The luxury tax is always a topic that is brought up whether talking about player movement or 2019. This article will review the luxury tax rules in play for the Dodgers in the near future.

Luxury Tax Basics

The Collective Bargaining Agreement (CBA) agreed upon after the 2018 season for luxury tax (also known as the Competitive Balance Tax – CBT) purposes is as follows:

  • The thresholds for being taxed for the duration of the CBA are:
    • 2018: $197 million
    • 2019: $206 million
    • 2020: $208 million
    • 2021: $210 million
  • There are various penalties for exceeding the CBT that begin at 20%. The number changes based on the number of consecutive years the threshold is exceeded.
  • The penalties reset when a team stays under the threshold.
  • A team that exceeds the threshold by $40 million or more are penalized in the draft. A team not in the top 6 of the draft will have their first pick moved back 10 spots.
  • Penalties are calculated based on the Average Annual Value (AAV) of a multi-year contract.

CBT Ramifications For 2018

The Dodgers are repeat offenders of the competitive balance tax threshold and have paid massive penalties. According to USA Today the Dodgers paid almost $150 million in penalties for the last 5 seasons, not including 2018. The Dodgers want to reset their penalties in 2018. The Dodgers desire to reset was the main reason some hoped for moves weren’t made, including trading for Giancarlo Stanton or re-signing Brandon Morrow.

If the Dodgers do not reset in 2018 they will be facing a 50% penalty for every dollar spent over $197 million. As repeat offenders, they’d still be on the hook for a 50% penalty in 2019. According to Eric Stephen at TrueBlueLA the Dodgers are about $6.5 million under the CBT threshold, but that doesn’t include about $4-$5 million in incentives for Kenta Maeda. Any last minute trade before the August 31 post-season roster deadline would affect the threshold.

The Dodgers will meet their goal of resetting their tax penalties in 2018 unless something crazy happens in the next few days.

CBT Ramifications for 2019

According to COTS (see second tab) the Dodgers have $123 million committed in contracts for 2019. This does not include players who are under Dodgers control as either pre-arbitration or arbitration eligible players or any contractual incentives. There is almost $83 million available to fill out the roster with players under control, incentives, trades and free agents.

May 17, 2017; San Francisco, CA, USA; Los Angeles Dodgers starting pitcher Clayton Kershaw (22) throws a pitch during the sixth inning of the game against the San Francisco Giants at AT&T Park. Mandatory Credit: Ed Szczepanski-USA TODAY Sports

Clayton Kershaw is eligible to opt out of his contract that would free up another $30.7 million under the CBT threshold. That would give the Dodgers about $113 million under the threshold. I would hope the Dodgers would want to keep Kershaw, so one idea could be to sign him to a long-term contract with a lower AAV than the existing $30.7 million. This writer wants Kershaw to not opt out of his contract.

Building A 2019 Roster

Other free agents of the high-end type include Manny Machado, Bryce Harper and many on the wrong side of 30 years old. Many have said that this is one of the best free agency classes but I don’t see it. Massive contracts will not be given by the Dodgers for players projected who only have 1-3 years left of high-end productivity. Kershaw, if he opts out, is an exception. LA will not, easily, let him leave. Both Harper and Machado will be over $30 million per season for 5 to 10 years. Yasmani Grandal, Hyun-Jin Ryu, and Brian Dozier are other possible free agents. Key arbitration candidates include Corey Seager, Alex Wood, Joc Pederson and Yasiel Puig. Keeping most of the players from 2018 into 2019 will be costly.

Summary

The Dodgers will accomplish their goal of resetting their CBT penalties in 2018. In 2019 they will be to spend almost $246 million in contracts without incurring a draft pick penalty. It has been upsetting to many fans that the Dodgers would not exceed the CBT threshold in 2018. Many of us understand the strategy but they’d better get back into the high-end spending or the fans will be, rightfully, very upset. The bullpen suffered the most with the more controlled spending in 2018. The only way I see them not exceeding the threshold is if they are forced by MLB to continue to fix their debt.

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