Examining luxury-tax payments for the Dodgers and Padres

As expected, the Dodgers and Padres are the two teams that exceeded the luxury-tax threshold this past season. The Associated Press reports that Los Angeles will pay $32.65M in fees, while the Padres’ tax penalty lands at a more modest $1.29M. No other teams exceeded the threshold in 2021.

Neither the Dodgers nor the Padres exceeded the threshold in 2020. Under the terms of the 2016-21 collective bargaining agreement, teams were subject to escalating penalties only for exceeding in consecutive years. Thus, both teams will be treated as first-time payers this offseason.

Teams are subject to penalties only on the dollars they spend above the threshold. The 2021 penalties for first-time payers checked in at 20% on every dollar between $210M and $230M, 32% on overages between $230M and $250M, and 62.5% on each dollar spent above $250M. CBT figures are calculated by summing the average annual values of all of a team’s player contracts (plus benefits), not by looking at a team’s actual payrolls in a given season.

As their hefty tax suggests, the Dodgers were by far the game’s biggest spenders in 2021. Los Angeles’ final luxury-tax number checked in at $285.6M. (Their tax payment is calculated as the sum of $4M on their overages between $210M-$230M, $6.4M on their overages between $230M-$250M and $22.25M on their overages above $250M.) The Dodgers flexed that financial might to build a star-studded roster that went to the NL Championship Series.

By exceeding $250M, the Dodgers also accepted a minor hit in next year’s amateur draft. Teams that exceeded the highest tax threshold in the previous CBA saw their top choice moved back 10 spots in the ensuing Rule 4 draft. Instead of picking 30th overall next season as originally scheduled, they’ll first select at pick No. 40.

While the Dodgers shattered the luxury mark, the Padres very narrowly exceeded the first threshold. Their final ledger checked in at $216.5M, the highest mark in franchise history. San Diego’s financial cost for doing so is minuscule, but surpassing the threshold would be of more import were they to sign a free agent who has been tagged with a qualifying offer. Teams that pay any CBT penalties are subject to the highest levels of draft-pick and international signing bonus forfeiture for signing qualified free agents. Exceeding the tax also reduces the compensation teams receive when one of their own qualified free agents signs elsewhere; this winter, the Dodgers received the lowest possible compensation (a pick after the fourth round) for Corey Seager's departure.

As mentioned, the previous CBA contained escalating penalties for teams that exceeded the threshold in multiple consecutive years. It’s not clear whether that process will continue with the next CBA (or where the thresholds will land in the next CBA) but most high-revenue teams have occasionally determined to dip back under the threshold to “reset” their tax bracket and dodge escalating penalties.

That makes the Padres’ decision to narrowly exceed the threshold and potentially shoulder escalating penalties in future years a bit atypical. A handful of teams settled their spending limits just below the $210M mark. According to the AP, each of the Phillies, Yankees, Mets, Red Sox and Astros ended with payrolls less than $5M below the first tax threshold. They’ll each be first-time payers if they exceed that mark in 2022, with the Yankees and Astros resetting after exceeding the threshold in 2020. (The Cubs also exceeded the threshold in 2020 but didn’t come especially close to $210M in 2021.)

The AP also reports that overall spending on players took a step back. The combined tally of all 30 teams’ luxury-tax payrolls this past season tallied $4.52 billion, down from the $4.71 billion teams spent in 2019. That’s not entirely surprising on the heels of a 2020 campaign with essentially no gate revenues, but it’s the lowest overall expenditures on players since 2016’s $4.51 billion.