- As baseball's competitive balance tax increasingly functions as a salary cap, Los Angeles found a money-moving deal that gives them options for free agency.
One year ago this week, baseball was enjoying a blockbuster trade between the Los Angeles Dodgers and Atlanta Braves. The Dodgers had sent off Adrian Gonzalez, Brandon McCarthy, Scott Kazmir and Charlie Culberson in exchange for Matt Kemp—but none of those names were especially important. The trade wasn’t about either team's players or performance. Instead, the trade was about money. The Dodgers had exceeded the threshold for the competitive balance tax for five years in a row, paying a higher rate with each passing year. They weren’t about to go over again. Thanks to the Kemp trade, they didn’t. In 2018, the team stayed under the threshold and, in doing so, refreshed its penalty tax rate back to the level of a “first-time payor” for the next time it goes over the limit. The move wasn’t just about getting under for 2018. It was about the future.
“I hadn’t noticed, is there a big free-agent class next winter?” Dodgers President of Baseball Operations Andrew Friedman quipped at the time.
Well, next winter is here. And Los Angeles has welcomed it almost exactly as did last year—with a money-moving deal involving Kemp. On Friday afternoon, the team sent Kemp, Yasiel Puig, Alex Wood and Kyle Farmer to Cincinnati, along with a few million in cash. The return? Pitcher Homer Bailey and two prospects, Jeter Downs and Josiah Gray. Even with sending that extra money and taking on Bailey’s $17.5 million 2019 salary, Los Angeles is still saving some room under the threshold: $14 million, or roughly thereabouts.
The Dodgers won’t necessarily stay under the threshold; if a big free agent is on the way (Bryce Harper, anyone?) they won’t. But they now have plenty of options that don’t involve going over, and no matter what happens from here, the deal is still representative of a strategy that the team has been sharpening in recent years. It’s the art of moving money—relatively commonplace in the salary-capped land of the NBA and NHL, but far less popular in MLB. With free agency approaching after this season for Puig, Kemp and Bailey, this deal especially comes across as something straight from basketball: a swap fueled by the power of expiring contracts.
Baseball’s competitive balance tax is not a salary cap. It just increasingly seems to function like one. The most recent collective bargaining agreement installed harsher penalties for teams that repeatedly spent over the threshold; since then, clubs have been less willing to cross the line. The 2012 CBA taxed each dollar above the threshold at 17.5% for a club’s first year going over, 30% for the second consecutive year, 40% for the third and 50% for the fourth or beyond. The 2016 CBA changed that to 20% for the first year, 30% for the second and 50% for the third—plus a tax on top of that for teams that bypassed the threshold more than $20 million. If a team goes over the line by a total between $20 and $40 million, they face a surtax of 12%. (Think 32% for first-time payors, 42% for second-time payors, etc.) If a team goes over by more than that, the penalty is even steeper. Going $40 million or beyond over the threshold brings a first-time penalty rate of 62.5%, a second-time rate of 75%, and a third-time rate of 95%. In 2018, a new provision kicked in with an additional penalty for teams in this spending bracket, causing them to lose 10 spots from their highest draft pick for the following year if their pick is outside of the top six.
If these recent penalty rates sound like a crippling deterrent—well, yes and no. Look at the Red Sox, who had baseball’s highest payroll last year, at $239.5 million. This put them past the dreaded mark of $40 million beyond the $197-million threshold; their top draft pick’s standing was booted down, and they were taxed in the highest bracket. Their final tax bill was a terrifying…$12 million. (Remember, teams aren’t taxed on total spending, but on spending over the threshold.) It’s not nothing, and yet, in the grand scheme of a major league club’s payroll, it’s also not that much. It’s a lower-mid-range free agent. It’s less than half of the penalty that Boston paid to sign Yoan Moncada. It’s the cost of doing business now—a cost that certainly paid off here, with a championship and all of the ensuing money brought in—and while it’s higher than it used to be, it’s not high enough to be a hard-and-fast roadblock. Or, at least, it shouldn’t be.
Yet teams are treating it like one. At November’s GM meetings, Jeff Passan of Yahoo Sports detailed just how much owners now see the luxury tax as a de facto salary cap. The Dodgers’ embrace of contract shuffling shows that as much as anything. Perhaps the team, with its recently cleared space in the outfield, will go over the threshold again by going in on Harper. Perhaps it won’t. It can go after a trade for J.T. Realmuto or Corey Kluber, or sign a free agent like A.J. Pollock, and still stay under the limit—opportunities that now feel just as likely, if not more so, than going after the big-time expense of Harper.
As for the Dodgers’ newly annual tradition of trading for tax purposes? It seems likely to grow more common across the game, rather than less. The current system’s restrictions have created an environment where moving money isn’t simply a means to an end. It’s an end in and of itself—and it’s one that no one has chased with as much creativity as the Dodgers.