Definition of Luxury Tax (Sports)

What is a "luxury tax" as it applies to the world of sports? What does the term "luxury tax" mean in the sports world?

In the world of sports, a "luxury tax" is an amount that is paid by a team when they have a payroll that is over a certain amount.

The main purpose of a "luxury tax" is to level the playing field by taking money from higher revenue teams and giving it to lower revenue teams. For instance, in Major League Baseball, the New York Yankees bring in more than double the revenues that the Pittsburgh Pirates do. In order to level the playing field, the Yankees will pay a "luxury tax", part of which will be spread to lower revenue teams.

The current luxury tax threshold in Major League Baseball is $178 million. If one team's total player salaries and benefits add up to more than $178 million in any given year, they will have to pay a "luxury tax".

In the NBA (National Basketball Association), a soft salary cap with a luxury tax is used. In the NBA, if a team exceeds a certain payroll threshold, they will be forced to pay a "luxury tax" which is then distributed to teams that are below the tax threshold.

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