Where the Dodgers stand with the competitive balance tax in 2018

The general managers meetings begin on Monday in Orlando, and while not as exciting as the winter meetings, the annual event allows a chance to lay some groundwork for the offseason.

For the most part, the Dodgers in 2018 will likely look very similar to the 2017 team that won 104 games and got to the seventh game of the World Series, though there are some trade and free agent opportunities.

“We’re fortunate to be in a position where a lot of the team is going to be coming back,” general manager Farhan Zaidi said last week. “Every offseason, you take a look at your roster and find potential target areas. As we look at our roster, we don’t feel like we have any glaring needs. We’re going to continue to be opportunistic like we always are for ways to improve the roster.”

Something to watch on just how the Dodgers improve the roster will be the competitive balance tax. The club has been over the tax threshold for five straight seasons, paying a total of $113.5 million in tax from 2013-16, and will have a bill of at least $25 million more for 2017 per the Associated Press, and probably a little more since that estimate was based on opening day payrolls.

The luxury tax threshold will be $197 million in 2018, $206 million in 2019. The Dodgers are currently paying at a 50% rate for any payroll over the threshold as a repeat offender. At some point the club would likely prefer to get under the threshold to avoid the tax, since that would reset the penalties going forward, starting at 20% for the first year over, 30% the second year, then 50%.

“What’s the luxury tax?” president of baseball operations Andrew Friedman joked last week. “We don’t have really have a great feel for exactly how things will play out. The one thing we are confident about is that we’ll get to CBR in February with a team that is positioned to compete for a championship.”

The Dodgers have some room to maneuver under the tax threshold — a little bit this winter, and more flexibility next offseason. But just how much?

For competitive balance tax purposes, the average annual value of the contract is used instead of the actual money paid out during each season. For instance, Justin Turner will make $11 million in 2018, but with his contract guaranteeing him $64 million over four years, his tax number for 2018 is $16 million.

Similarly, half of Scott Kazmir’s $16 million salary is deferred until 2021. But instead of an $8 million figure for competitive balance tax purposes, his 2018 number is just short of $15 million — the average of his salaries over the life of his three-year, $48 million contract, discounted to account for the deferrals.

Here is a quick and dirty look at where the Dodgers stand for 2018 in regards to the luxury tax, including salary arbitration estimates from MLB Trade Rumors:

The total payroll includes an amount for benefits that is the same for all team. It was $12.9 million in 2016 and estimated to be just shy of $14 million in 2017. We estimated here that next year those benefit costs will be $15 million.

UPDATE: Neither Yaisel Sierra nor Erisbel Arruebarrena, both off the 40-man roster but signed to major league deals with average annual values of $5 million each, do not count against the tax.

The Dodgers’ payroll includes some dead money, including the released Dian Toscano (he was in the Bud Norris trade from Atlanta in 2016, and had a four-year, $6 million contract through 2018) and the club’s payment to San Diego from the Matt Kemp trade. I still haven’t gotten an answer one way or another whether Kemp’s number is the $3.5 million the Dodgers are paying in 2018 or an average of what they will have paid from 2015-2019 ($6.4 million). For now, we’ll keep it at $3.5 million.

The Dodgers are already over $200 million for 20 players on the 40-man roster, but that also includes Kazmir, who last pitched in the majors in 2016. Filling six more active roster spots at salaries somewhere near the minimum salary of $545,000 would add another $3.5 million roughly to the total, putting the Dodgers at approximately $204 million.

That’s over the luxury tax threshold of $197 million, and it’s also before any other moves are made.

Escalating costs

With the new collective bargaining agreement, there are now extra tiers of penalties for exceeding the luxury tax, more punitive as the payroll increases.

• For teams $20 million over the threshold, there is an extra 12% surcharge
• For teams $40 million over the threshold, there is an extra 45% surcharge (42.5% for first-time offenders)

That means that for the Dodgers in 2018, any payroll above $237 million will be taxed at a 95% rate, so each marginal dollar added is nearly doubled.

As an example, if the Dodgers have a $250 million payroll next year, they would pay...

50% on the amount from $197 million to $217 million: $10 million
62% on the amount from $217 million to $237 million: $12.4 million
95% on the amount above $237 million: $12.35 million
Total tax: $34.75 million

There is also one more punitive cost to exceeding that highest threshold, beginning in 2018. Teams that are in that highest tier will see their first draft pick moved back 10 places.

Each of these penalties have some monetary value, to be factored in as a cost before considering each potential deal. It doesn’t necessarily mean the Dodgers will avoid such deals, just that the current collective bargaining agreement makes things a little more costly for doing so.