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Did The Baseball Union Make a Colossal Mistake?

Monday, 5 Dec 2011 | 6:03 PM ET

When Major League Baseball owners and the players announced that they had reached a new Collective Bargaining Agreement a couple weeks ago, I immediately thought, "Why was it so easy?"

MLB baseballs seen through the netting of a basket
Getty Images
MLB baseballs seen through the netting of a basket

Sure, getting labor peace has its appeal, but that's not the job of either side to make sure that happens.

As I began to study the agreement, I couldn't believe that the players actually agreed to the revenue-sharing plan that the owners got away with. By connecting revenue sharing with the luxury tax they effectively put a soft cap on player payrolls and discouraged traditionally heavy spenders from spending more.

Let me take you through this.

The new deal, for the first time ever, disqualifies 15 markets from receiving initial revenue sharing dollars. They are: The Yankees, Mets, Red Sox, Cubs, White Sox, Phillies, Blue Jays, Nationals, Braves, Rangers, Astros, Giants and A's (assuming they build their new stadium).

Beginning in the 2013 season, teams on this list can get back a percentage of what they pay in revenue sharing (referred to as a "rebate"). In 2013, those teams would get 25 percent of their money back. In 2014, those teams would get 50 percent of their money back. In 2015, those teams would get 75 percent of their money back, all the way up until 2016, when they would basically get a free pass.

A condition of getting this rebate however is that you couldn't get it if you were paying any sort of luxury tax. And that's the problem. The threshold in 2013 is $178 million and from 2014-2016 is $189 million. Go over that and you'll have to pay at tax PLUS you'll lose your ability to get your rebate, which increases over time.

So why is the word out that the Yankees go over a $189 million payroll in 2014? The math is easy. Let's say the Yankees are right at $189 million and decide to spend $10 million on a free agent to make it $199 million. That free agent didn't just cost them $10 million. That free agent just cost them $25 million!

Why?

Because they pay a 50 percent repeat offender tax, which means they're paying a $5 million luxury tax payment and then they'll lose their rebate, which let's say is about $10 million.

Then there's another incentive for them not to go over. The new deal allows a repeat offender's tax to go from 50 percent to 17 percent if there's a year in between where the team doesn't go over the threshold. So, now you see how the union has essentially discouraged top revenue earners and spenders from spending more.

But it gets worse.

They actually discourage those getting the revenue sharing from spending more as well. The rule for teams that are still eligible to get initial revenue sharing payments is that they must spend 25 percent more than what they receive on payroll. That's actually a bad percentage.

Let's say a team gets $30 million in revenue sharing. That means they have to spend $37.5 million on payroll? That's crazy.

If the union was going to set limits at the top, they needed to set a limit at the bottom. The solution would have been to set similar rules as to when they would start to lose their revenue-sharing money, just like they set the rules for conditions of getting a rebate back.

For years, the Major League Baseball union has been the strongest of the four major leagues. It's hard to understand how they messed up such an essential bargaining point.

Questions? Comments? SportsBiz@cnbc.com

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