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How much does resetting the luxury tax actually save?

Putting the Dodgers’ offseason in perspective

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Division Series - Workout Day Photo by Harry How/Getty Images

We are a little more than a month into what has been a quiet offseason for the Dodgers. But the talk surrounding the winter has revolved less around the moves the team still very much needs to make, in lieu of how much money they choose to spend to fill the holes.

The Dodgers haven’t outright said they plan to remain under the competitive balance tax threshold — and why would they? — but have also laid the groundwork of why they might in the process.

“If money is what is needed, we’ll certainly do that, as we’ve shown time and time again,” team president and CEO Stan Kasten told Bill Plaschke of the Los Angeles Times in November. “If we think we have kids who need time to play up here, I’m sure we’ll do that as well.”

“Going over [the threshold] is something we’ve done with regularity, and it adds cost. All of that gets factored in. It’s never been about, ‘Hey, we have to get under.’ It’s been about putting together the most talented team together,” Dodgers president of baseball operations Andrew Friedman said after non-tendering Cody Bellinger. “Obviously, we’ve been aggressive the last few years, and not just in terms of payroll, but in terms of taxes paid as well. All of that gets factored in.”

After all the costs have counted, no major league team spent as much as the Dodgers in the ten full seasons of the current ownership group. They’ve had the top competitive balance tax payroll in six of the 10 seasons, and will likely be second to the Mets in 2022. This year’s numbers haven’t been finalized yet, but Ronald Blum at Associated Press in September reported the expected totals.

Dodgers competitive balance tax payroll history, 2013-2022

Year CBT payroll Luxury tax Payroll + tax 3-year total 5-year total
Year CBT payroll Luxury tax Payroll + tax 3-year total 5-year total
2013 $243,234,050 $11,415,959 $254,650,009
2014 $277,737,083 $26,621,125 $304,358,208
2015 $298,320,297 $43,728,119 $342,048,416 $901,056,633
2016 $252,551,634 $31,775,817 $284,327,451 $930,734,075
2017 $253,633,893 $36,209,572 $289,843,465 $916,219,332 $1,475,227,549
2018 $195,039,730 $0 $195,039,730 $769,210,646 $1,415,617,270
2019 $204,918,530 $0 $204,918,530 $689,801,725 $1,316,177,592
2020* $204,653,651 $0 $204,653,651 $604,611,911 $1,178,782,827
2021 $285,599,944 $32,649,965 $318,249,909 $727,822,090 $1,212,705,285
2022 $289,500,000 $29,025,000 $318,525,000 $841,428,560 $1,241,386,820
*2020 is for a full season (not actual 60-game payouts) 2022 numbers are estimates from Associated Press

The 2020 numbers above are what would have been over a full season, rather than the truncated 60-game campaign, so we can have an apples-to-apples comparison with the other years.

I added running totals as a reference to 2021, when the Dodgers dove back into the deep end of the spending pool. “I think it’s difficult at any one moment in time to look at our payroll, and to deduce too much from it,” Friedman said at the time. “It is a three- to five-year kind of process that we look at, the ebbs and flows of that. But the thing that has been constant throughout is winning.”

You can see the evolution of the Dodgers over the last decade. The first half was literally spent using money to keep up at the major league level while building up the organizational infrastructure. The Mets under Steve Cohen are doing this now, with an offseason spending spree that saw them sign Justin Verlander, Brandon Nimmo, Edwin Díaz, Kodai Senga, José Quintana, and David Robertson. Per The Athletic’s Will Sammon, the Mets’ 2023 payroll for CBT purposes projects to be $345 million, which would incur an additional $75 million in tax.

The Dodgers weren’t quite at that level in 2015, with $342 million in payroll and competitive balance tax combined, but maybe they were, considering they also spent a combined $92 million during the 2015-16 international signing period in bonuses and taxes. Since the 2017 collective bargaining agreement, that option to spend freely was closed with a hard cap on international free agents.

As the development pipeline has improved, the Dodgers have cut back at times in spending, to a point. They did not pay any luxury tax from 2018-20 — though they would have in 2020 had David Price not opted out of playing that season — but still had top-five payrolls in all three seasons. In 2018, the payroll was less than $2 million shy of the CBT threshold, and in 2019 the payroll was just over $1 million shy.

You can see why this method might be preferred by a team, after all owners are in this to make money, and the Dodgers basically had the best of both worlds under relative austerity. They reduced payroll and still made the World Series in 2018 then won 106 games in 2019. To date, the Dodgers cutting back on spending hasn’t meant a lack of competitiveness.

As luxury tax payors in 2021 and 2022, the Dodgers would face increased tax rates should they exceed the $233-million threshold in 2023.

2023 competitive balance tax rates

2023 threshold 1st-year payor 2nd-year payor 3rd-year payor
2023 threshold 1st-year payor 2nd-year payor 3rd-year payor
$233-253 million 20.0% 30.0% 50.0%
$253-273 million 32.0% 42.0% 62.0%
$273-293 million 62.5% 75.0% 95.0%
over $293 million 80.0% 90.0% 110.0%

Free agent Justin Turner said of the team in an interview on AM 570 in November, “There’s all this crap about the luxury tax and payroll and paying a gajillion dollars in taxes because the payroll’s been high the last few years. I think they’re trying to figure out what they need to do, and prioritize what’s best for them.”

Should the Dodgers avoid paying tax in 2023, their tax rates would restart once they decide to spend more freely the next time. As someone who lived through the “Dodgers are just resetting for Bryce Harper” years, I’m not yet willing to fully buy that the team is solely focusing on Shohei Ohtani once he’s a free agent after next season. So for now, let’s just speak in general terms.

The 2023 CBT threshold is $233 million, and in 2024 it increases to $237 million.

The Dodgers’ estimated CBT payroll for 2023 is $184.2 million, with arbitration estimates and roster fill-ins factored in. That does not include the suspended Trevor Bauer, but the chance of that penalty getting reduced could add up to $34 million to next year’s total, and render this granular discussion moot.

They will almost certainly acquire at least one more starting pitcher, and very much need to add at least two or three position players even if only for depth (but likely for larger roles), and can sort out the positions later.

Let’s say the Dodgers decide to spend $500 million total in payroll in the next two seasons combined. If they spend right up to the limit but don’t go over ($233 million) in 2023 but then spend $267 million in 2024, they’d pay a total of $7.2 million in tax. If they spend $250 million in 2023 and $250 million in 2024, the total tax would be $15 million ($8.5 million in 2023, $6.5 million in 2024).

If they plan to go right back into the deep end of spending in 2024, the difference is a little higher. Spending $233 million next year and $287 million in 2024 would mean a $13.6-million tax. Shifting the split to $253 million/$267 million would incur a total tax of $26.2 million.

While an extra $12.6 million that doesn’t bring back an extra player is inefficient, it still is just a cost to be added to the pile. This offseason will be spent figuring out if the benefits of such decisions are worth it.