For the first time, we are seeing the new “Luxury Tax” is keeping some teams from moving into a “gated community of Playoffville”. The “Luxury Tax” aka “The Competitive Balance Tax” has been the source of some new Boras-isms as super-agent Scott Boras tries to cajole teams into big spending and exceed the $197 million tax threshold which comes with stiff penalties.
“The team cutting payroll is treating their family where they’re staying in a neighborhood that has less protection,” Scott Boras said. “They’re not living in the gated community of Playoffville. And certainly they’re saving a de minimis property tax, but the reality of it is there is less firemen in the bullpen. There’s less financial analysts sitting in the press boxes. The rooms in their houses are less so obviously you’re going to have less franchise players when you move to that 12-room home in Playoffville.”
There have already been multiple repercussions of the Giancarlo Stanton trade to the New York Yankees as they have traded Starlin Castro in the Stanton trade and Chase Headley in a salary dump to the Padres to get below the $197 million limit. The Dodgers just made a blockbuster trade to rid themselves of Adrian Gonzalez, LHP Scott Kazmir, RHP Brandon McCarthy and infielder Charlie Culberson to the Braves in exchange for Matt Kemp. According to reports, this was all about the Dodgers dumping salary to get below the cap.
If this is all accurate that the Yankees and Dodgers have made these deals to get below the tax threshold, then we can deduce that both teams are “out” on any of the big free agents in this off-season.
This year Boras has 5 of the top 10 free agents and he has not found a home for any of them. He has Jake Arrieta, Eric Hosmer, J.D. Martinez, Mike Moustakas and Greg Holland. Without the Yankees and Dodgers in the running, he could be looking for low budget teams like the Padres and Twins to place his top players.
UPDATED 12/19/17 7:20PM: The USA Today came out with a 2017 recap of the teams who exceeded the tax threshold and and the Washington Post stated he Nationals were one of the teams exceeding the tax threshold. According to a comment Mike Rizzo made at the “State of the Nats” forum, Rizzo confirmed the USA Today report which was welcomed news, but then ESPN today came out with a report today that goes with another report that the Nationals were $7.25 million over the tax threshold.
According to USA Today, the Dodgers had a $244 million payroll in 2017 followed by the New York Yankees ($209.3 million), Detroit Tigers ($190.4 million), Boston Red Sox ($187.9 million), Chicago Cubs ($186.5 million) and San Francisco Giants ($186.4 million).
The latest report by Maury Brown this evening does not list the Nationals exceeding the tax threshold, but then he corrected himself later that the Nationals were the 5th highest in payroll and did exceed the tax threshold.
https://twitter.com/BizballMaury/status/943277308084756480
CORRECTION due to table formatting off the AP wire. Dodgers, and Yankees numbers correct. The Red Sox did NOT break the threshold. Giants were $4,133,193, Tigers $3,661,484 and the Nationals were $1,448,190. My apologies on that. https://t.co/snnYq8HTxN
— Maury Brown (@BizballMaury) December 20, 2017
The Tigers are in a rebuild as are the San Francisco Giants while the Red Sox just signed Mitch Moreland as their first baseman instead of the more costly Hosmer. Could this be the year that no team exceeds the limit?
Competitive Balance Tax
There will be a financial burden as well as draft penalties for teams exceeding the competitive balance tax aka the “luxury tax”. The new 2017 Collective Bargaining Agreement set in motion far reaching penalties if teams exceed the payroll thresholds with a tax rate increase annually based on the number of consecutive years a team has exceeded the payroll threshold.
The new Collective Bargaining Agreement sets these limits on the competitive balance tax :
- 2018: $197 million
- 2019: $206 million
- 2020: $208 million
- 2021: $210 million
If a team exceeds the Competitive Balance Tax threshold for the 1st time, they must pay a 20% tax on all overages above the threshold. A team exceeding the threshold for a 2nd consecutive season will see that figure rise to 30% on the overage.
The penalties get even stiffer after the 2nd consecutive season. A 3rd consecutive season that a team is above the threshold comes with a 50% luxury tax.
If there is good news for a team, the threshold rises by almost 5% in 2019 making the limit $206 million. If a team is able to go below the limit in any season, then the penalty level is reset as if they had never exceeded it.
MLB guidelines also call for teams that “exceed the threshold by $20 million to $40 million are also subject to a 12% surtax. Meanwhile, those who exceed it by more than $40 million are taxed at a 42.5% rate the first time and a 45% rate if they exceed it by more than $40 million again the following year(s). Beginning in 2018, clubs that are $40 million or more above the threshold shall have their highest selection in the next Rule 4 Draft moved back 10 places unless the pick falls in the top six. In that case, the team will have its second-highest selection moved back 10 places instead.”
Not only will teams have a cash penalty but they start to have their draft picks affected. There is enough disincentive to even scare the Los Angeles Dodgers as they have made the moves aforementioned to get below the threshold. With all that said, Yankees GM Brian Cashman also believes his team will be below the threshold even after the Stanton acquisition. Creativity like salary deferrals won’t work as MLB imputes a present value known as AAV.
AAV is the acronym for average annual value. The AAV of every contract on the 40-man roster computes the salary plus medical benefits and performance bonuses. That is a different definition than the typical way of computing payroll by how much the team is actually paying a player in a given season. Teams tried to circumvent the tax threshold by including easy targets to pay bonuses along with future service agreements. It will be difficult to give financial incentives and circumvent the AAV calculation now.
Playoffville
At the GM meetings in November, super agent Scott Boras coined a new metaphor for the competitive balance tax comparing it to a “property tax” and coining a new Boras-ism that teams need to live in “Playoffville”.
When you are a super agent representing the biggest names in the sport, you need to prime the pumps and almost guilt teams who are not spending to spend big. The Boras message to teams is that they need to spend to their revenues not to their tax limit. Here is a Boras message on Eric Hosmer:
“He’s Playoffville Federal Express,” Boras said. “He can be overnight delivery, one-day, two-day, three-year, whatever. He fits every franchise.”
Will teams respond and join Boras in his plan to build “Playoffville” this off-season?
Boras said Derek Jeter‘s Marlins have gone from a “jewelry store” to a “pawn shop”. The Mets have been a target of Scott Boras’ disdain for years as a team that is not spending big. Boras has said that several of his players would fit well with the Mets.
“The Mets have all the materials to live in a palatial estate of Playoffville,” Boras said. “The question is, ‘When do they choose to begin construction?’”
“You talk about what Major League Baseball provides them in revenues, just without selling a ticket, and then you look at their local TV revenues, you look at their radio and you look at their parking, concessions and others,” Boras said. “Where is the money going? And then it’s Casper finance. Where’s the ghost?”
Some teams also want to be in position for the 2019 free agent market that could include Manny Machado, Charlie Blackmon, Josh Donaldson and Bryce Harper. If Clayton Kershaw opts-out of his current contract after the 2018 season, he would also jump into that great free-agent class.
The Big Free Agents of this Off-Season
In conclusion, there is going to be a glut of big name free agents this off-season as teams work to get under the tax threshold. Because of that, there could be some bargains for teams this year.
Keep an eye out for some surprise signings in January and February.
