How the latest CBA chilled this offseason's hot stove
It's January 2018 and J.D. Martinez, Eric Hosmer, Yu Darvish, and Jake Arrieta have yet to ink new contracts.
That's odd for many reasons. It's certainly not as though there's a shortage of clubs that could use the services of those top-tier free agents.
One popular explanation for this quiet offseason has been the theory that many front offices are saving their budget space for next winter's free-agent class, which will likely boast Bryce Harper, Manny Machado, and Josh Donaldson, among others.
However, the collective bargaining agreement ratified last offseason features a new system of competitive balance taxation, and that could be giving general managers some extra trepidation about offering nine-figure contracts.
Major League Baseball has long placed a soft cap on salaries, taxing the payroll overages of the wealthiest teams who were willing to spend beyond a certain amount. Under the new CBA, however, that soft salary cap has three tiers, and the penalties escalate for repeatedly exceeding them. Here are the payroll thresholds at which the taxes take effect over the four-year lifespan of the current agreement:
| Tax level | 2018 | 2019 | 2020 | 2021 |
|---|---|---|---|---|
| Base level | $197M | $206M | $208M | $210M |
| 1st surcharge level | $217M | $226M | $228M | $230M |
| 2nd surcharge level | $237M | $246M | $248M | $250M |
And here are the rates of taxation for each tier:
| Tax level exceeded | 1st time | 2nd time | 3rd time or more |
|---|---|---|---|
| Base level | 20% | 30% | 50% |
| 1st surcharge level | 32% | 42% | 62% |
| 2nd surcharge level | 62.5% | 75% | 95% |
To put that more plainly: If a team exceeds the base tax threshold by $20 million or less, the overage will be subject to a 20 percent tax for the first year, a 30 percent tax if it happens again the next year, and a 50 percent tax in every subsequent year the club goes over.
If a team exceeds the base threshold by more than $20 million, the first $20 million of overage will be taxed at 20 percent; the next $20 million of overage will be taxed at the next tier's rate (32 percent); and any additional overage will be taxed at the next tier (62.5 percent). (All those rates are first-time penalties.)
To be even clearer, let's use a real-world example - someone who's still on the market, potentially because of how expensive these taxes could make him.
The Boston Red Sox were recently rumored to have offered J.D. Martinez a five-year deal. Based on his agent's $200-million expectations, let's estimate Martinez is looking at a five-year contract worth $125 million (which seems realistic based on average annual value).
According to Baseball Reference, the Red Sox are already expected to exceed the base threshold next season. For the purposes of this exercise, let's assume Boston's payroll stays at $215 million over the next four years. Right now, the Red Sox are on the hook for $3.6 million in taxes in 2018 without signing Martinez.
If we add Martinez's $125-million estimated payroll to the books, bumping the Red Sox up to an annual outlay of $240 million, this is how much tax the club would pay for the first four years of his deal (not including the rest of their overages):
| 2018 | 2019 | 2020 | 2021 | TOTAL |
|---|---|---|---|---|
| $8.675M | $9.18M | $13.94M | $13.7M | $45.495M |
*Scroll to the end for an explanation of how these figures were calculated (and why they fluctuate).
Even if the Red Sox backload Martinez's contract, they'll still go over the second surcharge level in the first year - the tax thresholds are based on average annual value, so the overage is unavoidable.
As for the fifth year of his deal, let's assume the tax thresholds continue to rise by $2 million a year, the way they do at the end of this CBA. That means the Red Sox would owe $59 million in tax based on Martinez alone.
To Boston, then, signing Martinez to a five-year, $125-million contract is functionally giving him a $184-million deal, through no fault of the super-slugging free agent.
The Red Sox appear to be one of the most likely teams to exceed the tax threshold (since they're already over), but they probably won't be alone. Here are the other clubs that are already close to $197 million in payroll, according to Baseball Reference:
| Team | 2018 Payroll |
|---|---|
| Dodgers | $191.9M |
| Giants | $176.7M |
| Nationals | $176.5M |
| Angels | $164.9M |
| Yankees | $162.3M |
| Mariners | $161.6M |
While the slow offseason can't be attributed to a single cause, it appears major-league front offices are tightening their purse strings to avoid being punished by the new CBA. It remains to be seen how these penalties will - or won't - affect next offseason's high-profile class of free agents.
*In the first year, the first $2 million of Martinez's theoretical contract gets taxed at 20 percent, the next $20 million gets taxed at 32 percent, and the remaining $3 million gets taxed at 62.5 percent. In 2019, the first $11 million gets taxed at 30 percent (the second-year penalty for exceeding the base threshold), and the next $14 million gets taxed at 42 percent (the second-year penalty for exceeding the first surcharge threshold), but the Red Sox no longer exceed the second surcharge level because it's higher that year. And so on ...