A luxury tax in professional sports is a surcharge put on the aggregate payroll of a team to the extent to which it exceeds a predetermined guideline level set by the league.
The ostensible purpose of this "tax" is to prevent teams in major markets with high incomes from signing almost all of the more talented players and hence destroying the competitive balance necessary for a sport to maintain fan interest.
The money derived from the "tax" is either divided among the teams that play in the smaller markets, presumably to allow them to have more revenue to devote toward the contracts of high-quality players,[1] or in the case of Major League Baseball, used by the league for other pre-defined purposes.
In North America, Major League Baseball has implemented the luxury tax system.
However, there is a tax levied on money spent above a threshold set by the Collective Bargaining Agreement (CBA) between the players union and the owners.
In aggregate, the Yankees have paid out some $325.00 MM, 73.78% of the total fines assessed since the luxury tax began.
[7] The luxury tax is separate from revenue sharing, which is a system to balance out the income distribution between large and small market teams by dividing money from merchandise sales and media contracts.
The money generated from the luxury tax is not distributed to the rest of the league, as is the case with the NBA, but rather is used for other purposes.
Penalties for teams that breach the salary cap regulations are: [22] The National Football League (NFL) and the National Hockey League (NHL) both have hard salary caps, making it unnecessary to utilize the luxury tax.
Several other leagues in the United States and abroad use salary caps, but the luxury tax is uncommon.