A Luxury Tax Refresher Before Spring Training

Twice this offseason I have written about the Astros player payroll situation for 2020. One was an early analysis before free agency took place while the second was a relatively brief look once the carnage of the open market somewhat settled down. In short, the Astros are going to sport one of the highest player payrolls in baseball, regardless of the finer details pertaining to average annual value calculations or exact player benefits.

But before we dive into the actual salaries and projected luxury tax payments, here is a quick reminder about how the competitive balance tax (CBT) operates under the current Collective Bargaining Agreement. I feel like it is important to spread this information as it does greatly dictate how a club operates when approaching these various thresholds and how it could impact future roster decisions.

Tax Thresholds for 2020 Season

• Base threshold before tax implications: $208 million
• Second-level threshold with tax implications: $228 million
• Third-level threshold with tax implications: $248 million

Tax Penalties for Each Threshold (Via Cot’s Baseball Contracts)

• 20 percent tax penalty for first-time payor on any overage amount between $208 to $228 million; increases to 30 percent for second-time payor; 50 percent for three-time or more payor
• 12 percent surtax on the amount exceeding initial payroll threshold by $20 to $40 million
• Initial 42.5 percent surtax for exceeding the initial payroll threshold by more than $40 million; increases to 45 percent in each subsequent season when threshold is exceed by same amount
• Club who has exceeded the initial threshold by $40 million or more will have its first selection in the next Rule 4 draft moved back by ten places; club picking in the top-six will have its second highest selection moved back instead
• Penalties reset following a season under the base threshold

There are few helpful sites one can use to look up these payroll and luxury tax figures that I’m about to share. I personally prefer the following three: Cot’s Baseball Contracts housed at Baseball Prospectus, Spotrac, and RosterResource from FanGraphs (in no particular order). Now, each site’s figures will vary depending on how they prefer to calculate the 40-man and luxury tax payrolls, but the overall picture doesn’t drastically shift.

For this particular exercise, however, let’s use just Spotrac’s figures, which already include a nifty projected luxury tax payment in their calculations.

As it currently stands, the Astros possess the second-highest luxury tax payroll, and tax bill, in the majors. Only the Yankees have a higher total with roughly $30 million more allocated towards salaries with luxury tax implications. Of course, these figures will change a bit depending on how salaries are allocated following the Mookie Betts and David Price trade to the Dodgers and the subsequent fallout. But when it comes to any luxury tax bill, the Yankees, or any team for that matter, those amounts should be viewed as nothing more than chump change in the grand scheme in light of the streams of revenue flooding the sport. That said, teams are unfortunately going to use that tax threshold, which is $208 million in 2020, as a soft salary cap. As long as this “salary cap” doesn’t grow in proper proportion to league revenue, we will continue to see this issue persist in baseball. But when viewed only under the pretenses of how clubs prefer to operate, it is clear that the Astros aren’t exactly cheap when compared to their major league brethren.

For the Astros, in this year’s instance, the final calculation likely holds some sway for the club in how they operate. With Spotrac’s projections, Houston barely ducks the second-level surtax of 12.5 percent on any overage between $20 to $40 million, which is between $228 to $248 million for the 2020 season. From what we’ve gathered during the offseason, at least under former GM Jeff Luhnow, the Astros appeared intent to avoid accruing that additional surtax by not exceeding the $228 million threshold. The lack of activity for Gerrit Cole, or any notable free agent, indicates as such.

New GM James Click, who is from the exceedingly efficient Rays organization, may hold to the same financial line as Luhnow when it comes to roster decisions, at least for the foreseeable future. After all, Justin Verlander, Jose Altuve, and Zack Greinke, all under contract for at least the next two seasons, combine for roughly 42 percent of the Astros’ 2020 payroll. The rest of the roster isn’t exactly full of players on pre-arbitration contracts, either. As everyone anticipated for quite some time, it is becoming increasingly expensive to retain the majority of this core. And there isn’t much in terms of financial flexibility to easily add impact players to an already talented roster, which is why the farm system is now relatively drained compared to previous years (see: Greinke trade).

The 2020 payroll situation is mostly set in stone, more or less. A fringe signing or two (a Hunter Pence reunion?) are still entirely possible and Click may find a willing trade partner to shed some salary before the season starts. Josh Reddick and his $13 million salary immediately comes to mind, as it already has for the entire freaking offseason. The Astros are likely looking at a tax bill of nearly $4 million and the final calculations may include an additional surtax. But consider that potential surtax of 12.5 percent to be more of a minor inconvenience to a team’s deep pocketbooks than a major obstacle to roster construction. At least, that is my viewpoint of the situation.