Luxury Tax Concerns

I continue to read that Dodger Ownership/Management wants to get under the luxury tax threshold THIS year.  That is certainly a laudable goal, and under normal circumstances I can see why that should always be the goal.  But is 2018 the year to draw the line?

 

Sometimes you need to spend money to make money.  In home building, finishes are upgraded to get buyers to sign. Buyers are visual…bling sells!  In manufacturing, equipment needs to be updated to improve efficiency.  R&D costs are large budget items in pharmaceutical companies, auto manufacturers, and IT operations.  Venture capital companies exist to “invest” in what if and maybe.  Companies spend these dollars to improve their eventual profitability.  Sometimes they swing and miss, but sometimes they hit a grand slam.  Sounds a lot like baseball operations.

 

I am a business man and detest the idea of paying a competitive balance tax.  I get it.  But there are times where you have to look at the tax as a cost of business, or even an investment. In economic terms this refers to marginal utility and diminishing returns.  Yeah, I know boring stuff when all we fans want to see is a WS champion.  But the Dodgers are a business and need to be concerned with such economic theories.

 

The Dodgers committed nearly $200M in three players in last year’s FA market, knowing this would take them well over the luxury tax threshold, but did so because they believed that the three players (Kenley, JT, and Hill) would help them get to and win the World Series.  Well it accomplished one of those goals.  Would they really consider letting the luxury tax be an impediment to their chances of reaching the ultimate goal in 2018, especially when knowing that they lose another $50M in dead contracts next year?  Sure they have Clayton to re-sign if he decides to opt out.  But he is already penciled in at $33M, so how much of the $50M savings would he need for 2019?  Most of the remaining nucleus is team controlled…Seager, Bellinger, JT, Kenley, Barnes, CT3, Puig, Wood, Hill, Maeda, Buehler/Urias, Toles/Joc/Verdugo.  So while the Dodgers can get under the luxury tax this year, they most certainly can for 2019.

 

The Dodgers as they sit right now have a formidable 40 man roster.  They won 104 games last year and the only significant player loss would be Brandon Morrow.  I have advocated resigning Morrow, but I am sure that Friedman and Zaidi believe they can find another Morrow, so will not overspend.  We can all debate that point, but how many (other than me) advocated Brandon Morrow at all for 2017.  Can Brock Stewart take that role?  Wilmer Font?

 

I do not know if Giancarlo Stanton is the one to push the team across the finish line.  But more importantly, I am not sure whether the Dodgers believe he is.  Is staying under the luxury tax more important than Giancarlo Stanton?  I submit that if the Dodgers believe that Stanton can get them across the finish line, but ownership insists on getting under the luxury tax, they can do both.

 

The Dodgers currently have a projected salary/benefits cost at $179.4M.  That includes 20 players:

Starting pitchers (7) – Kershaw, Hill, Wood, Maeda, Ryu, McCarthy, and Kazmir

Relief pitchers (6) – Jansen, Avilan, Cingrani, Fields Baez, Garcia

Catchers (1) – Grandal

1B (1) – A-Gon

2B (1) – Forsythe

3B – (1) JT

SS – (0)

OF (2) – Joc, Puig

Utility (1) – Kike’

 

Of those 20, Yimi Garcia would appear to be the only player who would start out at OKC to get his baseball legs back after being out of baseball for the greater part of 2 years.  That would leave 6 pre-arbitration team controlled players to make the 25 man.  As it stands, that should be fairly easy…Seager, Bellinger, Barnes, CT3, Toles (3 options), and Stripling (2 options).  Let’s assume that the cost for those 6 would be $4M.  If Maeda starts and stays healthy all year, that could add $6M+ of incentives to the salary calculation.  Let’s assume another $3.6M for September call-ups and players called up for players placed on the DL (Farmer/Buehler/Stewart/Urias/Verdugo/Garcia/Liberatore/Locastro/Oaks/Santana/???.  If they do nothing else, that would be $193M or $4M under the luxury tax threshold.  But with no changes and the loss of Morrow can they win the WS?  The cynic in me says yes as long as Kershaw goes MadBum and dominates in the post-season.

 

So for Stanton to work this year, the Marlins have to take Kazmir in a trade, and other moves will need to be made.  The only team that can realistically take Kazmir and his $15M hit would be the Marlins to move a $25M hit.  Thus, if the Dodgers cannot make that trade happen, then I would expect them to DFA him after Spring Training to open a spot on the roster, and eat the $15M.  I see no way he can make it into the rotation.  Forget trading A-Gon.  He is not going to waive his no-trade. I do not see him playing just to play, so I would expect him to retire after this year anyway (at 37).  IMO he is going to take his $21.5M and “retire” this year.  I would hope that the Dodgers would be able to DFA him, and he could then move into a Community Development position with the Dodgers where he would be outstanding.

 

What other salary saving moves can be made? Brandon McCarthy has value for teams looking for a #4 or #5, with a $12M hit.  Yasmani Grandal has value and is projected at $7.7M.  That is nearly $20M that can be moved and with only prospects in return, that would be a near $20M in savings.  Combined with Kazmir, that is more than enough to trade for Stanton and get under the salary cap.   I still believe that McCarthy and Grandal can move to a team that needs to be all in this year and benefit that club (Orioles???).  With all of McCarthy’s flaws, he would be a #3 in that rotation as it is now.  Grandal would be an excellent mentor for Chance Sisco as he adapts to MLB.  They can go straight prospects and save, or they can include Luis Avilan and his projected $2.3M and take Zach Britton and his $12.2M hit. That gives the O’s 3 players (including a LH reliever) that will help them next year.  After 2018, they have problems anyway.  Even if the Dodgers assume Zach Britton, combined with Kazmir they could still acquire Stanton and get under the luxury tax.  The Marlins want ML players under team control (Joe Panik), top tier prospects (Chris Shaw & Tyler Beede), and contract relief to move Stanton.

In addition to Kazmir, I could also project another $2M savings by including Joc Pederson in the trade.  If the Marlins are willing to assume $45M in salary (as reported in the Giants proposed transaction), I would propose that in addition to Kazmir, they could defer the additional $30M in salary reimbursement by postponing the payment until Stanton decides whether to opt out after 2020.  That is where the salary relief will be needed anyway.  The Dodgers could also include Omar Estevez and take Derek Dietrich, giving the Marlins more salary relief, and the Dodgers the LH platoon 2B they could use.

 

I still do not believe the Dodgers will do it.  I am simply stating that they can acquire Stanton and get under the salary cap, and get prospects in return in other moves to offset those that would be lost in the Stanton trade.  I just do not think they will.

 

I would still propose they trade McCarthy, Grandal, Verdugo, Alvarez, and Avilan to the O’s for Britton, Austin Hayes and Hunter Harvey.  Losing Verdugo and Alvarez would be a risk, but one I think would be offset by the prospects of Hays and Harvey.  Both Harvey and Alvarez are high risk but high reward prospects.  Verdugo could be an on base machine, but Hays is the RH OF power bat they could use.  With a young RH hitting Trey Mancini in left, the O’s can afford to move Hays for the right opportunity.  The Dodgers could get $10M in salary relief they can use to resign Morrow and stay under the luxury tax.

 

I might try to acquire Avisail Garcia.  He would look great in Dodger Blue.  Yes he is a RF but he could move to left just as easy as Stanton.  Would the ChiSox take Joc, Rios, Ryu, and Thompson?

 

Or maybe they just look to simply move contracts for prospects (McCarthy, Grandal, Ryu), sign Morrow, Minor, and Austin Jackson and call it an off-season.

 

While they can acquire a bat like Stanton and get under the luxury tax, I do not believe they really want that contract, when I think they can make a lesser move in quality of talent and still be better than they were in 2017.  There are just too many other options out there where they can improve, and still be able to sign Brandon Morrow.

 

Regardless as to what they do, the 2018 luxury tax should not be a concern when in all likelihood, the salary will get way below in 2019.  If it means winning, what is the difference between $210M and $197M to the Dodgers?  Even with a $6.5M hit on luxury tax, should that stop them from pursuing the best chance to win it all in 2018?  I think the marginal utility of that additional $20M investment is well worth the risk.

 

Posted by Always Compete

This article has 25 Comments

  1. Because I want the Dodgers to take advantage of their youth and because I want them under the salary penalty now, I would be happy if the Dodgers were to start the season with this lineup:
    .
    Taylor, Seager, Turner, Bellinger, Puig, Pederson, Barnes, Forsythe.
    .
    Kershaw, Wood, Hill, Maeda, Ryu, Buehler/Stewart or hopefully Ohtoni.
    .
    I like having Toles and Verdugo as young inexpensive talent available as needed which could be as soon as opening day.
    .
    I would give Grandal playing time as he seems to be a much better player in the first half than he is in the second half. His value would increase for a mid-season trade if he hits early in the season. That would give Barnes more rest that would help him be strong in the second half and give Smith more time to develop and be Grandal’s replacement after the trade.
    .
    It would be great if Morrow were re-signed and I would like to trade for Britton later in the season after his health is better known. Grandal and Verdugo for Britton and Austin Hayes would be good pieces of a trade package.
    .
    I have always gone back and forth with Puig. My main concern with him is his threat to the center fielder. He will be a free agent soon enough anyway. Now might be a good time to use him to help get a team to take on one of Gonzales’ , McCarthy’s, or Kazmir’s contract.
    .
    I would love if the Dodgers could dump the contracts of McCarthy, Kazmir, and Gonzales. 100% is doubtful.
    .
    I am curious if Toles could be converted to a middle infielder like Russel and Lopes were. He could be the lefty hitting compliment to Forsythe although I prefer that Taylor be the full time second baseman and Forsythe traded–(Angels?)
    .
    In summary, I think the Dodgers could improve by subtraction more than addition other than relief pitching and adding Ohtoni.
    .
    I would rather trade for Thousand Oaks native Christian Yelich than for Inciarte. But I have been looking for a righty version of Verdugo and Austin Hays may be that player. This link takes you to Baltimore’s top 30 prospects. Hayes is their #2.
    http://m.mlb.com/prospects/2017?list=balThis link takes you to Baltimore’s top 30 prospects. Hayes is their #2. http://m.mlb.com/prospects/2017?list=bal
    .
    If Kershaw wants to opt out of his contract I would let him go unless he dominates in the WS in 2018. He would be the one leaving the Dodgers and not the other way around. His salary is big enough already.

  2. Excellent write-up. Very impressive research/analysis. The Winter Meetings start in about a week and it will be interesting and fun to see what the Dodgers FO will do. Regardless if they make a push for Giancarlo or not, I think it’s fairly obvious they are in search of some salary relief and I suspect Grandal, Ryu and McCarthy are the prime targets to move this off season.

  3. I have always maintained that for Stanton to become a Dodger a lot of things have to happen and that does not include the Dodgers “pushing” to get Stanton. They aren’t pushing – they are patiently waiting.

    IF Stanton rejects trades to all other teams;

    IF the Marlins will take what the Dodgers offer;

    IF the Marlins will take back some major salary; and

    IF Stanton is OK with paying about $40 million to the State of California… then the deal can go down. That’s part of the reason AC doesn’t see it happening. Truth be told, I don’t expect it either, but I also don’t think he will go the Giants.

  4. Where the Dodgers stand with the competitive balance tax in 2018
    by Eric Stephen Nov 12, 2017, 11:00am PST

    Something to watch on just how the Dodgers improve the roster will be the competitive balance tax. The club has been over the tax threshold for five straight seasons, paying a total of $113.5 million in tax from 2013-16, and will have a bill of at least in $25 million more for 2017 per the Associated Press, and probably a little more since that estimate was based on opening day payrolls.

    The luxury tax threshold will be $197 million in 2018, $206 million in 2019. The Dodgers are currently paying at a 50% rate for any payroll over the threshold as a repeat offender. At some point, the club would likely prefer to get under the threshold to avoid the tax, since that would reset the penalties going forward, starting at 20% for the first year over, 30% the second year, then 50%.

    The Dodgers have some room to maneuver under the tax threshold — a little bit this winter, and more flexibility next offseason. But just how much?

    For competitive balance tax purposes, the average annual value of the contract is used instead of the actual money paid out during each season. For instance, Justin Turner will make $11 million in 2018, but with his contract guaranteeing him $64 million over four years, his tax number for 2018 is $16 million.

    Similarly, half of Scott Kazmir’s $16 million salary is deferred until 2021. But instead of an $8 million figure for competitive balance tax purposes, his 2018 number is just short of $15 million — the average of his salaries over the life of his three-year, $48 million contract, discounted to account for the deferrals.
    The total payroll includes an amount for benefits that is the same for all team. It was $12.9 million in 2016 and estimated to be just shy of $14 million in 2017. We estimated here that next year those benefit costs will be $15 million.

    The Dodgers’ payroll includes some dead money, including the released Dian Toscano (he was in the Bud Norris trade from Atlanta in 2016, and had a four-year, $6 million contract through 2018) and the club’s payment to San Diego from the Matt Kemp trade. I still haven’t gotten an answer one way or another whether Kemp’s number is the $3.5 million the Dodgers are paying in 2018 or an average of what they will have paid from 2015-2019 ($6.4 million). For now, we’ll keep it at $3.5 million.

    The Dodgers are already over $179 million for 20 players on the 40-man roster, but that also includes Kazmir, who last pitched in the majors in 2016. Filling six more active roster spots at salaries somewhere near the minimum salary of $545,000 would add another $3.5 million roughly to the total, putting the Dodgers at approximately $183 million.

    That’s still shy of the luxury tax threshold of $197 million, but it’s also before any other moves are made.

    Escalating costs
    With the new collective bargaining agreement, there are now extra tiers of penalties for exceeding the luxury tax, more punitive as the payroll increases.

    For teams $20 million over the threshold, there is an extra 12% surcharge
    For teams $40 million over the threshold, there is an extra 45% surcharge (42.5% for first-time offenders)
    That means that for the Dodgers in 2018, any payroll above $237 million will be taxed at a 95% rate, so each marginal dollar added is nearly doubled.

    As an example, if the Dodgers have a $250 million payroll next year, they would pay…

    50% on the amount from $197 million to $217 million: $10 million
    62% on the amount from $217 million to $237 million: $12.4 million
    95% on the amount above $237 million: $12.35 million
    Total tax: $34.75 million

    There is also one more punitive cost to exceeding that highest threshold, beginning in 2018. Teams that are in that highest tier will see their first draft pick moved back 10 places.

    Each of these penalties have some monetary value, to be factored in as a cost before considering each potential deal. It doesn’t necessarily mean the Dodgers will avoid such deals, just that the current collective bargaining agreement makes thing a little more costly for doing so.

    My thought
    I would think to see their first draft pick moved back 10 places is a very big deal for the Dodgers. If the Dodgers want Stanton, Kazmir and McCarthy must be traded and Gonzales also but most likely the Dodgers will pay at least half of his 21.5 million.

    1. With all due respect to Eric Stephen (which he so rightly deserves), he is missing the additional incentives for Kenta Maeda which will be somewhere between $4M and $6M, and the additional salaries for the September callups and those called up to take the place of those on the DL. That is how I got to $194M from $184M.
      .
      Secondly there is no possibility the Dodgers payroll gets anywhere near $250M. The Dodgers lost $50M for Crawford, Ethier, Guerrero, Gutierrez, Utley, Romo, and others. They are not going to sign players for $50M – $60M for 2018.
      .
      I would think the Dodgers would feel comfortable if they took on an additional $16M from where they are now and stayed around $210M IF they thought that would help them to win the WS. No surcharge. No losing 10 spots in the draft. They will lose another $50M in 2019 and be well below the $206M threshold.
      .
      That is why I question the line in the sand for the 2018 luxury tax. FAZ is stuck with the A-Gon and Arruebarrena contracts, and they will be gone next year. If they do not incur the most onerous of the penalties, are they saying the additional $20M in payroll and luxury tax will create a financial burden for 2018? I am not advocating spending the payroll simply because they can, but if they can sign a difference maker why should the luxury tax deter them if they stay below the large penalties and get below next year? Again I ask, if the Dodgers were so concerned about the luxury tax, why did they commit nearly $200M to 3 players for a $48M AAV annual salary hit last year. They knew that it would blow them well by the luxury tax cap.

      1. I haven’t read anywhere the Dodgers are saying they will be under the luxury tax in 2018. In fact here is a quote from Andrew Freidman about the luxury tax.
        “What’s the luxury tax?” president of baseball operations Andrew Friedman joked last week. “We don’t have really have a great feel for exactly how things will play out. The one thing we are confident about is that we’ll get to CBR in February with a team that is positioned to compete for a championship.”
        AC to answer your question about spending over $200M on 3 players last year knowing in so doing they would blow over the luxury tax cap? As is the case this year, the tax is important, but it’s not the number 1 concern, Last year they felt the investment for those players was the right move to make the team as competitive as it could be. The Dodgers might feel the same way about Stanton and sign him, but not before they can find ways to clear some payroll off the books, look at other players to see if those players can make the team as strong or stronger without Stanton and his ten-year contract. If they think the team will be stronger with Stanton then Stanton will be a Dodger, if they don’t think that then one or more players will be Dodgers.
        The trade to Atlanta( AC’s idea ) for Inciarte is just the type of deal the Dodgers like to make.

        1. I agree with you. I do not think the Dodgers Baseball people are concerned with the luxury tax as much as is being reported. I think they would like to get under the tax threshold, but I do not believe they will let the team take a back seat to getting under the luxury tax threshold.

          1. MJ, I agree the financial stuff is boring. I do it 7 days a week. Unfortunately in today’s environment, how a team is structured financially is as big of a story as to who goes where in the off-season. Free agency has changed the canvas of the game forever.

  5. I wonder how concerned FAZ really is about the Luxury Tax. Oh, I’m sure they would like to get under it but I was doing a little figuring. I read an article by Darren Rovell, ESPN Senior Writer, that the average ticket price for the tickets at Dodger Stadium for the World Series was $3,164.00. Now if there are 56,000 seats available that is a lot of cash. This is not counting concessions and paraphernalia. This comes to $177,164,000 per game, 4 games equals $708,736,000….for 4 games! That is amazing. This has nothing to do with the 81 home games they play during the season or the other playoff games they play. This is just the four World Series games. Those games seem they probably paid for the bills and any deep concern they may have about the Luxury Tax. Of course they don’t make that kind of money during the season but it seems to be a pretty cost effective gamble to spend money to make money. Getting to the World Series is where the money is.

    1. The Dodgers didn’t get that much per ticket. That was the 2nd hand market. Either way they made a lot of extra revenue by having 2 rounds of playoffs and 4 WS games at Dodger Stadium. I wonder how much extra revenue that is from tickets, concessions, and parking.

  6. AC, I do like that your trade proposals take into account why the trade partner would do a deal. Too may people don’ think out their proposed trades from the non-Dodgers standpoint. I agree that Kazmir could only be moved to Miami or the Dodgers are going to eat that money. I also agree A-gone is going to more than likely be a sunk cost. However, I do believe Arrubureana could be moved in the Miami deal as well. He and Kazmir would be about $22 million I believe. Then the Dodgers throw in some prospects like Verdugo and Alvarez for Stanton and $3 million a year for the length of the contract. Stanton appears to be waiting for the Dodgers to get in. It may or may not happen, but if so now seems to be the time leading up to the winter meetings. Now that the Dodgers have replaced Kapler and the hitting coaches, I think they can focus on the roster with a little more urgency. Like FAZ said, they were starting behind because of playing in the WS. The Dodgers know what they have to beat. The St. Louis offers and Vagiants offers are out there. They may not even have to beat them. If they make just a decent offer it will embolden Stanton. Like JT last year, he wants to be a Dodger. If the Dodgers can move a couple of contracts like I mentioned then I’m all on board.
    ~
    I believe the plan always was to get under the luxury tax in 2018 or 2019, but I agree it isn’t imperative as long as they aren’t still at the upper tier that levies the most punitive penalties. The Dodgers can’t come that close and then not improve their roster over $10 million or so when they have so much coming off the books next season. Gonzalez, Kazmir, Ryu, McCarthy, Arrubureana, Grandal. That is about $70 million and that doesn’t even count Kershaw. Is getting under the luxury tax this season so that they can bid against the entire league for guys like Machado and Harper a year from now better than getting Stanton now who wants to be a Dodger?

    1. Agree with all of it. Stanton’s contract may look like a bargain after next year’s free agents sign, and I am not a Harper fan. I like Arrenado as much as Machado, but the cost will be huge and a lot of teams will be in.

  7. In this age of predatory capitalism and tax cuts I kinda wonder why some noble politician somewhere doesn’t want to deregulate MLBs unfair business practices. I mean it looks a lot like affirmative action…or even corporate welfare in reverse. LOL. Course beings NY, LA, Boston and Chicago are the most moneyed up teams, and they are cities that are bastions of liberalism….guess I answered my own question.

  8. The Luxury Tax is certainly a “thing to be avoided” but not at any cost. I do think the Dodgers want to stay under the $237 million mark and they can certainly do that… even if they sign Stanton. I do not think they will go over $237 million.

  9. I agree with 1439 and saw that quote from Freidman. They have so much money coming in from the TV contract plus great attendance and all that comes with it, and are the #1 drawing road team. The luxury tax is a concern but not the main concern. Add in playoff and WS money and staying under the $237 M is the real concern as Mark, AC and others have opined. If some contracts were moved they could sign Stanton, Ohtani and Morrow or Watson and still make some smaller moves. If they land Ohtani the starters are set for this season. The farm is loaded but not at every position and they are thick with pitchers who all can’t make the big club.

    1) Go all out for Ohtani.
    2) Shop Grandal, Ryu, Joc and McCarthy to fill other needs.
    3) Any of the above and all prospects not named Buehler, Ruiz and White could go to offload AGon and Kazmir.
    4) Sign Morrow or Watson. If not go for Minor or another bullpen setup guy.
    5) Slow play Stanton until the price drops or Miami plays ball.
    6) If no Stanton upgrade LF with a RH bat, otherwise utilize Toles, Verdugo and Kike.
    7) Normal around the edges tinkering and possible roster thinning, quantity for quality.
    8) A wild open audition in spring training.
    9) Another deep playoff run.

    If the window for keeping Kershaw closes after this season, isn’t that a good reason to go all in?

    1. While it sounds great. Ohtani’s ability to play both ways would be severely diminished by adding Stanton unless you’re moving Puig to CF. Ohtani is a LF/DH. Some have speculated that he could play some 1B. Every team in baseball is going to give him the chance to show whether or not he can both pitch and hit. How does that work with an acquisiton of Stanton?

      1. The odds of getting both are slim but I believe the Dodgers (and me) would prefer to get Ohtani. If they do they may not be as motivated to go after Stanton. If they don’t it fits into their slow play strategy for Stanton. If they somehow pull off both he could play first but bats left same as Cody. I have read he is a better CF than the player on his Japanese team. The DH is coming to the NL at some point also. Since you brought it up Puig is an above average CF but a GG RF. Taylor can move around as needed between OF and 2B.

  10. Hawkeye Dodger
    Actually the cheapest seats were 756.00 and the most expensive were 10,000.00. The Dodgers made a haul for their participation in the World Series. Which leads me to believe that they would be wiling just as AC said earlier, sometimes you spend money to make money. They definitely made some money during the World Series and I would think that they plan on being back, because that is where the money is and they won’t be afraid to spend it to make it.

  11. Keith Law of ESPN on INSIDER says that he and many other scouts are not sure Othani can become an average hitter if he doesn’t play everyday. In part he says:

    “I didn’t run into anyone who would say Ohtani would not hit, just increasing levels of skepticism that he could 1) shorten his swing enough to cover the inner third and 2) develop a real two-strike approach and 3) recognize MLB-caliber pitches well enough to become an average hitter. If he were to get 500 at-bats here in 2018, and maybe again the following season, that would change his outlook, but no matter what teams tell Ohtani now, there’s no way anyone will risk his health or deal with the fatigue that would come with having him play every day.

    Ohtani would make sense for any team strictly as a pitcher, and for any team as a bench player/part-time outfielder, especially in this era of 12- and 13-man pitching staffs that leave managers with comically short benches. I would not, however, project him to throw 200 innings — something he’s never done — this year, or assume he’ll add five wins or more to my team.


    He may be a perfect fit for the Dodgers, if he can be convinced he probably can;t be both a full-time pitcher and a hitter, but the real question is: Do You Bleed Blue? Do ‘ya?

    1. The thing he has going for him is his age. He doesn’t have a lot of miles on his arm so it should be much easier for him to transition to a 5-man rotation than previous Japanese pitchers.

  12. We should know very soon (SD Tribune story) the teams that Ohtani has selected to participate in round two which will be face-to-face meetings starting this week.

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