Luxury tax (sports)
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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 obstensible 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 competitve 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.
Currently in North America, Major League Baseball has implemented the luxury tax system; as of this writing it has seemed to have little impact on the free-spending ways of New York Yankees owner George Steinbrenner, who was largely regarded as its primary target. 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, at least to this point, prevented any need for a luxury tax arrangement there.
It is widely assumed that the ongoing negotiations between National Hockey League owners and players will of necessity 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 are not financially long-term viable enterprises under the current arrangements. Many players have vowed not to accept a salary cap under any circumstances but some have appeared to at least be open-minded with regard to the concept of a luxury tax.