Throughout the offseason, the Astros constructed their roster with the luxury tax threshold in mind. That was most apparent in the club’s signing of right-hander Jake Odorizzi to a two-year guarantee that came with an extremely low-priced 2023 player option the veteran righty will almost certainly reject.
The obvious purpose was to spread out the contract’s average annual value — a club’s luxury tax balance is calculated by summing the AAV’s of the team’s financial commitments, not their actual payroll in any given season. Because player options are treated as guaranteed seasons for luxury tax purposes, Odorizzi’s deal is tabulated as a three-year contract with a $7.83MM AAV even though the most likely outcome is that he departs after collecting a total of $20.25MM for two years of work. That creative accounting allowed the Astros to enter the season with a luxury tax balance just under $207MM, in the estimation of Cot’s Baseball Contracts, a little more than $3MM shy of the $210MM first tax threshold.
Houston’s proximity to the tax threshold would seemingly limit their options for making midseason acquisitions, but Astros general manager James Click suggested the organization could exceed the threshold to accommodate a trade. In an appearance on The Sean Salisbury Show, Click said owner Jim Crane “has been very clear” to the front office that the $210MM mark “is not a hard line” the organization cannot go past.
That’s not to say the Astros will certainly go out and acquire one or more players on high-priced contracts. Click promptly cautioned that whether to exceed the threshold “is something we have to factor into our decision-making process” based on the ancillary penalties that come with doing so, particularly with regards to qualifying offers.
Under the terms of the collective bargaining agreement, a team that goes over the threshold and loses a player who had rejected a qualifying offer in free agency receives a compensatory pick after the fourth round of the upcoming draft. A team that neither receives revenue sharing (the Astros don’t) nor exceeded the luxury tax would receive a compensatory pick after Competitive Balance Round B, which directly follows the second round. Ultimately, exceeding the tax would knock the Astros’ compensation for losing qualified free agents from a pick in the 70-80 overall range to a pick in the 125-140 range. Paying the tax would also carry increased draft and international signing bonus penalties were they to sign a qualified free agent from another club.
The Astros, who lost their first and second round draft picks in both 2020 and 2021 as punishment for the sign stealing operation, are virtually certain to offer a QO to Carlos Correa and could plausibly issue one to Justin Verlander as well. Given their recent lack of high picks, the potential ability to stockpile selections in 2022 could carry extra import to the organization.
Houston exceeded the threshold last season. Were they to do so again, they’d be subject to a 30-percent tax on any overages between $210MM and $230MM because they’re a tax payor for the second consecutive year. (They’d be subject to higher tax rates in the unlikely event they pushed their CBT ledger north of $230MM this season). That’d also set them up for potential higher penalties were they to exceed the threshold a third consecutive time in 2022, assuming the current system remains in the next collective bargaining agreement.
That’s not to say there’d be no justification for the Astros going past the $210MM mark this season. At 53-33, they’re 4.5 games up on the A’s in the AL West. Houston has the best record in the American League and the top run differential in MLB. This team looks the part of a legitimate World Series contender, so there’s certainly merit to the idea of giving them the best chance to win in 2021.
However, the system disincentivizes teams (particularly so in the Astros’ case) from barely exceeding the threshold to make marginal upgrades. As Click explained to Salisbury, “the worst thing we can do is go over by $1. If we’re going to go over, we’re going to go way over. … If we have an opportunity to bring in somebody that we feel like dramatically improves our chances to win the World Series (whose contract would exceed the threshold), that’s something Jim Crane has shown he’s willing to do for this franchise.”
It remains to be seen if the Astros find an upgrade significant enough for ownership and the front office to deem that worthwhile. With the offense having been far and away the league’s best and the rotation performing well, fortifying a rather young bullpen would seem to be the priority for the Houston front office in the coming weeks.