Under the collective bargaining agreement that ended the 1994-1995 major league baseball player strike the five major league teams with the largest player payrolls must pay a luxury tax.61 The luxury tax is 35% of the difference between their payroll and the midpoint between the fifth- and sixth-highest payrolls. Proceeds of the tax are distributed through the league's revenue-sharing plan. For the 1997 season the five teams (Yankees, Orioles, Indians, Braves, and Marlins) paid almost $12 million.
The tax threshold was $55,606,921. The owners in negotiations with the players had originally proposed that the tax apply to all teams with a threshold of $51 million. In 1997, 13 teams had payrolls in excess of $51 million. Is the collective bargaining agreement affected by collusion among the owners? How? How do the terms of the agreement affect the sustainability of collusion? Is the luxury tax a facilitating practice? What should be the legal status of the luxury tax? In other professional sports the collective bargaining agreement contains a salary cap that limits the payroll that each firm can spend. Which is more effective at sustaining collusion, a salary cap or a luxury tax? Why?