Six teams are set to pay penalties under the newly restructured competitive balance/luxury tax for their 2022 payrolls, per a report from the Associated Press. Each of the Mets, Dodgers, Yankees, Phillies, Padres and Red Sox is currently over the threshold. That marks just the second time since the luxury tax’s inception that six teams will pay the tax.
This will be the second straight year paying the tax for both Los Angeles and San Diego. Each of the other four clubs was under the threshold in 2021 and thus counts as a first-time luxury tax offender.
The 2022-26 collective bargaining agreement not only saw the tax thresholds increase by a relatively significant margin — it also implemented a newly created fourth tier of penalization. For a reminder, the new thresholds are as follows:
- Tier One: $230-250MM (teams pay a 20% overage)
- Tier Two: $250-270MM (32%)
- Tier Three: $270-290MM (62.5% for first-time payors; 65% thereafter)
- Tier Four: $290MM+ (80%)
For second-time payors (i.e. Dodgers, Padres), those rates jump to 30%, 42%, 75% and 90%, respectively.
While those sound like substantial penalties at first glance, the actual amounts to be paid by most teams in excess of the luxury tax is relatively minimal. Those clubs are only taxed on dollars over the threshold, leading to often trivial sums of money (by the standards of a Major League franchise, anyhow). The Padres, for instance, are less than $3MM over the threshold, per the AP, so even with an increased 30% tax rate they’re only set to pay a bit more than $800K. The Red Sox are roughly $4.5MM over the threshold, putting them in line to pay about $900K in fees. The Phillies ($2.6MM) and even the Yankees ($9.4MM) are also looking at generally small sums, relative to their annual payroll marks.
The only two teams set to pay substantial sums are the Dodgers, who fall just shy of the fourth tier of penalization, and the Mets, who exceeded that tier by nearly $9MM. The Mets are in line to pay as much as $29.9MM in taxes, per the AP, while the Dodgers check in just slightly behind that sum at $29.4MM.
What the AP’s report does not delve into, however, are the other penalties associated with the luxury tax — which some teams view as more detrimental than the fiscal penalizations. Any club that exceeds the first tax threshold by $40MM or more will see its top pick in the following year’s draft pushed back 10 slots, for instance. With regard to the 2023 draft, that applies to both the Mets and the Dodgers.
Tax payors are also subject to stiffer slaps on the wrist when signing free agents who have rejected a qualifying offer and to diminished returns when losing such free agents. CBT payors who sign a “qualified” free agent stand to lose their second- and fifth-highest selections in the draft as well as $1MM from their league-allotted bonus pool for international free agency (which typically represents anywhere from roughly one-sixth to one-quarter of the total pool). That’s in contrast to revenue-sharing recipients, who forfeit only their third-highest pick, and to non-revenue sharing recipients/non-CBT-paying teams, who lose their second pick and $500K from that international pool.
More interesting with respect to this year’s group of luxury payors is the fact that a CBT-paying club who extends a qualifying offer to a free agent only stands to gain a compensatory pick after the fourth round of the 2023 draft. For a team that does not receive revenue sharing and does not pay the CBT, that pick would fall after Competitive Balance Round B — roughly 60 picks higher.
For a team like the Red Sox, who exceeded the tax by just $4.5MM, that means they’ll see their potential compensation for Xander Bogaerts — a lock to receive and reject a qualifying offer — shrink considerably. It also lessens the incentive to extend a qualifying offer to a more borderline candidate like Nathan Eovaldi, who’s been shelved for more than a month due to shoulder inflammation.
It also further welcomes scrutiny of Boston’s decision to hang onto veterans such as Eovaldi, Rich Hill and J.D. Martinez at the trade deadline. It’s certainly commendable that the club sought to remain in the Wild Card mix, but the Sox sent some mixed signals by trading Christian Vazquez (and to a much lesser extent, Jake Diekman) while simultaneously acquiring Tommy Pham and a paid-down-to-league-minimum Eric Hosmer. The Red Sox didn’t really commit to shattering the threshold in the name of an all-out postseason push in 2022 but also didn’t take the necessary steps to maximize their return in the event that Bogaerts departs in free agency. The result could be that their compensation for losing Bogaerts, a four-time All-Star who’s received MVP votes in four different seasons, will be a single draft pick somewhere in the 135 to 140 vicinity next summer. That’s not necessarily a franchise-altering outcome, but it’s also far from ideal.
At one point, the Padres might have faced similar considerations with regard to their own free agents, although they’ve sorted themselves out more organically. Joe Musgrove’s extension keeps him in San Diego and renders moot any considerations regarding a qualifying offer, though. Meanwhile, fellow starters Mike Clevinger and Sean Manaea looked like potential QO candidates at the time of the trade deadline but have struggled considerably in the second half, lessening the likelihood they’d receive a QO in the first place.
That diminished draft compensation, while not a deterrent for the Mets with regard to their roster construction, will be a reality they face this winter. With as many as four potential QO recipients — Jacob deGrom, Edwin Diaz, Chris Bassitt and Brandon Nimmo — they stand to see the return for those potential departures undercut in a meaningful way. Ditto the Dodgers, who’ll assuredly make a QO to Trea Turner and could at least ponder one for Tyler Anderson. The Yankees, too, have a slam-dunk QO recipient in their lineup (Aaron Judge) and borderline call in their rotation (Jameson Taillon). The Phillies don’t have much to consider with regard to potential qualifying offers.
All told, the six teams in question will pay a combined total of about $73MM in luxury fees, with the Mets and Dodgers accounting for the vast majority of that sum. The luxury tax will hit the Mets the hardest both in terms of actual dollars paid and in terms of return for recipients of the qualifying offer. Both the Padres and Dodgers were content to pay the tax in consecutive seasons, and given the extent by which the Mets exceeded the threshold this year, that’ll likely be the case for them in 2023 as well. Time will tell whether San Diego and Los Angeles are willing to incur an even steeper set of tax penalties as a third-time offender, and it’s certainly plausible that any of the Red Sox, Yankees and/or Phillies could look to dip back under the first tier of penalization next season, when the first-tier threshold increases to $233MM.