What is the ultimate harm from being over the tax threshold? I admit I struggle to be well-versed about this aspect of the game. Is it forfeiting draft picks and a monetary penalty? Trying to understand why it was so unforgivable to some folks.
Let's Talk About MLB Tax Levels And Penalties
- Thread starter 8slim
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One thing is it knocks your first round draft pick back ten spots, with the corresponding loss of pool money.
Note: The phrase ‘Rule 4 draft’ is a technical term for the annual amateur draft.
https://www.mlb.com/glossary/transactions/competitive-balance-tax
I broke out these three posts from yesterday because there is so much discussion in MLB about staying under tax levels, but it's not very well known (including by me) what the exact ramifications for going over each limit are, especially since each new CBA changes it some, so I thought we could talk about that in one dedicated thread.
I'm not so interested in the solely financial penalties, but the other ones, like draft and international pool allotments. For instance, NYY stayed under the third tax line in 2022, and I am pretty sure that the main reason they did so was so they wouldn't lose international money and possibly affect their Jan 2023 signing of Brandon Mayea, but that kind of thing is rarely discussed in detail anywhere that I can find. So let's do it here!!
I'm not so interested in the solely financial penalties, but the other ones, like draft and international pool allotments. For instance, NYY stayed under the third tax line in 2022, and I am pretty sure that the main reason they did so was so they wouldn't lose international money and possibly affect their Jan 2023 signing of Brandon Mayea, but that kind of thing is rarely discussed in detail anywhere that I can find. So let's do it here!!
Competitive Balance Tax (MLB.com website)
Financial Penalties
Tax Rates on overages:
1st Year: 20%
2nd Year: 30%
3rd Year: 50%
There are also surcharges for teams that go well above:
$20-$40M over: 12% surcharge
$40-$60M over: 42.5% first year, 45% each consecutive year
$60M over: 60%
So, while yes it is just money, the penalties can get pretty steep, pretty quickly. Moving on....
Draft Penalties (or where the penalties start to get real):
Rule 4 (Amateur) Draft: If a team goes more than $40M over the tax threshold, their top pick is moved down 10 spots, with the exception of teams picking in the top 6, whose 2nd pick will move down 10 slots. This not only affects the draft slot, but the amount of bonus pool money a team has to spend on their draft picks, and it can be significant (for instance, the difference between #7 and #17 in 2022 was nearly $2M).
Draft Compensation and Qualifying Offers: If a team goes over the luxury tax threshold both their compensation and penalties are affected. (Reference)
Compensation: A team that did not go over the tax threshold who has a player decline a QO and subsequently sign with another team receives a pick at the end of Compensation Round B, which comes at the end of round 2. If a team was over the tax threshold, their compensation is instead at the end of round 4, so, basically a two round difference. The pool bonus between a Comp Round B pick and a pick at the end of round 4 is somewhere around $400K.
Penalties (Or, why I think not finding a way under the threshold was a big mistake for the 2022 Red Sox): If a team signs a player who received a QO from another team, they are penalized depending on their Competitive Balance Tax status.
- A team that exceeded the threshold will lose their 2nd and 5th highest picks, and $1M in International Bonus Pool money.
- A team that did not exceed the limit and also received no revenue sharing money will lose their second highest selection, and $500K in International Bonus Pool money
- A team that receives revenue sharing will lose their third highest selection.
Financial Penalties
Tax Rates on overages:
1st Year: 20%
2nd Year: 30%
3rd Year: 50%
There are also surcharges for teams that go well above:
$20-$40M over: 12% surcharge
$40-$60M over: 42.5% first year, 45% each consecutive year
$60M over: 60%
So, while yes it is just money, the penalties can get pretty steep, pretty quickly. Moving on....
Draft Penalties (or where the penalties start to get real):
Rule 4 (Amateur) Draft: If a team goes more than $40M over the tax threshold, their top pick is moved down 10 spots, with the exception of teams picking in the top 6, whose 2nd pick will move down 10 slots. This not only affects the draft slot, but the amount of bonus pool money a team has to spend on their draft picks, and it can be significant (for instance, the difference between #7 and #17 in 2022 was nearly $2M).
Draft Compensation and Qualifying Offers: If a team goes over the luxury tax threshold both their compensation and penalties are affected. (Reference)
Compensation: A team that did not go over the tax threshold who has a player decline a QO and subsequently sign with another team receives a pick at the end of Compensation Round B, which comes at the end of round 2. If a team was over the tax threshold, their compensation is instead at the end of round 4, so, basically a two round difference. The pool bonus between a Comp Round B pick and a pick at the end of round 4 is somewhere around $400K.
Penalties (Or, why I think not finding a way under the threshold was a big mistake for the 2022 Red Sox): If a team signs a player who received a QO from another team, they are penalized depending on their Competitive Balance Tax status.
- A team that exceeded the threshold will lose their 2nd and 5th highest picks, and $1M in International Bonus Pool money.
- A team that did not exceed the limit and also received no revenue sharing money will lose their second highest selection, and $500K in International Bonus Pool money
- A team that receives revenue sharing will lose their third highest selection.
I posted in the other thread about this, and I really think the Sox wanted to get under the tax threshold last season, but nobody wanted to take on JD's contract (which may or may not have got them all the way under the threshold anyway, the numbers are.... squishy). It's also why I suspect any of the free agents who received a QO (outside of the game changing ones, who have already signed) will likely end up back on the team they received the QO from (Eovaldi falls in this camp for me, for instance), or not sign until after the draft (this didn't work out real well for Conforto last year).
Additionally, going over the tax made losing Xander hurt a lot more, as well, as losing ~60 spots in the draft and $400K of bonus money is a big deal for a team trying to move to a "more sustainable" model.
I really, really think the Sox will actively avoid signing any free agents that have a QO tag on them this year.
Additionally, going over the tax made losing Xander hurt a lot more, as well, as losing ~60 spots in the draft and $400K of bonus money is a big deal for a team trying to move to a "more sustainable" model.
I really, really think the Sox will actively avoid signing any free agents that have a QO tag on them this year.
I was about to write up the Compensatory pick/international bonus pool stuff when I saw LogansDad's post, so I'll just stop here lol
So the new CBT runs from '22 to '26. It increased the tax threshold from $210m in 2021 to:
2022: $230 million
2023: $233 million
2024: $237 million
2025: $241 million
2026: $244 million
It also added a 4th tax level $60m over the threshold. Since '22 is already done, let's just use 2023 #s:
I know you said you weren't interested in the financial penalties, but they're the easiest place to start, & they aren't nothing:
$233m to $253m - 20% if 1st time, 30% if 2nd time, 50% if 3rd or more.
$253m to $273m - 32% if 1st time, 42% if 2nd time, 62% if 3rd or more.
$273m to $293m - 62.5% if 1st time, 75% if 2nd time, 95% if 3rd or more.
$293m or more - 80% if 1st time, 90% if 2nd time, 110% if 3rd or more.
These tax rates are calculated kind of like income tax, so you're paying the % at each level & not suddenly paying the larger % if you're over the highest threshold.
Using the Mets is the simplest way to show how this works in reality. The Mets were under the tax in 2021 with a payroll of approximately $203m. Last year they jumped to $268m, & they are currently projected for a payroll of $353.9m. This would mean this they would be a "2nd time offender" (oddly derogatory term which shows what owners are really up to - especially with the new 4th tax level which is widely referred to as the "Steve Cohen Tax").
Anyway the 2nd time "offender" rate is 30% of the first $20 million ($6 million), 42% of the 2nd $20 million ($8.4 million), 75% of the 3rd $20 million ($15 million), & if their payroll holds at what it's projected at now, 90% of the last $60.9 million ($54.8 million), for a total tax bill of $84.2 million and an overall outlay of $438.1 million on player salaries + taxes.
A simple financial example - if the Mets dump James McCann's $10.15m luxury tax salary, they would save $19.3m of real money.
Clubs that are $40m over the 1st threshold (over the 3rd threshold), have their 1st pick moved back 10 places, unless they have a top 6 pick, in which case their 2nd pick moves back 10 places.
So the new CBT runs from '22 to '26. It increased the tax threshold from $210m in 2021 to:
2022: $230 million
2023: $233 million
2024: $237 million
2025: $241 million
2026: $244 million
It also added a 4th tax level $60m over the threshold. Since '22 is already done, let's just use 2023 #s:
I know you said you weren't interested in the financial penalties, but they're the easiest place to start, & they aren't nothing:
$233m to $253m - 20% if 1st time, 30% if 2nd time, 50% if 3rd or more.
$253m to $273m - 32% if 1st time, 42% if 2nd time, 62% if 3rd or more.
$273m to $293m - 62.5% if 1st time, 75% if 2nd time, 95% if 3rd or more.
$293m or more - 80% if 1st time, 90% if 2nd time, 110% if 3rd or more.
These tax rates are calculated kind of like income tax, so you're paying the % at each level & not suddenly paying the larger % if you're over the highest threshold.
Using the Mets is the simplest way to show how this works in reality. The Mets were under the tax in 2021 with a payroll of approximately $203m. Last year they jumped to $268m, & they are currently projected for a payroll of $353.9m. This would mean this they would be a "2nd time offender" (oddly derogatory term which shows what owners are really up to - especially with the new 4th tax level which is widely referred to as the "Steve Cohen Tax").
Anyway the 2nd time "offender" rate is 30% of the first $20 million ($6 million), 42% of the 2nd $20 million ($8.4 million), 75% of the 3rd $20 million ($15 million), & if their payroll holds at what it's projected at now, 90% of the last $60.9 million ($54.8 million), for a total tax bill of $84.2 million and an overall outlay of $438.1 million on player salaries + taxes.
A simple financial example - if the Mets dump James McCann's $10.15m luxury tax salary, they would save $19.3m of real money.
Clubs that are $40m over the 1st threshold (over the 3rd threshold), have their 1st pick moved back 10 places, unless they have a top 6 pick, in which case their 2nd pick moves back 10 places.
Actually, one correction to the McCann thing - his AAV is $10.15m, but his actual salary this year is $12m, so the Mets would actually be saving the $12m salary + $9.15m of luxury tax for a real life savings of $21.15m this year, and another $12m that he is owed next year plus whatever their tax would be at the time (likely 110% of his $10.15m AAV, so another $23.2m for a total real life savings of $44.15m over 2 years by getting rid of a player who put up 0.4 fWAR last season).
Seconded, this is a great educational thread on a facet of the game I don't normally pay much attention to.
Maybe a dumb question but speaking of squishy numbers - how (and when) is the actual payroll calculated for CBT purposes? Some weighted average at the end of the season based on pro-rated amounts of who was on the roster for how long, and at what salary?
Terrific post, thank you. Question just out of curiosity, not doubting your #'s but sticking with the Mets example, 2023 will be their 2nd year over in general, but their first time that much over. Is being over for the second consecutive year enough to slot them into that "2nd time offender" tier across all salary bands? Or would it be 2nd time offender for the first two tranches (up to 273m) and 1st time offender for the latter two? Thank you.
It’s only the lowest line that counts for this, you are either under or over each season. NY reset theirs in 2021 by a tiny amount and the Dodgers are at least taking a run at it so far this winter.
It's a good question, & I double-checked it myself when I was running through the post but Simplicio & JA are correct. Under the CBA, you're either an offender or you aren't.
ETA - missed the previous question about when the CBT is calculated. The short answer is on the last day of the season, but there's a better answer than that.
Plus some nebulous amount for "benefits", which I'm not too sure about. It always shows up on Cots contract's calculations but I don't know what it covers, if it's just for the MLB guys or if minor league guys have benefits too, and of it is the same for everyone or if it varies based on salary, seniority or anything else. I never see it defined in any of the cba stuff, but other writers have mentioned it being part of the tax calculation too.