Luxury tax (sports)

A luxury tax in the sports sense 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 then 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.

In North America, Major League Baseball has implemented the luxury tax system. The National Basketball Association also has a luxury tax provision; its utility is somewhat limited by the fact that the league also has a salary cap provision. The "hard" salary cap of the National Football League has prevented any need for a luxury tax arrangement.

It was widely assumed that the negotiations between the National Hockey League owners and players would have had to result in the implementation of a luxury tax, a salary cap, or some combination of both either under those or other names; most NHL teams were not financially long-term viable enterprises under the current arrangements. In the end, a hard salary cap was agreed upon.

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