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Dodgers will be luxury tax payers for a while

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The Dodgers’ December shopping spree saw them sign the top two free agents on the market in Shohei Ohtani and Yoshinobu Yamamoto, as well as trading for Tyler Glasnow, who was signed for five years as part of the deal. These moves shift how we talk about the Dodgers and the competitive balance tax.

It’s no longer a matter of if the Dodgers will pay the luxury tax, but how much tax they will pay for the foreseeable future.

The timing of this spending makes sense, considering the Dodgers coveted both Ohtani, the two-way superstar who dominated the last three seasons, and Yamamoto, the 25-year-old ace with a minuscule 1.42 ERA over the last three seasons in Japan.

They are also capitalizing on the already-in-house excellence of Mookie Betts and Freddie Freeman, who finished in the top five in National League MVP voting in each of the last two seasons. Betts is signed through 2032, Freeman through 2027. Yamamoto’s deal runs through 2035, but he can opt out after 2029. Ohtani is signed through 2033, and Tyler Glasnow is signed through 2027, plus dual options for 2028.

That quintet of Ohtani, Betts, Freeman, Yamamoto, and Glasnow are all signed together for at least four more years, and their salaries for competitive balance tax purposes total $150.7 million annually.

The first CBT threshold for 2024 is $237 million, then $241 million in 2025, and $244 million in 2026. The tax threshold for 2027 will be determined by the next collective bargaining agreement.

The Dodgers, who have paid a combined $84.5 million in competitive balance taxes over the last three seasons, already have an estimated $300.9 million in CBT payroll for 2024, with about a month and a half still remaining in the offseason. That includes the not-yet finalized one-year, $23.5 million contract for outfielder Teoscar Hernández. That would put the Dodgers past the fourth threshold of $297 million this season, which incurs a tax of 110 percent on everything over, plus the $41.4 million in taxes already incurred for the payroll from $237 million to $297 million.

In other words, each additional move the Dodgers make in 2024 that adds payroll will actually cost more than double that amount.

It’s important to note that competitive balance tax payroll doesn’t just include major league salaries. There are also the minor league salaries for players on the 40-man roster, plus the $1.67 million annually each team contributes into the $50 million pre-arbitration bonus pool. There’s also accounting for player benefit costs, an amount paid equally by each team. In 2023, for instance, player benefit costs came to $17,090,029 per team. That’s right around $20 million in “other” costs that are included in payroll for competitive balance tax purposes.

Let’s say, for argument’s sake, that the Dodgers wanted to get under the competitive balance tax in one of the next four years. Outside of trading one of Betts, Freeman, Yamamoto, Glasnow, or Ohtani (who has a no-trade clause), the Dodgers would have roughly $70.3 million to spend on the other 21 active roster spots in 2025, and about $73.3 million in 2026.

In 2025, Chris Taylor and Max Muncy are already under contract for a combined $27 million in CBT payroll. Will Smith will likely make eight figures in his final year of salary arbitration, and the quintet of Evan Phillips, Brusdar Graterol, Tony Gonsolin, Dustin May, and Gavin Lux will likely combine to make north of $25 million through arbitration.

In 2026, Gonsolin, Phillips, Graterol, Lux, and James Outman will all be arbitration-eligible, plus maybe Bobby Miller (currently 132 days of major league service time) as a Super Two as well. This would be the first year the Dodgers might conceivably get under the first tax threshold ($244 million), but that would require a high hit rate on various young-ish players – Emmet Sheehan, Gavin Stone, Miguel Vargas, Michael Busch, et al – plus good health for Ohtani (on the mound), Glasnow, and Yamamoto. And that’s before considering any free agents or trades the Dodgers might also add over the next two offseasons or the remainder of this offseason.

Considering the team’s pledge to build a winning team around Ohtani, whose nominal $700 million, 10-year contract includes $680 million in deferred salary, such that he “only” counts as $46.08 million annually for CBT purposes, it’s unlikely the Dodgers are done adding players for the foreseeable future.

“I figured maybe if I defer as much money as I can, that’s going to help the CBT and that’s going to help the Dodgers to sign better players and make a better team,” Ohtani said at his introductory press conference on December 14, through interpreter Ippei Mizuhara. “I felt like that was worth it, and was willing to go in that direction.”

After committing $700 million to Ohtani, the Dodgers over the next four weeks signed Yamamoto to the largest contract ever for a pitcher ($325 million), traded for Glasnow and signed him for $136.56 million, and signed Hernández for $23.5 million. Add in re-signing Jason Heyward and Joe Kelly makes for a $1.2 billion offseason for the Dodgers.

For several years, team president of baseball operations Andrew Friedman has referred to the competitive balance tax as another cost to be factored in, rather than necessarily a restriction.

“We know there are some added costs associated with it, which is not ideal, and it is a cost,” Friedman said in 2021. “But we feel like with where we are and the team we have, the reward outweighs that.”

The Dodgers did avoid paying tax in 2018 and 2019, years that included a pennant and a 106-win campaign. They also avoided the luxury tax in 2020, but only because David Price opted out of playing that season during the COVID-19 pandemic.

But they’ve paid the competitive balance tax in each of the last three seasons, and will likely pay the tax for the next three or four years as well, at least.