Eight teams combine for record $209.8M in luxury tax bills

Major League Baseball has finalized the luxury tax calculations for the 2023 season, and the eight teams over the Competitive Balance Tax threshold will combine for a total bill of $209.8M, Ronald Blum of the Associated Press reports.  Both the total number of tax-paying teams and the total sum are new records, surpassing the previous highs of six teams (in 2016 and 2022) and $78.5M (in 2022).

Here is what each of the eight teams owes for surpassing at least the $233M base CBT threshold….

• Mets: $100,781,932
• Padres: $39.7M
• Yankees: $32.4M
• Dodgers: $19.4M
• Phillies: $6.98M
• Blue Jays: $5.5M
• Braves: $3.2M
• Rangers: $1.8M

As a reminder of how the luxury tax operates, the CBT figures are determined by the average annual value of salaries for players on the 40-man roster.  A player earning $20M over two seasons, for example, has a CBT number of $10M, even if the player might earn $8M in the first year of the contract and $12M in the second year.  Deferred money in a contract can reduce a luxury tax number to some extent — most famously, Shohei Ohtani’s $700M deal with the Dodgers contains $680M in deferred money, so his CBT hit will be roughly $46M per season instead of $70M.

A team is considered a “first-time payor” if they haven’t spent above the CBT threshold in the previous season.  A first-time payor would owe a 20% surcharge on any dollar spent between $233M and $253M, 32% of anything between $253M and $273M, 62.5% on anything between $273M and $293M, and then 80% of overages for anything beyond $293M.  These percentages rise if a team is a tax payor for two consecutive seasons, and then even further if a team exceeds the CBT line in three or more consecutive seasons.  This year’s CBT class featured three first-time payors (Texas, Atlanta, Toronto), three two-time payors (Philadelphia, both New York teams) and two three-time payors (San Diego, Los Angeles).

The $293M threshold was instituted in the last Collective Bargaining Agreement as a fourth penalty tier, and it is unofficially known as the “Steve Cohen Tax” in a reference to the Mets owner’s penchant for big spending.  Even though New York has only topped the CBT whatsoever in 2022 and 2023, it isn’t surprising that Cohen’s team set new standards for tax payouts.  The Mets’ tax payroll of $374.7M and approximate $100.78M tax bill far exceeded the 2015 Dodgers’ previous records of $291.1M and $43.6M, respectively.

This bill would’ve been even higher if the Mets hadn’t unexpectedly struggled, and unloaded some expensive contracts at the trade deadline in order to save some money and reload with an eye towards probably 2025 as a more clear-cut return to contention.  Blum also notes that the Mets received a $2,126,471 tax credit related to a CBA provision, which slightly reduced their bill further.

As always, the actual financial cost of exceeding the tax is perhaps the least-important part of the penalties, especially for teams who barely across the first threshold.  Teams who exceed the CBT line would face further punishment in regards to free agents who reject qualifying offers, whether that translates to additional compensation required to sign a QO-rejecting player, or lesser compensation received if a team’s own qualified free agent signs elsewhere.  For instance, signing Ohtani cost the Dodgers not just $700M, but also $1M in international draft pool money and their second- and fifth-highest picks in the 2024 draft.  For a team like the Padres, should Blake Snell or Josh Hader sign elsewhere, San Diego’s compensatory draft selection wouldn’t come until after the fourth round of the 2024 draft.

Spending on talent is more often than not a recipe for success on the field, though obviously hardly a guarantee.  The Mets had a losing record, and the Padres and Yankees each squeaked over the .500 mark with 82-80 records.  The other five tax payors reached the playoffs, though the Phillies and the World Series champion Rangers were the only members of that group of five to win at least one postseason series.

The $209.8M in tax revenues will be split up in three ways by the league.  The first $3.5M is devoted to funding player benefits, $103.15M will go towards funding individual player retirement accounts, and the other $103.15M will be put into a supplemental commissioner’s discretionary fund and distributed amongst revenue-sharing recipient teams who have grown their (non-media) local revenue over a pre-determined number of years.