MLB Luxury Tax Explained: Competitive Balance Tax Tiers

MLB’s luxury tax, officially the Competitive Balance Tax, is a penalty a team pays for carrying a payroll above a set threshold, which is $241 million for 2025. Baseball has no salary cap, so this tax is the only brake on the biggest spenders, and it is built to escalate, both the more you spend and the more years in a row you spend it.

Base rates rise with repeat offenses

The first thing to grasp is that the rate is not fixed. It climbs based on how many consecutive seasons a team has been over the line, per MLB’s own explanation of the tax:

Consecutive years over threshold	Base tax rate on overage
First year	20%
Second straight year	30%
Third year or more	50%

A team that dips back under resets the clock. That is why some clubs deliberately duck below the threshold for a single season, to shed repeat-payor status before spending big again.

The surtax tiers stack on top

Above the base threshold sit three more lines, and each adds a surcharge on top of whatever base rate applies. For 2025 they work out roughly like this:

Payroll over the $241M base	Added surtax	Common name
$20M over ($261M)	+12%	First surtax
$40M over ($281M)	+45%	Second surtax
$60M over ($301M)	+60%	Cohen tax

Stack a 50% third-year base rate on top of a 60% surtax and the top marginal dollars can be taxed at more than 100 cents on the dollar. A team $60 million over is paying more in tax on its highest slice of payroll than the salaries themselves cost, which live trackers like Spotrac’s MLB tax page estimate through the season.

The draft-pick penalty

Money is not the only cost. A club that ends the season more than $40 million over the threshold has its highest pick in the next draft moved back 10 spots, unless that pick falls in the top six, which is shielded. So the deepest spenders take a hit to their future talent pipeline as well as their bank balance, a deliberate double deterrent.

Why it is not a salary cap

This is the crucial distinction. The NFL and NBA cap spending directly; a team physically cannot exceed the number. MLB does not. The Competitive Balance Tax only makes spending more expensive, so a determined, deep-pocketed owner can run whatever payroll they choose and simply eat the bill. That freedom is why baseball’s payroll gap between the richest and poorest clubs is far wider than the NFL’s, where revenue sharing and a hard cap compress the field.

A CBA on the clock

One timing note worth flagging: the current collective bargaining agreement runs only through the 2026 season. Thresholds are set to rise modestly each year until then, but the whole framework, and the long-running question of whether MLB should adopt a genuine salary cap, is due for renegotiation, per the MLB Players Association CBA materials. Expect the tax to be a central fight in the next round of labor talks.

For now the tax remains a soft governor rather than a wall, which is exactly why the sport’s payrolls run so high. To see whose contracts push teams deepest into surtax territory, our list of the highest-paid MLB players shows the deals doing it, and if you want a format that uses chance rather than taxes to help weaker clubs, our MLB draft lottery odds explainer covers the other side of baseball’s balance toolkit. All thresholds and rates here are 2025 figures set by the current CBA, so verify the current numbers, which change with each new labor deal.