Nationals Baseball: Payroll vs Luxury Tax

Wednesday, October 03, 2018

Payroll vs Luxury Tax

The Nats roster for 2019 is a mystery right now. All we know is that the Nats would like to get under the luxury tax threshold for next year, which stands at 206 million. They wanted to do it this year but even with the sell-off couldn't quite make it so in January they will be paying a tax.

The tax they pay won't be a lot. Much like the U.S. income tax, you pay based on the money made in each bracket, not the overall amount you make. In baseball there are only two brackets, under and over, and the under pays no tax. The over pays an increasingly larger amount 20% then 30% then 50% depending on how many years they've been over in a row. It resets once you get back under. So for an example if the luxury tax threshold is 200 million and the amount of yours that counts against the luxury tax is 210 million and this is your first year over you would pay 2 million dollars

(210-200) * 0.20

If it was your second year you'd pay 3 million, if your third or more 5.

The Nats will barely squeak over the tax so even though this marks year number 2 going over they are going to pay 30% on some small number. A couple million over maybe so a few hundred thousand in taxes. A lot for us, not that much for the Lerners.

If it's not a lot why do the Lerners want to be under so badly? The WaPo covered this pretty well a few weeks ago. Money saved is money saved. You get that tax amount reset in case you want to spend more later. You get better compensation for free agents leaving. The system is set up to try to get teams not to spend much, and it works for the most part.

Where do the Nats stand for next year? The luxury tax is not as simple as the amount paid out because it includes numbers we aren't really privy to and it doesn't care about your deferred money. For most teams that's not going to be a big deal. For the Nats it's everything.

Let's take Scherzer's contract. He signed a 7 year deal for 210 million total. It wasn't just salary. It was 160 in salary and 50 million in signing bonuses. Salary has to be defined within the years of the contract and Scherzer's was 10, 15, 15, 15, 35, 35, 35.  (2019 is the first 35 year). Even though they need to be defined like this they don't have to be paid like this and the Nats, as you know have deferred a bunch. Max's actual salaries are 10, 15, 15, 15, 0, 0, 0 (end of contract), 15, 15, 15, 15, 15, 15, 15. This would suggest that Max is getting paid nothing this year but that's not true. The contract stipulates the 50 million is to be paid out as such 5, 0, 0, 0, 15, 15, 15.

You can see here what the Nats did in effect. They gave Max a 15 million dollars a year for 14 years.

But neither the payroll (I guess for actual tax purposes) or the luxury tax sees it this way. For payroll Max is making what is defined in the contract - originally noted as 10, 15, 15, 15, 35, 35, 35, with the deferred amounts adjusted for reduced value** plus the 50 million spread out over those 7 years. that's 7+ million a year so it ends up being like 17, 22, 22, 22, 37+, 36, 34+

Luxury tax is easier as it has an equal value for each year. For Max's contract that would be 28.7 million. But as you may notice that 28.7 million times 7 years doesn't get you anything. Not the original value 210 million, nor the adjusted present-day value of like 190 million if you add up those payroll numbers. It's kind of like a half-way point between the two but I don't know. It uses a different methodology to calculate the annual salaries.

Anyway I'm getting in the weeds here. Max and Stras themselves cost like 54 million toward the luxury tax. Zimm and Eaton's AAV adds another 17. Doolittle himself, if I have this right, will throw in 6 million (the entirity of his option - which isn't factored into AAVs because it's not guaranteed) Kendrick 3.5. That's 80+.  Arbitration guys - which include Rendon - add their annual salary about 30 million. Let's say 110. So do the pre-arb guys, another couple million. 112? Someting like that. Let's say 110-115. Then you factor in medical benefits (yep this is part of it and no I don't know exactly but 15 million is a conservative high-end guess) so 125-130 is set.  The Nats have 75-80 million to spend for next year while still being under the threshold.  Could you fit Bryce and other fixes? Yes.

If Bryce's AAV is 30 then you have another 45 or so to spend. But that adds up quick. A very good starting pitcher (think Kuechel or Corbin), a catcher (Grandal) and you are already at 35 ish without doing anything to a pen that's just Doolittle. Can you fix hat for 10 million? AND the Zimm back-up that costs you a few million each year the last two years but you definitely needed?  You get really close. And the thing is - if you are close and you start picking people up at the trade deadline? Those costs come back at you. So if they want to be under AND want to have any flexibility for late season moves they have to stay a good 10 million under. This means Corbin-Grandal becomes Happ-LuCroy.

Assuming the bench and pen costs about 15 million to just fill with decent talent and you want that cushion you have 50-55 million to play around with to finish up this team. This is what the Nats are looking at going into the off-season.



*Why do a signing bonus instead of just paying him like this? I don't know. Some sort of tax thing probably. 

** what does this mean? It means that MLB says - well given inflation you aren't paying him 105 over those last three years it's more like 87 - and if we adjust that for each year depending on when you pay them out exactly you get salaries of 30+, 28+, and 27+  so 10, 15, 15, 15, 30+, 28+, 27+

25 comments:

blovy8 said...

It's pretty much why you have to trade propsects if Harper stays.

Anonymous said...

If Bryce stays, they'll need to shed some salary. Eaton at $8 mil and MAT in arbitration are the most obvious places. Salary is probably why they'd have to choose to keep Robles rather than Eaton if Bryce resigns even though Robles has more trade value (another reason to keep Robles over Eaton is defense).

Ryan said...

MAT's gotta be gone, right? Probably Eaton too. I think we see a lot of Stevenson and Sanchez on the bench next year plus that Zimm back up. Could Holland be cheap enough?

Froggy said...

@Annon, Not sure I buy the either or with Robles and Eaton. Why do you have to give up a 'known' Eaton for the prospective Robles?

G Cracka X said...

Really good stuff as usual, Harper. I didn't fully appreciate the difference between payroll and luxury tax calculations. Thanks!

Anonymous said...

Froggy, the either-or with Robles and Eaton arises only if the team signs Bryce. They both stay if the team doesn't sign Bryce. One needs to go if the team does sign Bryce (I suppose they could keep Robles in AAA but that wouldn't make sense), and Eaton is probably the man to go because of salary reasons.

Todd Boss said...

Not to link hijack, but we did this same luxury tax analysis here (http://www.nationalsarmrace.com/?p=15382) and arrived at more conservative numbers to work with for FA market this coming off season. My work is shown in the post but essentially we came up with these salary projections for 2019:
- $90M in known payroll already
- $35M for arb-eligible players (which might be light)
- $7.2M to cover the rest of the pre-arb 40-man players
- $14.5M estimate for player benefits (an estimate i got from Cots);
== $146.7M.

2019 luxury tax cap is $206M, less $146.7M == $59.3M of payroll room for FAs.

If you buy Harper at $30M ... that's an awful big chunk of that $59.3M gone before addressing a single other need (starters, catcher, bullpen, bench).

Honestly ... i believe that Harper at $30M producing 4 wins (his average bWAR over his 7 seasons so far) versus the potential of Soto and/or Robles producing similar value for 1-60th of the cost is folly

Soto just put up a 3.0 bWAR season in 116 games, which projects easily above 4 wins in a full season ... and Robles was projecting as a better prospect, at a more valuable position defensively.

I'd rather allocate that money to the rest of the roster, assume that an outfield of Soto-Robles-Eaton will produce just as much as an outfield of Harper-Soto-Robles/Eaton (assuming at that point you have to move either Robles or Eaton, which itself is kind of ridiculous because both are amazingly cost effective/cost controlled players).

Froggy said...

I see you argument, but from a business perspective I'd want to get a full season return out of Eaton before making a decision to sell. Afterall, unless you trade up with him, isn't his salary sunk cost?

Froggy said...

Here's a crazy thought: what if Bryce took the qualifying offer from the Nationals?

Would the Nats be in a better position to offer a long term deal without luxery tax / cap issues presented now?

Kevin Rusch said...

The nats would definitely be in a better position, but Bryce has very very little reason to take them up on that. The QO would be ~$20M for 1 year, and Bryce is liable to get $25-30M for multiple years guaranteed, plus opt-outs if he's offered $40M somewhere. So sure, it'd be great, but it's unreasonable to even think it might happen.

ssln said...

RIP

St Louis Cardinals & Matt Adams
Chicago Cubs & Daniel Murphy & Brandon Kintzler

It is now clear that the failure of the Nats during 2016 and 2017 can be laid at the feet of Daniel Murphy. He was here for both of our playoff failures and the Cubs failure in deciding divisional game and the wild card game. Nothing could be clearer. He infected both teams.
Now before everyone goes crazy let me explain my statement because I'm certain you won't understand it. You can line facts up in such a way to prove almost a point. There has been much discussion as to why the Nats failed to make the playoffs. Injuries, the hole at catcher, the lack of a 5th starter and our wonderful bull pen seem to predominate. But it is never quite that simple.
Here are some other things to consider. An inability to play fundamental baseball. An inability to hit with runners in scoring position. An inability to handle pressure, AKA a lack of toughness. A lack of trust in a rookie manager. My point is that there were multiple reasons for the Nats failures this year and they go beyond the obvious. We just don't know the degree to assign to all the various problems that plagued the team.
So what does this have to do with Bryce. Bruce hit about 215 before the All Star break and about 310 afterwards. What changed? He won the Home Run Derby. Give me a break!
One of the potential problems with the season was that before the ASB Bryce was swinging for the fences on every pitch. Got to get those numbers in a contract year. He left a ton of runners on base early on. After the break, he magically found left field and a higher batting average.
Wouldn't it have been nice if he had done that all year...and where would the Nats have finished if he had? We will never know because you can't rewrite the season.
The team can't afford Bryce and plug all the holes. Teams reach that conclusion about the 5th year of a 10 year contract with players like Bryce. The only question is whether the Nats will realize that now.

Harper said...

Todd - from my understanding (and I could be wrong) that the luxury tax takes into account AAV not actual salary - that would account for the 10 million difference between your known payroll and mine. The arb guys and pre-arb guys I probably underestimated there off the top of my head. So 135ish? Maybe like 70 million to officially play with? But like I said you don't want to be right at it if you are afraid of going over. You gotta be a good 10 under so if you need something at the trade deadline you can get it. So really I see it as 60? And Bryce taking up half of that... yeesh that's not much to fill in like a half dozen needs for quality (not to mention needs for just filler)

Josh Higham said...

I think if you sign Bryce, you have to be OK with paying the tax at 50% for a year and try to get under later. If the Lerners really, really care about the luxury tax, they probably don't really, really care about winning, and that's fine. But if you really, really care about winning, I think you've got to sign Bryce and pay the tax.

Froggy said...

Why not a reverse mortgage type of thing with Bryce: one year at $30mm and then a mutual opt-out portion (admittedly I don't know what that would look like...). My point is give Bryce the highest AAV for a year and then decide. If he really did turn it around after the ASB then a combination of Bryce Soto, Robles, and Eaton for a year will validate or disprove the experiment.

NavyYardSteve said...

FWIW, since the Yankees were trying to get under the luxury tax this year, one of the Yankees blogs took a stab at tracking payroll through the 2018 season. I think the link below has a pretty good methodology of tracking it while also explaining it layman's terms (or at least the layman who is a baseball fan who cares enough about tracking payroll calculations).

http://riveraveblues.com/2018/10/yankees-payroll-164320/

NavyYardSteve said...

Does Cot's Contracts or MLB Trade Rumors or one of those sites do projected arbitration figures that estimate how much arb-eligible players like Rendon, Roark, et al will make next year?

Anonymous said...

The luxury tax isn't the big deterrent, it's the less compensation you receive for losing a player who received a qualifying offer and the penalties you get for signing someone who received one. They get worst each year and that's why the Yankees and Dodgers got under the cap.

Anonymous said...

@NavyYardSteve - MLB Trade Rumors does a projected arb figures annually. Last year it was released on Oct 10 so we should be able to get a better idea soon

Johnny Callison said...

With such huge money already doled out to Max and Stras and Harper leaving this year, it makes even less sense that the Nats didn't do an "all-in" kind of thing in July when they realized they had so many holes--they should have gone after Hamels or Happ and a second baseman like Cabrera at the very least, and one more BP piece.

They probably should have done more to improve at catcher and SP in the off-season, frankly, due to a declining Roark, a notoriously inconsistent (and probably lucky in 2017) Gio, and a non-existent #5. And of course, the rookie manager thing didn't work, especially on a team with so many injuries.

The payroll issues really come into play for 2019, so they should have gone for it this year.

The Lerners are trying to thread the big market/small market needle and it's not quite working, at least not well enough to advance in post-season.

ssln said...

RIP

St Louis Cardinals & Matt Adams.
Chicago Cub & Daniel Murphy & Brandon Kintzler.
Oakland Athletics & Shawn Kelley.

Froggy said...

If for no other reason this is why Boston must beat the Evil Jankees.

http://www.espn.com/mlb/story/_/id/24894401/oakland-athletics-find-fan-doused-beer-send-care-package

You stay classy NY!

G Cracka X said...
This comment has been removed by the author.
G Cracka X said...

I don't think the Starting Pitching Plan for 2018 was all that different from the Starting Pitching Plan in 2017.

At the end of 2017, here are your top 6 Nats Starters by WAR:

Max
Stras
Gio (3.4 WAR, which is FIP, not ERA, based)
Tanner
Ross
Cole

At the beginning of 2018, here are your top 6 Nats starters:

Max
Stras
Gio
Tanner
Cole
Hellickson

Cole did poorly, so he was promptly traded. Hellickson was fine for a 5th starter, but got injured three times. Max was even better in '18. Tanner was maybe a hair worse.

So that leaves Stras and Gio. Gio was projected for about 2.8 WAR, and ended up with 2. Unfortunately, 25% of his 2 WAR was earned after he was traded.

The biggest impact came from Stras. He was projected for around 5 WAR, but only produced 2.2. Unlike in '17, when he came back from his injury in '18, he got hurt again and then after that, his stuff wasn't the same (at least in terms of FB Velo)

Huzzah! said...

I will be very pleased if the Braves can’t manage to score a single run in the postseason. Very pleased

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