As the Red Sox navigate toward 2020, a giant number may do as much to define them as whomever they install to take over their baseball operations department. The number: $208 million.
That is the line of demarcation for the Red Sox, the payroll threshold at which luxury tax penalties start to take effect. On Friday, Red Sox principal owner John Henry stated flatly that the team plans to bring its payroll under that figure in 2020 to reset the rate at which it’s taxed. While team officials (including Henry) subsequently lined up to amend that statement by saying it is a goal but not a mandate, every potential transaction this winter will be viewed through the prism of payroll.
So what does that mean, and why does it have implications that extend to Mookie Betts? Here’s a primer:
What is the luxury tax threshold?
Teams that exceed certain payroll thresholds get hit with progressive penalties (the “competitive balance tax,” also referred to as CBT or luxury tax). The penalties go up for repeat offenders. It’s a mechanism in the collective bargaining agreement that, depending on perspective, has either created a significant disincentive for teams to spend beyond certain levels or has provided teams with political cover to remain under those levels. Either way, teams prefer to not pay taxes (shocker!), so the threshold has served as a key factor in payroll plans.
What are the Red Sox’ tax rates?
For the second straight year, the Red Sox will absorb a sizable luxury tax bill, having spent more than any other team in baseball.
In 2017, the Red Sox kept their payroll under $195 million, avoiding a luxury tax that year and resetting the tax thresholds.
In 2018, when the threshold was $197 million, the Red Sox spent well beyond it, with a payroll of roughly $240 million in their championship season. They not only incurred the first-time offender’s rate of 20 percent on all outlays over $197 million, but also got hit with a 32 percent tax on expenditures above $217 million, and a 62.5 percent tax on payroll expenses above $237 million. They received a tax bill of roughly $12 million.
In 2019, the threshold is $206 million. The Red Sox blew past that — with the base tax rate moving up for a second-time offender to 30 percent — and the next tier, with a 42 percent tax on spending over $226 million. But they stayed below the third and highest threshold, which would have resulted in a 75 percent penalty on spending beyond $246 million. The team payroll is just north of $240 million but below $246 million, with an estimated tax bill of roughly $12 million.
In 2020, they face a bigger potential burden. Every dollar spent above $208 million would be taxed at a 50 percent rate; the next thresholds are 62 percent for anything over $228 million, and 95 percent beyond $248 million. If the Red Sox stay below the first threshold, however, they will reset their tax rate, with the base rate falling back to 20 percent.
My eyes have crossed. What does that mean in practical terms?
The Red Sox don’t particularly want to keep spending at a level that incurs the luxury tax. In theory, the idea of paying outfielder Mookie Betts $30 million in 2020 (an estimate of his potential arbitration earnings for next season) carries considerable appeal. Even at that price, his likely production makes him a bargain.
But if the payroll were right at the luxury tax threshold without Betts ($208 million), then the actual cost of his contract for 2020 would be more like $43 million. So every player becomes considerably more expensive for teams that repeatedly blow past the threshold, helping to explain why big-markets teams — the Red Sox (2017), Cubs (2018), Dodgers (2018), and Yankees (2018) — played limbo in recent years to get under it for at least one season.
|Jackie Bradley Jr.||10|
How is luxury tax payroll calculated?
There’s a bit more than meets the eye. It’s based on the average annual value (AAV) of player contracts. It also includes the salary of minor leaguers who are on the 40-man roster, as well as a standard benefits bill of a bit more than $15 million that all teams must pay. On top of that, teams want to keep a war chest to take on more salary with in-season callups and trades.
If the threshold is $208 million, where are the Sox?
If they keep their current roster intact and J.D. Martinez (who has the right to opt out of his five-year, $110 million deal this winter) remains on the roster, the Red Sox already would be beyond the threshold next year. Based on the current guaranteed contracts, projected arbitration earnings, and estimates for players who aren’t yet arbitration-eligible, they have roughly $220 million in commitments — and that’s without a fifth starter to replace Rick Porcello, without bullpen upgrades, and without a first baseman to pair with Michael Chavis.
That figure also does not account for a $10 million in-season war chest.
Those calculations place the payroll at $230 million and counting.
So how could the Red Sox get below $208 million?
Scenario 1: Martinez opts out.
The Red Sox wouldn’t quite shed his entire $22 million salary; they’d still be on the hook for $6 million — the difference between how his salary was calculated for luxury tax purposes in 2018 and 2019 (a total of $44 million based on the $22 million AAV in each season) and how much he actually made ($50 million — $23.75 million salaries in 2018 and 2019, along with a $2.5 million buyout).
Still, that $16 million — in combination with a decision to non-tender Steven Wright and Sandy Leon rather than offering them arbitration, thus saving about $4 million — would get the Red Sox just below the threshold, albeit with a few small problems: They’d still need a fifth starter, a first baseman, a DH, and they’d love to add a bullpen arm.
So they might have to keep shedding salary — possibly seeking to trade or even non-tender Jackie Bradley Jr. and his projected $10 million salary — freeing resources for some low-dollar signings to address the holes on the roster. They would then need to add a starter, a first baseman, a DH, and a center fielder.
If the Sox are to get below the luxury tax threshold, they probably couldn’t explore long-term deals for Betts or Rafael Devers or Eduardo Rodriguez until the 2021 season.
Scenario 2: Martinez opts in, gets traded.
In some ways, the Sox might find it easier to gain flexibility if Martinez opted into his contract and then was traded, allowing them to shed the entirety of his salary for 2020 rather than having the $6 million hit for his departure in free agency.
This scenario, along with the trimming of Wright and Leon from the roster, would get the Sox a bit of flexibility . . . but not that much. So they might still be left looking to deal Bradley.
Scenario 3: Martinez opts in, and Sox contemplate the unthinkable.
If they are hell-bent on getting below the luxury tax threshold, then there’s a direct path to doing so: trading Betts, particularly if they are convinced that he’s not willing to sign a long-term deal.
Perhaps the Sox could address some of their needs (low-cost starting pitcher and a starting outfielder) through such a deal while also freeing up money to spend on the rest of their needs.
The mere possibility of dealing Betts should be enough to sicken members of the organization, but it presents the clearest path to getting under the threshold in 2020 while also freeing resources to address other needs.
There has to be a better way, right?
The Red Sox could see if someone would take the last three years of, say, David Price’s contract if it was heavily subsidized — though any subsidy would count as payroll for luxury tax purposes. For instance, if they found a taker to pay roughly $10 million a year of Price’s 2020 salary, the Sox still would absorb a $22 million payroll hit (as calculated for luxury tax purposes), so they’d probably also have to part ways with Bradley, Wright, and Leon. And, of course, they’d need to add two starters, a center fielder, a first baseman, and help in their bullpen.
There could be even more elaborate possibilities involving Price. Is there a deal to be had with a team that would pay all of his 2020 salary — and then get all of Price’s contract in 2021 and 2022 ($32 million each year) subsidized by the Sox? Presumably, the Sox could offer one or more prospects as deal sweeteners. Such a move would create the same kind of 2020 flexibility as a deal involving Betts, even if it guaranteed that the Sox would spend enormous sums in 2021 and 2022.
Such deals are incredibly hard to pull off. But it’s worth recalling that the Braves and Dodgers made a dead-money deal involving Matt Kemp, Adrian Gonzalez, Scott Kazmir, and Brandon McCarthy before the 2018 season to exchange onerous contracts. The deal was close to financially neutral in the aggregate, but allowed the Dodgers to reduce their 2018 payroll and get under the luxury tax threshold while freeing up the Braves to have money to spend starting in 2019 (hello, Josh Donaldson).
Is there any chance Price could be dealt for a player or players who have similarly burdensome long-term obligations that are distributed over a longer time? It would be hard to find a match, given the lefthander’s historically large contract.
Merely imagining such long-shot possibilities underscores the difficulty of the Red Sox’ task if they truly do intend to get under the luxury tax threshold.
Should a team really be so insistent on doing this?
When it comes to the luxury tax threshold, fans/players and teams/owners have competing rational interests.
By staying below the threshold and resetting their tax rates in 2017 — something that required them to decrease payroll by about $6 million from 2016 levels — they saved a total of more than $20 million in tax payments in 2018-19. Red Sox president/CEO Sam Kennedy said those savings, along with the resetting of tax rates, left the team more inclined to spend aggressively in 2018-19, when they’ve outspent every other team by a sizable margin.
Yet for an organization that was once willing to spend $63 million on Yoan Moncada as a one-off expense on a speculative investment, should $20 million in prospective luxury tax savings (on top of the player’s 2020 salary) truly determine whether the team retains or parts with an elite talent like Betts or Martinez?
Can’t the Sox — a team with revenues among the most sizable in the game — afford to retain their stars? How much can a team truly afford to spend while remaining profitable? Is it reasonable for a big-revenue team — one that has spent more on player salary than any other pro sports team in North America over the last two years — to carry a payroll of roughly $200 million, or is there some obligation to spend closer to $230 million to $250 million?
Those questions hover not merely over the Sox but over the entire sport. And for the Sox, the answers will shape the future.
|Commitment||Players||2020 $ M|
|Major league pre-arb||8||4.99|
|Minor league 40-man**||2|