the penalties.

Revenue sharing has a similar history. A plan to move money from higher-revenue clubs to lower-revenue ones began in the 1990s, and the rules for it were tightened in later agreements. The point of the two systems is complementary: the tax discourages concentration of spending at the top, and revenue sharing supports the clubs at the bottom of the revenue scale.

For years, the New York Yankees were the club that paid the most in tax, because they combined the largest local revenues with some of the highest payrolls. Recent seasons have seen other large-market clubs near or over the line, and the group that pays changes from year to year. Which clubs are over the threshold in a given season becomes public once the league has calculated payroll, and the league's own announcements are the place to check.

How a club's payroll is measured

The number that counts for the tax is not the salary a club pays in a given year. It is a figure the agreement calls the club's CBT payroll, and it is built from three main parts. The first is the average annual value of the contracts of the players on the club's 40-man roster. The second is the cost of player benefits that the club pays. The third is a group of smaller items covered in the agreement. The final figure is settled after the season, once all trades and signings are accounted for under the agreement's rules.

The key idea is average annual value, often abbreviated AAV. A contract's AAV is its total guaranteed value divided by the number of years. A player signed for 10 years and $350 million has an AAV of $35 million, and he counts $35 million against the tax every year of the contract, even if the actual cash paid in some years is higher or lower. The method has a purpose: it stops a club from hiding the cost of a contract by paying a lot early and a little later, or the reverse, since the tax sees the same flat figure every year.

It also has consequences. A contract with deferred money, an option or incentives is counted according to special rules in the agreement, and those rules are where much of the cleverness in roster building takes place. A club that wants to keep its CBT payroll under the line has an incentive to find a structure that shifts value away from the measured years. The lesson is that a team's payroll in the newspaper, based on the salaries it pays this year, can be a different number from the one the league uses.

The threshold, year by year

The agreement fixes the threshold for each season. For the years covered by the agreement that took effect in 2022, the figure began at $230 million in 2022 and rose in small steps each year, to $244 million in the final season of the agreement. The intermediate values were $233 million, $237 million and $241 million. Readers who want to check any figure should consult the league's published summary of the agreement.

Two cautions apply. The threshold is a measure of payroll under a specific accounting method, so a club with an actual payroll below the line can still be over it once benefits are added, and a club above the line on actual salary can be under it. And the agreement sets the numbers, not the market. The threshold moves only through bargaining, which is why a rise in revenue in the sport does not automatically raise it.

The rates: why repeat payers are charged more

Once a club's CBT payroll exceeds the threshold, it pays a percentage of the excess. The percentage depends on how many seasons in a row the club has been over. As of the agreement that began in 2022, the base rates on the amount above the threshold were 20 percent for a club over the line for the first time, 30 percent for a club over it for the second straight season, and 50 percent for a club over it for the third straight season or more. A club that falls back under the threshold resets its count.

The agreement also adds surcharges for clubs far above the line: additional bands, the first of which begins at a fixed number of dollars over the threshold, carry higher rates, and the largest overages can carry non-financial penalties such as a move down in the club's draft position. The exact bands and rates are in the agreement and are not reproduced here, because they have changed between agreements and a stale percentage would mislead.

A simple example shows how the structure works. Suppose, with made-up numbers, a club's CBT payroll is $245 million in a year when the threshold is $230 million. The excess is $15 million. At the first-time rate of 20 percent, the tax is $3 million. If the club does the same thing the next year, the rate is 30 percent and the tax is $4.5 million. In a third straight year the rate is 50 percent and the tax is $7.5 million. The payroll has not changed, but the cost of keeping it has more than doubled. That progression is the part of the system designed to make a club think hard before staying above the line.

What a club does about it

The tax changes behavior in ways that fans can see. Near the end of the season, a club close to the line may trade a player with a large salary to a club well below it to get under the number; this is part of why the rules in the trade deadline rules matter to the finances as well as to the standings. In the winter, a club that wants a free agent but is near the line looks for contract structures that lower the AAV, such as a longer deal at a smaller annual figure. A long contract with a low AAV helps the CBT payroll in each year but increases the total risk, which is why the fine print of a signing can say as much about the club's thinking as the headline number.

There is also a link to the qualifying offer. Under the agreement, a club that is over the threshold pays a larger price in draft picks and other assets for signing a free agent who received a qualifying offer, a point covered in the qualifying offer explained. The agreement thus uses the tax as a marker that applies to several parts of roster management.

For the player, the system is less visible. Because the tax applies to the club and not to the player's salary, a high-paid player's earnings do not fall. What the union watches is whether the threshold becomes a de facto ceiling: if many clubs treat the line as a limit, then spending at the top of the market could be less competitive than it would otherwise be. That worry is a recurring theme in negotiations and is the main argument the union makes against raising the rates.

Revenue sharing: moving money between clubs

Revenue sharing is a separate system with a different goal. Clubs earn money from three broad sources: national revenue, such as league-wide media and merchandise income, which is shared on a basis agreed upon in the league's governing documents; local revenue, such as ticket sales, local broadcast rights and ballpark income; and other items. The sharing plan takes a percentage of each club's local revenue, after certain ballpark expenses, puts it into a pool, and distributes the pool so that the clubs with the least local revenue come out ahead. The net effect is that a large-market club pays in more than it takes out and a small-market club receives more than it pays.

The amounts involved are large. A club in a city with a modest television market may have local revenue that is a fraction of the largest clubs', and the pooled money narrows the gap. The plan has been controversial for two reasons. Clubs paying in have argued that they subsidize the others without any assurance the money is used to build competitive teams. The union has argued the reverse: that some receiving clubs pocket the money and keep payroll low, and it has filed grievances in the past on that ground.

The rules that came out of those disputes include requirements about how revenue-sharing proceeds can be used and what the league can ask of recipient clubs. As with the tax thresholds, the exact conditions are in the agreement and change with each one. The principle is that sharing is meant to support competitive teams, not to substitute for them.

The draft and international tools

Several other parts of the agreement serve the same purpose, though they are not financial transfers in the strict sense. The first is the competitive balance draft round. Clubs with the smallest markets and lowest revenues receive extra picks in the draft, placed after the first round and after the second, and those picks can be traded under the rules, which gives them value to clubs that would not otherwise receive them. The second is the draft lottery, which, as of the agreement that began in 2022, gives clubs that did not reach the playoffs a chance at the top picks rather than assigning them strictly in reverse order of record. The third is the bonus pool system for international amateur signings, which gives each club an allotted total to spend, with the size of the pool depending on market size and revenue. That topic is covered in the international draft debate, and it is the part of the system the owners have most wanted to replace with a draft.

All three tools work on talent acquisition, whereas the tax works on spending on established players. The combined idea is that a club with little money should still be able to acquire cheap young talent, and that a club with a lot of money should find it expensive to buy its way out of every mistake.

Does it work?

The honest answer is that it depends on what you measure. If the goal was to prevent the richest clubs from dominating, the record is mixed: large-market clubs have continued to win more than their share of championships in some stretches, and small-market clubs have won in others. If the goal was to make high spending expensive, it clearly does so: a club that stays over the line for three years pays a significant premium. If the goal was to make small-market clubs competitive, revenue sharing helps, though clubs differ in what they do with the money.

There are structural reasons the effect is limited. The threshold is high enough that most clubs in most seasons are well below it, so for them the tax is a distant fact. And a rich club can absorb a 20 or 30 percent surcharge on the part of its payroll over the line, because a tax on the overage is a tax on the marginal dollar, not on the whole budget. The system is better described as a brake than a barrier.

One more point for fans who follow the standings: a team's payroll is a poor predictor of its record over a single season. Player development, injuries and luck in close games swamp the difference in most years. Over a decade the correlation is stronger, which is why the sport's labor fights concentrate on the long run.

Common questions

Is the competitive balance tax the same as the luxury tax? Yes, in the sense that it is the successor to the original luxury tax and fans still use the old name. The official term in the agreement is competitive balance tax.

Does the tax money go to the players? The agreement sets rules for where the proceeds go, and they have changed from one agreement to the next, so check the current text. The club makes its payment to the league, not to its own players.

Can a club avoid the tax by trading a player at the deadline? It can lower its tax payroll by moving contracts, subject to the agreement's accounting rules, but it has to find a partner and accept the competitive cost. This is one reason clubs near the line sometimes become sellers.

Do other sports do this? The NFL uses a hard salary cap that clubs cannot exceed, and the NBA combines a soft cap with a luxury tax on high payrolls. Baseball's system is closer to the NBA's tax than to the NFL's cap, though it has no cap at all.

What happens when the agreement expires? The owners and the union negotiate a new one, the sport's history of work stoppages shows the process can be tense, and thresholds and rates may change. This article describes the agreement in force through the 2025 season; the league and the union publish the terms of any new one.

Where to go next

The tax interacts with how players earn their pay, which service time, salary arbitration and free agency explains from the player's side. For the clubs' views of the trade window, read the trade deadline rules, and for the market for amateur talent, the international draft debate. Business and labor coverage is collected on the business and labor topic page, and trades and free agency follows the market as it moves. The clubs' current records are on the standings page.