Exploring the Competitive Tax implications on the Astros Trade Deadline approach

As the season wears on and we start rapidly approaching the trade deadline, there’s another component that needs to be looked at. The Competitive Balance Tax (aka Luxury Tax) threshold.

For those who don’t know, it’s a “cap” with financial penalties if you spend over the allotted threshold, and there is an associated additional cost for every dollar over that limit. MLB has a whole explanation of the process and associated amounts, but I will focus strictly on the Astros for the 2019 and 2020 seasons.

For 2019, the Competitive Balance Tax threshold is set at $206 Million dollars. If the Astros exceeded it, since they would be first time offenders would be responsible for a 20% tax on every dollar over the limit.

There is a couple key items to know as the threshold is not calculated the same way as the payroll for the year. The value going towards the threshold is based on total value divided by contract years (AAV) NOT based on the amount paid in that year.

Quick Examples:

Yuli Gurriel - signed a 5 year $47.5 Million dollar contract. The salary decreases annually (2016 -$1.5 Mil // 2017 - $14 Mil // 2018 - $12 Mil // 2019 - $10 Mil // 2020 - $8 Mil). So despite the Astros only paying Yuli $8 Mil in 2020, they’ll be on the hook for $9.5 Mil towards the threshold.

Max Scherzer - 7 year $210 Mil (2015-2021). Paid out in an absurd fashion (2015 - $ 10 Mil // 2016 - $15 Mil // 2017 - $15 Mil // 2018 - $15 Mil // 2019 - $30.2 Mil // 2020 - $28.7 Mil // 2021 - $ 27.3 Mil .... and then $15 Mil a year from 2022 to 2028. From a payroll standpoint, an absolute nightmare. Towards the Competitive Balance Threshold? $30 Mil a year.

Hopefully that helps people understand the high level overview.

Erik Williams-USA TODAY Sports

Back in December, Jim Crane by Brian McTaggart was interviewed and talked about the Astros ability to increase the payroll and this was what he said:

“certainly we’re not going over [the luxury-tax threshold] -- but we could move closer to that,” Crane said. “We were pretty high up in the food chain last year. A lot of teams realize the penalty is pretty severe if you go over. We’ll stay within the strike zone.”

So with that said, let’s take a look at where the Astros stand. Sportrac actually lists the Astros at $206,508,305. Meaning they would be $500k OVER the threshold and responsible for a 20% tax.

I removed the corrections that I originally spelled out here when Spotrac was wrong, So here are the new numbers using Cot’s from Baseball Prospectus (thanks Cody Poage)

The Astros have $17,375,571 remaining in 2019. There are a few other factors as any performance based incentives that the team has on player contracts would count against that total when achieved. I do want to note, any player we acquired at the trade deadline would have a pro-rated portion of their salary hit our books, so it would not be the full amount.

For ease of math - if the trade occurred on July 1st, it would be almost exactly 50% (92/183) of their 2019 luxury threshold salary, at July 31st, it would be 33% (61 days / 183).

So in 2019, if the numbers above are correct, we should not have any issue in regards to the salary of a rental player.

BUT 2019 is just one element, you do need to look past that when looking at any trade acquisition that is not just a rental.

For 2020, the cap increases all the way up to .... $208 million. The Astros unfortunately have some very significant increases Bregman adds ~$19.5 Mil, Verlander adds roughly $15.5 Mil, and. So our payroll increases by close to $35 Mil on just these players. If we were able to re-sign our existing players at the exact same salaries plus arbitration increases, we’re already well over the limit. Doing very quick ballpark increases, we would have roughly $16.5 Million in increases in Arb eligible players. Meaning we’d be roughly $31.5 Mil over if all of our FA players re-signed for their exact same salary today.

We do have some large salaries potentially coming off the books next year with Gerrit Cole ($13.5), Joe Smith ($7.5), Collin McHugh ($5.8). Hector Rondon ($4.5), Robinson Chirinos ($5.75), Wade Miley ($4.5), Will Harris ($4.2). And while that total of $45.75 Mil is a large figure in it’s own right, that’s a lot of key players to be able to replace or attempt to re-sign on the open market for similar rates.

Truthfully, we’re looking at ~$14 Mil to replace or re-sign all of those players (not counting each league minimum player takes about half a million if we just do a minor league call up to replace them)

To me, this means as we’re looking at potential trade candidates they should be in 1 of 3 areas:

1.) Rentals (which I generally hate)

2.) Long term cost-controlled assets.

3.) Salary Relief candidates on our side (Trading Reddick and back-filling him as an example)

**** I am not 100% certain of the luxury threshold impacts, I am going based off the information reported on MLBTR as I was unable to find a better source, if you know of one, please let me know and I’ll update accordingly. ***

SUMMARY

We had almost 50 votes that people were still confused after reading the article, so I want to try to remove all the extra fluff.

The Competitive Balance Threshold is $206 million. If we spent over it, there are penalties - including a 20% tax on spending.

The Astros are currently at $188.6 Million, so they have just under $18 Mil to spend the remainder of the year, while remaining under the threshold (and salaries are pro-rated for the season).

Next year, we have 7 Free Agents who hit the market (Cole, Miley, McHugh, Chirinos, Rondon, Harris and Joe Smith), who represent $45.5 Million of our current payroll.

Next year, Justin Verlander and Alex Bregman’s extensions hit, adding $35 million back into the payroll, and we face approximately, $16.5 Million in Arbitration increases.

That leaves us with only $14 Million available for next year to fill the gap of Cole. Miley, McHugh, Chirinos, Rondon and Smith - which is a daunting task to say the least without any trades that impact next year’s payroll. Our focus for trades needs to be 1. Rentals 2. Cost-controlled long-term assets 3. Salary relief for the Astros.

With this in mind, tell us who would peak your interest from a trade perspective!