As was widely expected, the Red Sox and Nationals were the only two clubs who exceeded the $197MM luxury tax threshold this season, as MLB.com’s Jon Morosi confirmed (Twitter link) earlier this week. The exact figures aren’t known, though as per the luxury tax calculations on Cot’s Baseball Contracts, Boston surpassed the threshold by slightly beyond $40.85MM, while Washington was just under $6.3MM beyond the tax line. As a reminder, a team’s normal payroll is just pure dollars spent on player salaries in a season, whereas the payroll as calculated for Competitive Balance Tax purposes consists of the average annual value of player contracts, bonuses, and other expenses.
This is the second straight year that the Nats passed the luxury tax threshold, so their tax bill will consist of 30 percent of every dollar spent in overage (so around $1.89MM). After exceeding the threshold in 2015 and 2016, the Red Sox ducked under the CBT line in the 2017-18 offseason to “reset their clock,” so they’ll be taxed at the first-timer rate of 20 percent of every dollar spent in overage. By Cot’s numbers, however, the Red Sox surpassed the threshold by more than $40MM, so they’ll face a 62.5 percent surcharge on the overage.
This would work out to roughly $25.53MM in luxury tax payments and, perhaps more importantly, Boston’s top pick in next year’s amateur draft (currently the 33rd overall selection) would drop by 10 spots. Since the Sox are so close to that $40MM figure, it’s possible there could be some other calculation or unknown payroll factor that got the club under the $237MM mark — we won’t know for certain about the draft pick or the final Competitive Balance Tax bill until the league makes an official announcement. Had Boston stayed within the $20MM-$40MM range for payroll overage, they would have faced only a 12 percent extra in tax on top of their 20 percent first-timer percentage, putting them on the hook for approximately $12.672MM in luxury tax payments.
The Giants were right up against the $197MM line seemingly all season long, though by Cot’s calculations, they squeaked under the threshold by less than $1.6MM, thus avoiding their fourth straight year of tax payments. San Francisco was very careful in trying to stay under the $197MM payroll line after a busy offseason, as the team made a pure salary dump of a trade with the Rangers in July to unload Austin Jackson and Cory Gearrin’s contracts, and also traded Andrew McCutchen to the Yankees on August 31 once they were fully out of contention.
The Competitive Balance Tax was a major subplot of the 2017-18 offseason, as one of the reasons behind the unprecedented lack of free agent activity was the fact that big spenders like the Giants, Yankees, and Dodgers all kept their spending in check (at least by their standards) in an effort to stay under the threshold. For New York, this marks the first time since the luxury tax system was instituted in 2003 that the team will avoid making payments — the Yankees paid a whopping $319.6MM in total luxury tax payments from 2003-17. The Dodgers have exceeded the threshold every season since 2013, as the Guggenheim Baseball Management ownership group made an initial big spending splash to bring the club back into relevance, though the Dodgers always stressed that they would eventually take a more measured approach to payroll.
The expectation was that, once these teams reset their spending clocks, it would open the floodgates for increased spending in a 2018-19 free agent market that has two players (Bryce Harper, Manny Machado) in line for record-setting contracts. Those two superstars plus many other available big names like Patrick Corbin, Dallas Keuchel, Yasmani Grandal, Craig Kimbrel, Josh Donaldson, Nathan Eovaldi, and many others makes this winter a particularly important time to have as much salary flexibility as possible.
Any team who exceeds the luxury tax threshold in three or more consecutive years must pay a 50 percent tax on the overage, so getting under the line carries some noteworthy savings. Plus, as per the terms of the Collective Bargaining Agreement that came into play for the 2017 season, a team that surpasses the $40MM overage figure (as it appears Boston has done) faces as much as a 90 percent tax on the overage, plus that 10-slot drop for their top pick in the amateur draft.
Those stiffer penalties surely also contributed to the Yankees, Dodgers, and Giants’ decisions, though it should be noted that the actual dollars paid in tax penalties aren’t overly pricey for such wealthy franchises. While big spending is certainly no guarantee of success on the field, it usually does provide some level of competitive advantage — for instance, nobody in Boston’s organization is sweating that tax payment in the wake of a World Series championship, no matter if the final bill ends up at $12.672MM or $25.53MM. (Even dropping from the 33rd to the 43rd overall pick is a pretty light penalty.) As MLBTR’s Tim Dierkes has written in the past, some “large market teams are treating the CBT thresholds as lines they absolutely cannot cross,” perhaps as an overall excuse to curb spending. Only eight teams total have ever made tax payments, with two of those clubs — the 2004 Angels and 2016 Cubs — doing so only once. Teams will have even more room to spend in 2019, as the luxury tax threshold is jumping up to $206MM.
In paying the tax in 2018, the Red Sox and Nationals will each face added penalties for pursuing free agents who were issued qualifying offers, and will receive limited compensation if their own QO free agent (Kimbrel for the Sox, Harper for the Nats) leaves. If Boston or Washington signs a player who rejected the QO from his former team, the Sox/Nats would have to give up $1MM in international signing bonus pool money as well as their second-highest and fifth-highest picks in next year’s draft. Should Kimbrel and Harper reject their qualifying offers and sign elsewhere, the Sox and Nationals would only receive a compensatory pick after the fourth round of the draft.