What is the Competitive Balance Tax (Luxury Tax)?

The Competitive Balance Tax (CBT), commonly called the luxury tax, is a tiered tax on team payrolls above thresholds set by the Collective Bargaining Agreement. The goal is to dampen spending gaps.

For 2026, the first threshold is around $244M. Tax rates start at 20% (first overage year) and rise to 50% (third consecutive overage). Overlaid thresholds at +$44M, +$64M, and +$84M layer in higher rates.

Penalties go beyond the tax: exceeding the third threshold drops a team's draft pick by 10 spots, and Qualifying Offer compensation picks fall to round 4 — real market disadvantages.

The Dodgers have run consecutive overages signing Ohtani, Yamamoto, and Sasaki, accepting the bill in pursuit of titles. Smaller clubs avoid top FAs partly to stay below the threshold.

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