Monday, August 15, 2022

2022 MLB trade deadline: How Competitive Balance Tax could impact big spenders, including Yankees and Padres

The 2022 MLB trade deadline is only days away and the biggest names we’ll hear between now and then include Juan Soto, Luis Castillo, Willson Contreras, and competitive balance tax. Competitive balance tax? Competitive balance tax. Competitive balance tax is the fancy name MLB gave its soft salary cap, which penalizes teams for spending too much on players.

The competitive balance tax, or CBT, has been around 2003 and the current threshold is $230 million. Only a handful of teams even come close to the CBT threshold each year. Five teams had an Opening Day payroll north of $230 million this season: Dodgers, Mets, Yankees, Phillies, and Red Sox. The Padres were the only other team close to the $230 million threshold.

As part of the CBT, every dollar over $230 million is taxed at a rate dependent on how far the team goes over the threshold, and whether they’re a repeat offender. Here are the 2022 CBT thresholds and penalties in the new collective bargaining agreement:

$230 million

20%

30%

50%

$250 million

32%

42%

62%

$270 million*

62.5%

75%

95%

$290 million*

80%

90%

110%

* Teams that exceed the CBT threshold more than $40 million also have their next first-round draft pick moved back 10 spots. 

The fourth threshold, the $290 million threshold, is what has come to be known as the Steve Cohen tax. The new Mets owner came in and raised his team’s payroll considerably, which spooked MLB and the other owners into pushing for a fourth CBT threshold as part of the new collective bargaining agreement. They want to discourage other owners from raising payroll like Cohen.  

The should be noted the tax rates only apply within each tier. Here’s the tax penalty breakdown for a hypothetical team with a $282 million payroll as a first-time offender:

  • First $230 million: $0 tax
  • $230 million to $250 million: $20 million taxed at 20 percent ($4 million)
  • $250 million to $270 million: $20 million taxed at 32 percent ($6.4 million)
  • $270 million to $282 million: $12 million taxed at 62.5 percent ($7.5 million)
  • Total CBT bill: $17.9 million ($4 million + $6.4 million + $7.5 million)

Teams have two different payrolls each year. Their actual club payroll, which is the real dollars paid out in salary, and their CBT payroll. The CBT payroll is calculated using the average annual value of each player’s contract. Manny Machado’s 10-year, $300 million contract counts as $30 million against the CBT payroll, though his actual salary is $32 million this year.

Some teams treat the CBT threshold (or one of the higher thresholds) as a hard cap and limit their spending accordingly. That has an impact not just on their offseason activity, but also at the trade deadline. The CBT number for players acquired in-season is prorated, so add someone at the trade deadline and you absorb roughly one-third of his CBT payroll obligation.

As such, the CBT is an important consideration at the deadline. Some teams will exceed the threshold, others hold a hard line and won’t, and some aren’t close enough to the threshold for it to matter. Here are the contenders over and closest to the CBT threshold, and what it could mean for them leading into next week’s trade deadline (CBT payroll figures via FanGraphs).

New York Mets

CBT payroll: $289.9 million

CBT status: First-time offender

When your owner has a CBT tier unofficially named after him, you have to exceed it, right? The Mets are just under the $290 million threshold and, realistically, there is no way to stay under it. They’ll jump over that threshold just with injury replacements and Sept. call ups these next two months (every player called up counts against the CBT payroll). Unless the Mets cut payroll, something there is no reason to believe they will do, they’re going to exceed the $290 million threshold and incur the harshest tax rates. The CBT isn’t something that will limit what they do at the deadline. Cohen will pay whatever tax he needs to pay.

Los Angeles Dodgers

CBT payroll: $264.9 million

CBT status: Second-time offender

The Dodgers are roughly $5 million under the $270 million threshold, the threshold that would knock their 2023 first-round pick back 10 spots. They incurred the draft pick penalty last year, so they’re willing to do it. The Dodgers are right smack in the middle of their World Series window and they’re already well into CBT territory. There’s no reason to hold back now. Los Angeles won’t throw money around recklessly, though it’s hard to see CBT considerations derailing anything they want to do at the deadline.

New York Yankees

CBT payroll: $262.2 million

CBT status: First-time offender

The Yankees are an interesting CBT case study. Last year they stayed under the threshold and reset their tax rates, and to do it, they got the Cubs to pay Anthony Rizzo’s salary and the Rangers to pay Joey Gallo’s salary at the deadline. They had to give up extra/higher-quality prospects in those trades to get those teams to eat that money, but the Yankees did it, and they managed to stay out of the CBT penalty box. As such, the Yankees are a first-time offender subject to the lowest tax rates this year.

In 2019 and 2020, the Yankees treated the third CBT threshold, the threshold that incurs the draft pick penalty, as a hard cap. If they do that again this year, they have less than $8 million in wiggle room at the deadline. They could always get the other team to eat money a la Gallo and Rizzo last year, but wouldn’t you rather just move next year’s first-round pick back 10 spots than give up more/better prospects in a trade? The Yankees have a history of treating the third CBT threshold as a cap. Given the season they’re having and their needs heading into the deadline, I would guess they’re willing to go over the threshold to improve the team.

Boston Red Sox

CBT payroll: $238.1 million

CBT status: First-time offender

I think the Red Sox should buy at the trade deadline. They hit an ugly (very ugly) rough patch recently, but they’re still within a few games of a wild-card spot, and a big-market team like Boston should always go for it when they’re in the race. You’ve got Xander Bogaerts and Rafael Devers in their primes and you might sell? Come on.

If the Red Sox do sell, it is conceivable they could duck under the $230 million threshold, which would allow them to avoid paying tax this year and also go into next year as a first-time offender. Boston has several veteran rentals who would interest contenders at the deadline. Here are those players and approximately how much CBT payroll the Red Sox would save by trading each on Aug. 2:

These guys would all have to be replaced on the roster and a league minimum player will cost about $260,000 against the CBT payroll the rest of the season, which has to factored into the payroll equation. But yeah, the Red Sox can get under the $230 million threshold. Trading Martinez, Eovaldi, and Wacha would get Boston under $230 million with room to spare.

If the Red Sox decide to buy at the deadline, the CBT shouldn’t be a concern. They’re already over the $230 million threshold, and at that point, just get the help you need. Realistically, it would be almost impossible to take on enough money to push next year’s first-round pick back 10 spots. So just take on whatever money and pay the tax, and make a run at a postseason spot.

Philadelphia Phillies

CBT payroll: $236.3 million

CBT status: First-time offender

The Phillies have the National League’s longest postseason drought and are in the thick of the wild-card race. They will be a no-doubt buyer at the deadline. The late Nick Castellanos signing pushed Philadelphia over the $230 million threshold and, now that they’re in CBT territory, there’s no sense in holding back. They’ve already forfeited the benefits of staying under (i.e. no tax this year and no second-time offender status next year) so they might as well keep spending to get the help they need. The Phillies are also far enough under the $250 million threshold that they shouldn’t have to sweat an increased tax rate. Not much mystery here. The Phillies shouldn’t play CBT games at the deadline.

San Diego Padres

CBT payroll: $228.9 million

CBT status: Second-time offender

Last year the Padres exceeded the CBT threshold and paid tax for the first time. They are narrowly under the $230 million threshold this year, so narrowly that injury call ups in August and September alone could push them over the threshold. The Padres have tried to unload Eric Hosmer ($18 million) and Wil Myers ($13.8 million) and their hefty CBT payroll numbers for years now, but have had no luck. Hard to see them dumping one or both now. Could Blake Snell ($10 million) be a CBT payroll casualty?

More likely, Padres ownership will have to pick between two options at the deadline. Either exceed the $230 million threshold and pay CBT for the second straight year, or order GM AJ Preller to stay under the threshold, and thus limit his maneuverability at the deadline. I think it’s more likely to be the former, though I can’t say that with absolute certainty. The Padres are close enough to the $230 million threshold that it will take serious payroll gymnastics to make meaningful upgrades at the deadline without ownership’s approval to take on money.

Contenders well below CBT threshold

These 10 clubs are in no danger of exceeding the $230 million threshold at the trade deadline. The White Sox are closest to the threshold with $16 million in spending room and, using our Red Sox numbers, that’s enough to take on Martinez and Eovaldi and Hill at the deadline while still staying under the threshold. Realistically, these 10 clubs have no CBT considerations at the deadline. Only those six clubs mentioned earlier have to worry about the CBT.

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