There were plenty of raised eyebrows and pensive-emoji faces when a USA Today report claimed that the Cubs were among those teams that had exceeded the $195 million luxury tax threshold for 2017. While said report was based on payroll figures submitted to MLB, the interpretation of the numbers was erroneous. Like, in a bad way.
Without getting too far into it, raw payroll figures differ from the totals used to calculate a team’s luxury tax responsibility. The latter uses the average annual value of the total lives of all contracts, even though the team might be paying out significantly more in actual salary. This disparity is what makes Giancarlo Stanton’s back-loaded contract much more palatable than what the balance sheet tells you it should be.
Fast-forward to Wednesday, when the Associated Press obtained and revealed the actual tax numbers compiled by the commissioner’s office. Guess what? The Cubs were at $186.2 million, nearly $9 million below the limit.
Not that we were really worried about it, but it’s still good to have confirmation of the scratch-pad math and educated guesswork. So is it just a matter of being right or pointing and laughing at a major national publication? Yeah, kind of. I’d be lying if I said that didn’t factor.
Much more important than such pettiness is knowing that these final numbers hit the reset button on the Cubs’ tax status after they went over in 2016. Because the penalties escalate with each consecutive season that a team crosses the threshold, it’s important to avoid repeat offenses. Even habitual line-crossers like the Yankees and Dodgers are working hard to reset their own numbers under this new system, which was put in place by the new CBA.
Teams that exceed the threshold by $40 million or more will have their top pick dropped by 10 spots starting in 2018 and would also be subject to massive surtaxes that could bring the total fine to as much as 95 percent of their overage. Check out MLB.com for more details, but here’s the gist of the possible financial hits:
A club exceeding the Competitive Balance Tax threshold for the first time must pay a 20 percent tax on all overages. A club exceeding the threshold for a second consecutive season will see that figure rise to 30 percent, and three or more straight seasons of exceeding the threshold comes with a 50 percent luxury tax. 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.
Clubs that exceed the threshold by $20 million to $40 million are also subject to a 12 percent surtax. Meanwhile, those who exceed it by more than $40 million are taxed at a 42.5 percent rate the first time and a 45 percent rate if they exceed it by more than $40 million again the following year(s).
The Dodgers, who went over for the fifth straight season, will pay $36.2 million in competitive balance tax based on their MLB-high $243.7 million salary. And that’s actually down from the past two seasons. In all, LA has racked up around $150 million in tax penalties over the last five years. The Yankees, who have accumulated $341 million in total penalties by going over in all 15 years of the tax, owe a mere $15.7 million on their $208.4 million payroll this past season.
The financial finagling of these two teams, not to mention several others at the top of pile, bears a significant portion of the blame for the stagnant free-agent market. It’s no longer a matter of GMs just throwing sacks of cash at dudes and flipping the bird to the accountants responsible for tracking their team’s payroll. Nor is it a matter of avoiding big contracts altogether, just limiting them and working to get back under the tax limit every couple years or so.
The Cubs have officially done just that in 2017, and they also appear to be very well positioned to do the same in 2018. Even with some big arbitration raises and a $25 million AAV contract, they should come in well under the next year’s limit. Now it’s just a matter of seeing whether and how they can spend all that extra dough.