The Padres finalized their agreement with starter Michael Wacha this morning. That pact contained options from both the team and player perspective designed to meet the right-hander’s asking price while keeping the deal’s average annual value down for luxury tax purposes. It’s officially a four-year, $26MM guarantee, leading to a $6.5MM CBT hit.
That contract structure brings the Padres’ estimated luxury tax number around $272.2MM, as calculated by Roster Resource. That’s about $800K shy of the $273MM mark that delineates the third threshold of tax penalization. Public payroll figures are estimates, though Dennis Lin and Ken Rosenthal of the Athletic confirm with team officials the club remains narrowly below the $273MM figure. That’s no coincidence, of course, with the Padres’ front office intentionally structuring some recent contracts to add to the roster while staying under that threshold.
At the start of the offseason, the Friars signed Nick Martinez to a deal that was similarly built with dual club/player options and technically came out to an approximate $8.667MM average annual value. More recently, San Diego’s extension negotiations with Yu Darvish were shaped by the team’s CBT situation. The Friars signed the All-Star righty to a five-year, $90MM extension covering the 2024-28 seasons last week. That paired with Darvish’s preexisting $18MM salary for the upcoming season to result in a matching tax hit. Before the extension, Darvish had counted for $21MM against the luxury tax (reflecting the AAV of his prior front-loaded six-year, $126MM agreement with the Cubs). The extension trimmed $3MM off the team’s tax bill this year, which freed up breathing room under the $273MM mark for the Wacha money.
In the process, San Diego made a commitment to Darvish running through his age-41 season. Investing for that long in a pitcher of his age certainly isn’t without risk, though it’s one the Friars preferred to a shorter-term deal that could’ve come with higher annual salaries. Lin and Rosenthal report that Darvish’s camp initially broached extension talks seeking a two-year, $60MM deal. Instead, the Padres made a longer commitment that guarantees the veteran hurler an extra $30MM altogether but comes at a much lower annual value.
According to the Athletic, San Diego also pursued a multi-year guarantee with player options for Johnny Cueto before he signed with the Marlins last month. San Diego was known to be involved in the Cueto market. Rather than accept a deal similar to the ones Martinez and Wacha ended up taking, Cueto took a one-year, $8.5MM pact with a 2024 club option from the Marlins.
Ultimately, the Padres’ maneuverings allow them to open Spring Training a hair south of the third tax threshold. A team’s luxury tax number is calculated at the end of the season, not during exhibition play or on Opening Day. Depending on how much room exists below $273MM, the Friars could certainly wind up above that number — either by making a midseason acquisition via trade or waivers or simply by selecting the contract of a non-roster Spring Training invitee whose deal contains a base salary above the league minimum (i.e. Pedro Severino).
For the time being, however, the organization has an obvious desire to keep south of the $273MM figure. Finishing a season above the third tax threshold results in a team’s top draft choice for the following year (2024, in this instance) being moved back ten spots. It also subjects a team to higher payments. The Friars are set to pay a 50% tax on any spending between $233MM and $253MM and a 62% fee on spending between $253MM and $273MM. They’d be taxed at a 90% rate on spending from $273MM to $293MM. The latter penalties are ones they’re clearly looking to avoid right now.
San Diego heads into the season as one of the favorites in the National League. Perhaps they’ll eventually go beyond the third threshold to maximize this roster’s chances of contending. As of now, they project for the third-highest CBT payroll in the majors. The Mets are running away from the rest of the league in spending, while the Yankees are reportedly just under the final tax threshold at $293MM and reluctant to surpass that figure.