Understanding the Luxury Tax
The optimist sees bubbles and thinks of champagne. The pessimist thinks Alka-Seltzer. The fact of the matter is that everyone thinks the Dodgers are the richest organization in baseball and should sign an All-Star at every position because that is the recipe for a World…
The optimist sees bubbles and thinks of champagne. The pessimist thinks Alka-Seltzer.
The fact of the matter is that everyone thinks the Dodgers are the richest organization in baseball and should sign an All-Star at every position because that is the recipe for a World Championship. If you believe that, you are either naive or very dumb… or both.
First off, what is the Luxury Tax? Actually, it’s called the Competitive Balance Tax. It is just called the “Luxury Tax” because that is what it is called… duh. Each year, clubs that exceed a predetermined payroll threshold are subject to a Competitive Balance Tax – Those who carry payrolls above that threshold are taxed on each dollar above the threshold, with the tax rate increase based on the number of consecutive years a club has exceeded the threshold. Here it is Verbatim from MLB itself:
A team’s Competitive Balance Tax figure is determined using the average annual value of each player’s contract on the 40-man roster, plus any additional player benefits. Every team’s final CBT figure is calculated at the end of each season. (Note: If a player signs a contract extension that doesn’t kick in until a later season, his AAV for the purposes of the CBT doesn’t change until the new deal begins.)
The following thresholds were put in place per the 2022-26 collective bargaining agreement:
2022: $230 million
2023: $233 million
2024: $237 million
2025: $241 million
2026: $244 million
A club that exceeds the Competitive Balance Tax threshold is subject to an increasing tax rate depending on how many consecutive years it has done so.
First year: 20 percent tax on all overages
Second consecutive year: 30 percent
Third consecutive year or more: 50 percent
If a club dips below the luxury tax threshold for a season, the penalty level is reset. So, a club 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.
$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
Clubs that are $40 million or more above the threshold shall have their highest selection in the next Rule 4 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.
In simple terms, if the Dodgers are over the CBT in 2023, they will be in the highest tax category in 2024, and if they want to sign an Ohtani, they will have to pay out the a$$. If they are $40 million over the CBT, then they also lose draft positions. Of course, Dodgers president of baseball operations Andrew Friedman is adamant there is no mandate to stay under the tax threshold from ownership, but also noted, “there are benefits to doing it.”
Some of you weigh on every word that comes out of Andrew Friedman’s mouth, but smart fans will weigh every word that comes out of his mouth, realizing that he is under no obligation to tell you what he is going to do… if fact, he just might mislead you.
The penalties for going over three straight years or longer would be a 50% tax on every dollar spent over the $233 million threshold.
In addition, there’s also a surcharge threshold for clubs that exceed the base threshold by $20 million or more, ranging from a 12% surcharge up to 60%, depending on how far over the club is. Teams that are $40 million or more above the threshold also have their highest selection in the next MLB Draft moved back ten places under certain terms.
I find it interesting that the last time the Dodgers were under the threshold was when they had a luxury tax number of $178 million during the 2020 season. Hmm… that was also the last time they won the World Series. See any connection between spending and winning? No, it is just the opposite! The tax threshold in the 2020 season was set at $208 million. They also dipped under it in 2018 after paying a record penalty in 2017 and going over the threshold every season for five years since 2013.
Here’s another quote from Andrew Friedman:
“… the No. 1 thing for Mark Walter and our ownership group is to do everything we can to go out and win a World Series. Sometimes as part of the transition that happens on rosters over a three-, five-year period, young players get integrated onto the roster, by definition payrolls come down some when that happens, depending on how many.
We have a number of really talented Minor League players right now at the upper levels, and part of our focus this offseason will be how many to look to integrate early in the year, and how many of them will kind of serve as depth throughout the year, get experience and then be part of the core going forward.”
Miguel Vargas, Michael Busch, James Outman, Bobby Miller, Ryan Pepiot, and Gavin Stone are all going to be given an opportunity this season. That is the Dodgers’ plan this year.
However, all they need to do is get into the playoffs, and anything can happen. Spending on big-name players doesn’t guarantee anything, as we have seen so often, and the Houston Astros just won the World Series by promoting their own young players into essential roles.
The Dodgers may still make a significant move if the right one presents itself, but they aren’t going to pass the luxury tax threshold just for anyone, so depending upon what happens early in the season, I would not expect a big move right now. In fact, the deeper into the offseason it gets, the odds increase that they will stay below the threshold. Here’s the bottom line: According to SI:
“Los Angeles paid tax each season from 2013-17 and its total bill through last year reached $182 million since the luxury tax began in 2003. That’s second only to the Yankees’ $348 million bill.If the Dodgers owe tax for 2023, they would pay 50% above next year’s first threshold of $233 million, 62% above $253 million, 95% above $273 million and 110% above $293 million.”
That is not Monopoly money, people. Those are real dollars. Mark Walter has a fiduciary responsibility to the shareholders and partners in Guggenheim Partners, and money spent because “you just can” is like slapping your shareholders. In fact, Todd Boehly (one of the partners) has been openly vocal about going over the salary cap. BTW, Boehly may also be purchasing another team:
However, that is a different story… for another day. Mark Walter will authorize going over the CBT only if the Dodgers falter early in the season. They have one of the finest farm systems in baseball and maybe the best player development machine ever! There are still lots of free agents and trades to be had, but I think the Dodgers will stand pat until the middle of the season. If they are stumbling, then Friedman may pull the plug and abandon any possibility of staying under the threshold, but as it stands, the youngsters have to be given a chance.
Back in November, Stan Kasten gave a pretty clear indication that the Dodgers were going to rely on the Farm in an article in The LA Times:
"Having watched the best regular-season team in Dodgers history implode after just four nights in the playoffs, it appears that baseball’s biggest spenders might be ready to slightly change course. Miguel Vargas? He had a .915 on-base-plus-slugging percentage at triple A this year. Michael Busch? He slugged 32 homers with 108 RBIs at the top two minor league levels. Bobby Miller? He struck out 12 batters per nine innings at the same two minor league levels.
Those three players form the foundation of the Dodgers’ future and, if you listen to Dodgers president and chief executive Stan Kasten, that future could be now. “Earlier in the last decade, we had a wave of young guys who were going to be real contributors,” Kasten told the Los Angeles Times this past week. “We think we are now on the precipice of the next wave of young guys. We need to make room to allow that to happen.”
Kasten emphasized that the team would spend whatever it deemed necessary to improve but noted that this offseason could be a little different. “If money is what is needed, we’ll certainly do that, as we’ve shown time and time again,” he said. “[But] if we think we have kids who need time to play up here, I’m sure we’ll do that as well.”
Any other Dodgers winter, those words might be cause for alarm. But, hey, in the wake of the recent lifeless implosion of the Dodgers’ veteran All-Stars — their ninth postseason failure during a stretch of 10 years of regular-season excellence — why not mix in a few energetic newbies? During a 30-minute interview reflecting on the season, Kasten emphasized he was happy with the organizational direction and its leadership despite the team coming under the most critical public scrutiny since Kasten’s group took ownership a decade ago. But he acknowledged that the Dodgers will do whatever it takes to change the ending. “We have succeeded in too many ways on too many fronts for me to think of this as any kind of failure,” he said, later adding, “Just in the last eight years, five LCSs and three World Series, I don’t think those are bad numbers. ... We won one World Series, we lost another one in Game 7, I don’t think those are symbols of a fatally flawed program. I just don’t agree with that.”
The pitching is simply outstanding, and if healthy, they may have a surplus to trade. If an injury-free Max Muncy reverts back to his normal Dodger year (.890 OPS/.35 HR), Freddie Freeman and Mookie Betts do what they do, and Gavin Lux and Will Smith keep up their growth, and JDM just does what he did last year (I think he will actually have a monster year) and if one rookie shines, there is no reason to do anything. Lux, Betts, Freeman, Muncy, Smith, Martinez, and potentially Vargas are all very good to great players. The Astros won with a Rookie at SS, who hit .245 (and without much in CF). Rojas will be better than that! BTW, Rojas is going to play SS no matter how many mental gymnastics you engage in. Of course, that is also dependent upon health.
There are lots of opportunities and lots of talented players. There are dollar store purchases and rehab projects, but the main thing is that there are plenty of rookies who are hungry and ready to shep up and show out. Some will. Some won’t. Men invented statistics, analytics, and sabermetrics as a tool, but God gave you eyes. I would advise you to use them. Watch and learn!
If you think that is not a Championship Caliber team, all I am going to say is…
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Discussion (181)
Disagree, not disagreeable
Boras is Julio’s agent and there’s no way he’s signing an extension. He’s going to the open market and I doubt AF will pay top dollar for him. And I think we have to trust AF and his crew regarding the kids. I think Vargas will be a stud and maybe we get a plus with either outman or Busch
I was thinking about Duvall too. The fact that he is still out there has me wondering about his health. Or maybe he just overestimates his value.
Signing another veteran for a few million would make it harder for Vargas, Outman and Busch to get playing time.
I’m optimistic that Heyward, still just 33, can get his game back into shape. Heyward, Duggar and Zimmer become more important if CT3 is shipped out in a salary dump. (Getting Rojas also makes Taylor expendable.)
There is another matter I hope gets done: Signing Urias to an extension.
2024 six-man rotation:
Ohtani
Urias
Buhler
Gonsolin
May
Stone
Miller…
OK, that’s six and a spare.
I thought this was a fan forum. Where fans ask questions and see what people have heard rumors about possible signings. Didn’t know everything had to have a purpose. So I asked a good question. And the typical three guys smash it. Because, well I didn’t know maybe they knew. So I looked into free agents and pulled out three names with bug league experience just in case the rookies can’t hit. A player that would help the Dodgers next season. I thought that this is a fan forum. And not a dictatorship where the same three guys. Can only bring up topics to talk about. And then make fun of the questions everyone else asks on here. Maybe just maybe fans would like to know some things and you guys not be so critical of what people ask on here. And just answer the questions. Without a smart alleck remark. Okay.
I was just mentioning free agents that are still out there that could help the Dodgers if the rookies don’t develope. Sorry, for wondering what they will do. So I was asking for your opinion on who would be good to sign to a minor league deal. Ya know just in case. Forgot everything you mention is always right. Sorry for asking questions.
Adam Duval is still out there as an outfield free agent. That would have been a better fit for the Dodgers as a outfielder. Who can play all three positions in the outfield. He would be better then Duggar or Zimmer power wise.
Elvis Andrus is out there as a free agent shortstop. He has veteran leadership and experience played well for the A’s last year.
Brandon Solano is a infielder for the Reds plays like three infield positions he used to batter the Dodgers. When he was with the Giants. A good guy off the bench.
I wouldn’t be surprised is they try to sign some of these guys to minor league deals. The one with experience in the major leagues. Just in case the rookies can’t handle it. You know be prepared just in case. Just like last year. The Dodgers had that outfielder that used to be a Giant. Then he dislocated his shoulder. Where is that guy at now. He plays defense well in the outfield.
Dustin May, Bobby Miller, Diego Cartaya, Mike Busch, and Ryan Pepiot for Ohtani?
Would you do it?
Excellent article Mark.
If the Dodgers don’t reset the luxury tax this year and return to their normal payroll, they will likely incur an additional $20 million in tax payments plus lose draft pick value of another $10 million each year.
The simplest way for the Dodgers to reset CBT is to trade Treinen and attach prospects worth his salary of $8million. Per MLB trade values it would be something like Bruns and Knack together or Pepiot alone needed to be worth $8million.
The Dodgers need to keep their options open at this point, but in spring training they could still decide to unload Treinen salary without hurting this years team.
Dodgers should find a way to reset CBT unless they are forced to make a big move at the trade deadline.
Yep a more consistent lineup for the Dodgers is very important especially without doing the shift anymore.
Do you think Freeman and Betts and Smith should play less games and that way they aren’t warn out by the playoff time.
And like always Taylor Lux and Betts always seem to get injured and can’t play every game.
So they need guys that can replace those guys when they do not play. And be consistent hitters like a Heyward Thompson and Barnes. I think those guys are your bench players that give guys like Taylor Betts and Lux days off. Freeman will be everyday and Muncy and Smith and Betts. It’s the other side positions that will change because the computer will say to okay them against what ever pitcher there facing that day.
In 2021, the Braves won 88 games, The least of any division winner. But they got hot at exactly the right time and jumped out to a 3-1 game lead over the Dodgers in the NLCS, Counting the Wild Card and the three wins over the Giants, the 91 win Braves beat the 111 win Dodgers. When they played the Padres they had been sitting on their ass for five days playing intrasquad games while the Pads were fighting the Mets for their playoff lives I think that had more than a little to do with the lack of urgency, They won game one, then Trea’s error in game two opened the door for a come from behind win sending them to Dago tied at a game apiece rather than being two games up. Roberts pulling Anderson in game four when he was totally shutting down the Pads did not help either, That plus the fact that the bullpen sucked most of the series was also a contributor. Freeman, Muncy and Trea were the only regulars who were hitting. JT had a bad series so did Will Smith. Taylor was 0-7. Bellinger had 1 hit, Thompson had 2. The vaunted Dodger power showed up only in game 2 against Darvish when they cracked 3 homers off of him by the third inning. Never scored again that entire game.
That lineup with the two rookies in it starting. I feel matches pretty well with all the other teams in the west division. Plus, the Dodgers have the best pitching in the division. I would predict 2023 Dodgers to win about 98 games. Teams saw that you don’t have to win 111 games to get to the world series. Its all about what teams are hot and play together. When we played the Padres. There was no fire in the guys eyes. All the momentum was in the Padres dugout.
Good summary of the CBT, Mark.
One thing I would point out is that high end free agents salaries are far outpacing the increase in CBT thresholds.
Stan Kasten has always talked about the importance of developing minor league players, part of the Atlanta playbook, to create a talent pool and keep costs down.
In today’s marketplace, it is no longer feasible to build a team through free agency. The costs and length of contracts may prove successful in the short term, but will eventually lead to lengthy periods of decline unless organizations have strong farm systems. Most don’t.
As the Dodgers look at 2024 and beyond they have only two major lengthy contracts on the books (Mookie Betts and Freddie Freeman) so they have considerable flexibility moving forward.
They also have several players moving through the farm who can make an impact in ’23 and beyond.
A lot of writers and analysts believe they make a big play for Shohei Ohtani or maybe Juan Soto in ’24. Ohtani will be incredibly expensive, may be the biggest contract ever. Would the Dodgers commit that kind of money? Beyond just his ability to pitch and hit, Ohtani may open up another lucrative revenue stream for the Dodgers and that is the Japanese market. That may factor into their future plans.
So we’re back with Lux and Taylor in Centerfield. I thought you guys had Lux starting at shortstop. So that’s why I was wondering where he would play. Got it! I like that lineup to. The same nine guys for like what 160 games.
Sounds like we have plenty of hitters that are good. But which ones will start most of the games. It seems like the Dodgers never have a set nine guys that always play each day. Its always a different lineup. And, when the playoffs get here. Fans are like okay which nine guys is Roberts playing today. I like the years when you knew the nine guys that would start.
Yeager
Garvey
Lopes
Russell
Cey
Baker
Lacy
Smith
Those guys started and then you had guys on the bench that played sometimes. Now fans come to a game to see maybe the rookies play Outman and Vargas and on that day. Roberts puts in Taylor and Thompson to start. As a fan. You feel like dam. I spend all this money and get to see two bench players play. So, give me a starting lineup that would be your 2023 lineup most of the time. If Lux faulters at shortstop.
Very good article by the way. I think as a fan of the Dodgers. I would want Muncy and Vargas to play almost every day. So, if Lux faulters at short stop. And Rojas ends up starting at shortstop. What do they do with Lux? Then it sounds like he becomes a Chris Taylor yet younger who floats around an plays different positions. In spring training if Lux faulters. I do believe they will try to trade him and upgrade at shortstop. Then they can see how other shortstops are doing in spring training. And, maybe a team needs a second baseman. That’s what I think will happen with Lux. Or at least by the trade deadline.
Today is MLB International Signing Day:
According to Baseball America the Dodgers have thus far have signed:
Los Angeles Dodgers ($4,144,00)Pool money
Yoandry Vargas, SS, Dominican Republic
Arnaldo Lantigua, OF, Dominican Republic
Daniel Mielcarek, SS, Dominican Republic
Jesus Tillero, RHP, Venezuela
At 6-foot-3, the long and lean Vargas will face questions about his ability to stay at shortstop, but the Dominican Republic native already shows a quick first step, good hands and instincts for the position. He’ll stay in the middle of the infield for as long as he can, but his plus arm potential will serve him well if he transitions to third base in the future.
At the plate, Vargas shows an advanced approach with the ability to hit for average. One of the top hitters in the class, he hits line drives to all fields and shows home run potential with a mechanically sound swing. He is expected to show more raw power and rack up extra-base hits as he fills out his frame. Vargas trains with Raul “Banana” Valera, a member of MLB’s Trainer Partnership Program.
A power-hitting outfielder from the Dominican Republic, Lantigua is big and strong now, and more strength could be on the way. His ability to make consistent contact and hit for power emerged in recent years. If he continues to develop at a normal pace, he could turn into a middle-of-the order bat in the future because of his offensive prowess. Lantigua can be overly aggressive in the batter’s box and needs to be more patient at the plate, but he’s working on strike zone recognition and fine-tuning his approach.
Overall, he has a chance to stay in center field because of his speed and arm strength, but he also profiles as a right fielder for those reasons. He trains with Marino Sierra in the Dominican Republic.
The Astros’ SS Pena won games with his glove. I remember reading that he had the highest Defensive Runs Saved stat in league–and Rojas was close behind.
The “kids play” roster would have Lux at SS–and it could possibly have Vargas at 3B, Outman in CF and Busch in LF. Or maybe Busch plays 2B and Vargas is in LF, with Muncy shifting from 2B to 3B.
If the objective is to give all these guys some of that runway, Trayce could be the 4th outfielder and a late-inning defensive replacement. (I still like a Trayce/Vargas platoon, but Vargas needs the ABs.)
It’s puzzling to me that Busch, a multisport star in high school, still doesn’t seem to have a defined position. Second base seems most likely.
Great information Mark. I never really knew how the penalties worked out, but this explains it. I think the team will be fine. I think you put them position to position, they match up well with San Diego, more depth than the other three teams in the division, Freeman, Betts and Smith are clearly the class of the division at their positions. Soto needs a bounce back season to even compete with Betts in right. SD brought in Nelson Cruz to DH, but Martinez will be better. Freeman is the class of the division at first. Dodgers’ rotation is deeper than SD. SD’s bullpen has a slight edge. Smith is growing every year and is solid behind the plate too. He also calls a good game. As for the rest of the positions, we have little clue who will be where come opening day. Tatis is not available for the Padres for the first 20 games, and then he will no longer be the SS. That will belong to Bogaerts. Rumor is he is moving to center field. I wanted to expound on something I was unable to address in the last stream and it concerns defense.
There are some who post on this site that do not place much emphasis on defense. That is their opinion and that is fine. What I wanted to address is the fact that while fans might not see the value in defense, the Dodgers front office obviously does. One of the reasons they let Hanley Ramirez walk, his clubhouse cancer label notwithstanding, was simply because he was not an elite defender. His offense was great, but his glove was porous. For several seasons the team was not very good defensively and they wanted to change that. Since AF arrived, they have usually made trades out of need. If AF saw what he perceived as a weakness, he would trade to bolster that position. Chris Taylor was one of those guys, good glove, weak stick. But he blossomed after his initial season with the Dodgers. But, had he not learned to play the outfield, and stayed a SS only, he would not be a Dodger today. He and Kike picked up the team when multiple players went down.
Defense might not be your cup of tea, but it certainly matters when it comes to player trades and signings.