There is no doubt that Juan Soto will test the waters of free agency — even if he eventually signs back with the New York Yankees. The Yankees and Mets are listed as the top two favorites to land him. On one sports betting site, they are taking early prop bets on Soto’s contract over/under which is set at $500 million, and then you can bet on the team that signs him. The Washington Nationals are in their top-half of teams, and tied at 13th with Houston in top odds to sign Soto.
The Shohei Ohtani contract was for the highest pitcher/batter contract in baseball history as he is a starting pitcher and DH. One thing we all expect is that Soto will sign for stupid crazy money and be poised to set a record for a pure position player on a free agent deal. He actually could have set the record in 2022 when the Nats offered him $440 million with room to negotiate that further. Truth be told, Soto wants to test free agency — and the mighty Yankees cannot dissuade him from filing as a free agent. He has earned that right. The Yankees will have to compete for Soto’s services with probably a handful of teams that will be offering over half-a-billion-dollars.
What makes a Washington Nationals pursuit of Soto a strong landing spot is that the Nats have plenty of open space well-below the competitive balance tax (CBT) threshold along with Soto’s familiarity with all of the Nats’ management and ownership. What makes the Mets so intriguing in 2025 is that they are shedding over $185 million in CBT obligations this offseason. The bad news for them is that they were over the cap by $119 million. The Mets issue is that they need to replace several departing free agents and most notably Pete Alonso, Jose Quintana and Luis Severino.
The 2025 CBT is set at $241 million. Any team that exceeds the CBT threshold is subject to an increasing tax rate and penalties depending on how many consecutive years it has done so as well as their level of spending above the CBT. According to FanGraphs, there is a record-breaking nine teams that could be at or over the “luxury tax” threshold this year’s $237 million level. Last year, there were eight teams over the CBT threshold that set a record at the time.
The Mets, Dodgers, Yankees, and Phillies are four teams that would be subject to a 50 percent penalty on any overage in 2025 on dollars spent above $241 million. So if Soto’s AAV is $40 million, the Phillies would really be paying $60 million in total dollars and possibly even higher if they push their overage into the next tier (explained below). The Phillies get significant salary relief after the 2026 season, but can they afford Soto and push levels at the highest level in the sport for the next two seasons?
Here are the penalty taxes for first year, second consecutive year, and third consecutive year for any teams above the threshold:
First year: 20 percent tax on all overages
Second consecutive year: 30 percent
Third consecutive year or more: 50 percent
If a team goes below the luxury tax threshold for a season, the penalty level is reset. So, a team that exceeds the threshold for two straight seasons but then drops below that level would be back at 20 percent the next time it exceeds the threshold.
There’s also a surcharge threshold for clubs that exceed the base threshold by $20 million or more. That’s where the Mets had been.
$20 million to $40 million: 12 percent surcharge
$40 million to $60 million: 42.5 percent surcharge for first year; 45 percent for each consecutive year after that
$60 million or more: 60 percent surcharge
Teams that are $40 million or more above the threshold will have their highest selection in the next July Amateur 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.
That is a long education on the dollars and cents on the cost to acquire above the cap. The following sections were prepared by Don H.:
The Worksheets
This article explains how the Shohei Ohtani contract AAV and Total (Net Present) Value was calculated. As noted in footnote 2: The deferred salary discount rate for CBT purposes is equal to the annual Federal mid-term rate as of the October prior to the contract’s start. As of October 2023, the Federal mid-term rate was 4.43%.
For a Soto contract we need to use the October 2024 rate which is 3.70%. We have created an Excel worksheet that allows us/you to do some what-ifs on possible Soto contract proposals using the algorithm in the above link. Free free to click the link to download the Excel file and enter your own ideas. The downloaded Excel file includes some samples.
The Excel file has two worksheets.
The Ohtani Model. The salary and deferral amount is the same for each contract year. So each row represents a different contract. Just enter values in columns A, B and D. Columns C, E and F have the formulas define in the rows up to row 100. Also note that columns E and F use Excel’s conditional formatting facility to highlight in green if the values exceed the Ohtani value.
The Year by Year Model. This worksheet enables you to specify different values for the contract year (column A), salary for each year (column B) as well as the deferral amount for each year (column C) and the number of years(columns D). Column E has the formula to calculate the Net Present Value for that contract year. Column G and H provide the totals.
If you want to create multiple versions just duplicate the worksheet and enter the desired values.
Disclaimer: Due diligence was exercised in validating these calculations. Admittedly, there may be some oversights/errors.
When reality sets in, the pretenders will be separated from the contenders for Soto’s services. The CBT will cause several teams to go into heart palpitations in the process of considering a contract, and a team like the Nationals will have acid reflux in making a Soto deal fit their budget. One team will get Soto and 29 teams will not. That’s the reality of the situation.
