Ever since the Dodgers closed on tentative deals with Kenley Jansen and Justin Turner yesterday (along with Rich Hill earlier), there’s been this notion that the previously mentioned concerns about the luxury tax and debt were bunk.
So much for idea that luxury-tax concerns would restrain #Dodgers: Hill, Turner and Jansen expected to go for almost $200M combined.
— Ken Rosenthal (@Ken_Rosenthal) December 12, 2016
While that likely wasn’t Ken Rosenthal’s primary point there, many people are somewhat understandably running with the fact that the Dodgers just spent about $200 million in free agency to say they still don’t care about the luxury tax. However, the new luxury tax rules won’t entirely apply in 2017, as Bill Shaikin of the Los Angeles Times pointed out.
What about those supposedly stiff luxury-tax penalties in the new collective bargaining agreement?
They don’t fully kick in until the 2018 season, so the Dodgers are taking advantage of a one-year window in which they can run the same $250-million payroll as they did this year and pay only another $3 million in taxes.
For 2017, the luxury tax will not be assessed at the rates announced in the outline of the new collective bargaining agreement. The rate instead will be phased in — at an average of what the team would have paid under the old system and what it would pay under the new system.
The Dodgers ran an approximately $250-million payroll — for luxury-tax purposes — last season. The tax was 50% on every dollar over $189 million. That’s $30.5 million.
With the tax structure in the new labor agreement — the 50% on every dollar over $195 million, plus 12% on every dollar between $215 million and $235 million, plus 45% on every dollar over $235 million — the Dodgers would have been charged $36.65 million next season.
The difference is $6.15 million. Split that — $3.075 million — and add it to $30.5 million. Thus the Dodgers’ luxury tax payment for 2018 would be $33.585 million — basically, another $3 million over what it will be this year, based on the same $250-million payroll.
And the draft penalty — a team more than $40 million over the tax threshold moves down 10 picks in the first round — does not kick in until 2018.
But even if that weren’t true, the three new signings don’t necessarily conflict with the goal of reducing the payroll to something more sustainable. I made the case for re-signing trio in the middle of last month, specifically because I thought it was a rational way to remain in the hunt for a World Series while also maintaining long-term goals.
While the three free agents will add around $48 million to the payroll in the coming years, the team still projects to have about the same payroll in 2017 as in 2016, as Shaikin pointed out. Additionally, the team will drop $41 million (Andre Ethier, Carl Crawford, Alex Guerrero) next year with no key players hitting free agency and mainly arbitration costs to add. Then the following year, the team will drop another $52 million (Adrian Gonzalez, Brandon McCarthy, Hyun-Jin Ryu, Erisbel Arruebarrena, Andre Ethier buyout, Howie Kendrick deferred money, Dian Toscano), which will spike to $88 million when Clayton Kershaw opts out. By that point, the Dodgers will likely have a replacement for A-Gon lined up (either Cody Bellinger or they could move Justin Turner), and so they would just need to re-sign Clayton Kershaw and (maybe?) Yasmani Grandal in order to keep the core intact yet again. Even if Kershaw gets close to $40 million, the Dodgers could still potentially have room for a mega-deal with somebody like Manny Machado and get below the luxury tax threshold. Additionally, they could always move Yasiel Puig and his $7 million in salary, and they’ve been rumored to be attempting to off-load Scott Kazmir or Brandon McCarthy’s contracts as well.
Point being, these new deals can still work hand-in-hand with the Dodgers long-term goals of reducing the payroll to at least avoid the harshest luxury tax penalties, which they will want to do since that has consequences in player acquisition (draft pick) aside from just money concerns. So the new contracts doled out don’t indicate that the other reports about the luxury tax or the stated payroll goals were false, rather the Dodgers are just situated to shed a lot of non-essential contracts in the coming years, which means spending now to retain the core of the team in order to compete in the present makes a lot of sense.