What will it mean if Red Sox exceed the luxury tax threshold in 2018?
In 2017, the Red Sox played payroll yoga, contorting in an effort to create a well-rounded roster that nonetheless allowed them to get below the luxury tax threshold ($195 million for the 2017 season) after two straight years of exceeding it.
It’s almost impossible to imagine the Red Sox staying below the tax threshold again. To the contrary, if they hope to improve their roster – with president of baseball operations Dave Dombrowski already on record saying that he has to add more power to the lineup – then the question will shift from whether they’ll stay below the threshold to just how far beyond it they’ll spend.
Unless the Red Sox either find a taker for one of their biggest contracts (David Price, Hanley Ramirez, Rick Porcello) or decide to trade multiple arbitration-eligible players who represent relative bargains for their production, they seem poised to blow past the luxury tax threshold, which has been set at $197 million for the 2018 season.
The team has just over $129 million in guaranteed, multi-year commitments (as measured for luxury tax calculations) to seven players: Price ($31 million), Ramirez ($22 million), Rick Porcello ($20.63 million), Pablo Sandoval ($19 million – and yes, even though released, he’ll still count as part of the Sox’ payroll in both 2018 and 2019), Dustin Pedroia ($13.3 million for luxury tax purposes, $16 million in salary), Craig Kimbrel ($12 million for luxury tax purposes, $13 million in salary), and Chris Sale ($11.15 million for luxury tax purposes in a year where his salary will be $12.5 million).
Beyond that, with 15 arbitration-eligible players – including Mookie Betts, Xander Bogaerts, Jackie Bradley Jr., Christian Vazquez, Drew Pomeranz, and Eduardo Rodriguez – the Sox could have another $50 million or so. The team could pass on offering arbitration to players such as Brock Holt, Robbie Ross Jr., and Josh Rutledge, all of whom were limited by injuries this year, but for the most part, this group remains a relative bargain.
The Sox will also feature about a half-dozen players on their roster who aren’t yet eligible for arbitration and who thus will make something close to the big league minimum. Andrew Benintendi, Rafael Devers, and bullpen options like Matt Barnes and Heath Hembree will make relative peanuts even as they assume valuable roles. Such players will cost about $4 million.
Off the bat, in terms of returning players, the Sox will be on the hook for about $180 million to $185 million – a number that assumes that none of their players signs long-term extensions that would achieve long-term savings but would increase the payroll this year.
On top of that, they’ll pay an estimated $14 million in benefits, another $1 million to $2 million for minor league salaries of players on their 40-man roster, and about $8 million to $10 million for in-season call-ups and salaries absorbed in trades.
That ball of wax already crosses the $200 million barrier – without beginning to address the team’s offseason needs: The addition of power, a first baseman/DH to pair with Ramirez (assuming that Sam Travis is deemed unready for such a role), a fourth outfielder, and quite possibly a second base alternative to Pedroia depending on whether the second baseman elects to have a major surgery on his knee that could cost him a sizable chunk of the season.
So what does that mean? What are the consequences of spending beyond the luxury tax threshold?
WHAT IS THE 2018 LUXURY TAX THRESHOLD? $197 million, up roughly 1 percent from the $195 million line of demarcation in 2017.
WHAT IS THE PENALTY? The Red Sox, after resetting their tax by staying below the threshold in 2017, will get hit with a 20 percent tax on any spending beyond $197 million.
IS IT JUST A STRAIGHT 20 PERCENT TAX BEYOND $197 MILLION? Nope, and here’s where it gets interesting.
The Red Sox will be taxed at 20 percent for anything they spend beyond $197 million – with additional penalties for spending that’s more than $20 million and then $40 million above the threshold. For all spending beyond $217 million next year, the Sox will be taxed at a 32 percent rate. For all spending beyond $237 million next year, they’d be taxed at a 62.5 percent rate. Here’s how that would play out for three scenarios:
If the Red Sox have a $215 million payroll next year, they’d be on the hook for a $3.6 million luxury tax bill (20 percent of their $18 million overage).
If the Sox have a $235 million payroll next year, they’d be on the hook for a $9.76 million luxury tax bill ($4 million for the spending between $197 million and $217 million, plus $5.76 million for the $18 million subject to the second penalty threshold between $217 million and $235 million).
If the Sox have a $255 million payroll next year, they’d be on the hook for an addition $21.65 million – the $4 million (20 percent tax) for spending up to the $217 million mark, $6.4 million (32 percent tax) for spending between $217 and $237 million, and another $11.25 million (62.5 percent tax) for spending between $237 million and $235 million.
ANYTHING ELSE? Yup. Once a team spends beyond the $237 million threshold on its 2018 payroll, its 2019 draft pick gets bumped down 10 spots, and its available signing bonus pool likewise takes a hit. The new Collective Bargaining Agreement thus bakes in significant disincentives – beyond just a tax bill – for teams to go more than $40 million above the threshold.
Moreover, any team that goes beyond $197 million (the initial luxury tax threshold) in 2018 would suffer both draft pick (loss of a team’s second and fifth pick) and international signing bonus (a budget clipped by $1 million) penalties if signing a free agent in the 2018-19 offseason who had received a qualifying offer to a contract of more than $50 million. Given that the 2018-19 free-agent class has a chance to be one of the best in free agent history, that has a good chance to be relevant, but it’s a virtually unavoidable issue for the Sox given that there’s almost no way they can get beneath $197 million this coming year.
SO … WHAT DOES ALL OF THIS MEAN? The Sox need middle-of-the-order power. As noted in last week’s roster analysis, J.D. Martinez and Eric Hosmer are the two most obvious solutions. Yet both are likely to command upwards of $20 million a year – which would push the Red Sox past the $217 million mark and into a higher tier of penalties.
Given where Sox payroll now sits, if the Sox do pursue either player, it wouldn’t be shocking if the team considered dealing an arbitration-eligible player (or players) to clear some payroll while addressing other needs. Or, put another way: The Red Sox probably won’t address all of their winter needs in free agency without also offsetting salary by trading some controllable players.
In theory, the team could also see if a taker for Ramirez exists, but given that they’d have to absorb most of his salary in order to facilitate a deal, and that they’d then be thrown back into the free agent market to replace him with another first baseman/DH, any move involving the mercurial slugger would carry little payroll benefit. Similar considerations likely exist with Porcello, while Price’s combination of the largest salary of any pitcher and an opt-out make him virtually untradeable – even with his brilliant playoff performance. (Disclaimer: Dombrowski did once trade a player considered completely untradeable, swapping Prince Fielder for Ian Kinsler.)
One additional consideration: It’s hard to imagine the team considering Rusney Castillo as a fourth-outfield option, given that he would carry a payroll hit (as calculated for the luxury tax) of more than $10 million. Since that the Sox would have to pay millions of dollars in taxes on a salary that already significantly exceeds what a team wants to pay an outfield reserve, it’s doubtful he’ll ever again play for the Red Sox in the big leagues.
Unless the Sox decide that, with Chris Young off the roster, they’re going to consider Bryce Brentz for the fourth outfielder role, they’ll probably have to conjure a righthanded-hitting outfielder in free agency, unless Martinez is acquired for the role.
Correction: Because of a reporter’s error, an earlier version of this story incorrectly stated the level at which a team’s top draft pick would be moved back by 10 selections. That penalty is only triggered if a team exceeds a $237 million payroll in 2018.”