Phillies eyeing Luxury Tax loophole for 2020
While the Phillies faithful fret about their rivals for the National League East crown, general manager Matt Klentak is exploring the possibilities of absorbing a 20 percent tax rate for exceeding the CBT (competitive-balance threshold).
Robbing tomorrow:
Philadelphia Phillies management must now become creative to be between the CBT and under the second penalty level of $228 million AAV (average annual value). Basically, a handful of deep-pocked teams are considering this approach to be more competitive. And the Fightins are one!
IN OTHER WORDS: “I’m looking for loopholes.” (Said when caught reading the Bible.) – W. C. Fields
When fans have more information, their conclusions change accordingly. And three categories provide the answers: methods, voices and competition. So, having 70 percent of one, 30 percent of another and 20 percent of a third equals 120 of 300 or only 40 percent of the totality.
As you probably noticed during the Winter Meetings, one organization didn’t sign every superstar. No, three franchises paid top dollar for three top-tier stars: the high-bid strategy. And the New York Yankees have surpassed the top penalty ceiling of $248 million AAV by $13.56 million AAV.
Besides the Phils, two clubs are flirting with exceeding the CBT. Meanwhile, two organizations may trade some commitments to decrease their annual penalties. But if they please their supporters, the parity-oriented MLB might add another level of draft deterrence and/or tax rate.
Realistically, spending money isn’t a problem for deep-pocketed teams. But losing draft-picking order for transcending the third limit of $248 million AAV hurts what they value: top prospects. So, some front offices are considering a one-season tax by being over $208 million AAV but under $228 million AAV.
The red pinstripes have inked two key pieces for ’20 and are now at $205.35 million AAV or $2.65 million AAV shy of the CBT line. Yes, they can exceed the $208 million AAV for a five-slot starter and two bullpen pieces, or they can swap a player or two for AAV payroll flexibility.
When the Philly faithful hear blowing through the Luxury Tax, they imagine unlimited spending, but GM-speak means only surpassing the ceiling by $15 million AAV tops ($223 million AAV). Roughly, signing three free-agent pitchers could cost $20 million AAV and increase the Fightins’ tally to $225.35 million AAV.
Voices:
If you change Phillies fans to Yankees supporters, you’ll hear similar comments. In New York, the Yanks faithful the day after inking a $324 million contract for Gerrit Cole were expressing concern for an all right-handed lineup: They want a left-handed bat with power for first base. Yes, literally, the next day!
The locals are wondering if the good guys will make additional transactions. Well, they inked Zack Wheeler to slot behind Aaron Nola and shortstop Didi Gregorius as a left-side hitter with pop to separate more right-handed stars. And they could pick up pitching at or under $10 million per arm.
Even though some franchises have the financial resources, Luxury Tax rules are there to deter unbridled spending. But their fan bases exert pressure to sign free agents and/or re-up their stars, while those deaf to reason ignore opposing arguments.
Basically, the Phils consider the tax to be empty dollars, and the Yanks believe their money is going to clubs who will win more games against them as a result during the next 162. But now New York (AL) has transcended the third penalty ceiling of $248 million AAV by being at $261.56 million AAV.
Parity’s problem is it works: The Yankees and the red pinstripes haven’t been to the World Series since 2009. Realistically, top regulars become more costly, and their salary increases push a team over the CBT. Or management trades them and/or replaces them with in-house talent.
Methods:
With the CBT, the Phillies and other organizations have employed the club-option tactic to lower their AAV. To illustrate, a player receives a $30 million pact for three campaigns or $10 million AAV, but the same deal with a $2 million buyout on a team option changes the AAV to $8 million. The buyout is for a fourth summer.
Exchanging bad contracts is another loophole to be under the CBT by taking a shot with a bounce-back candidate returning to his previous form. After all, the star received an expensive and lengthy commitment based on previous success, which can be fleeting.
Another way is acquiring a young standout or top prospect with a contract albatross for a decent return. But as the New York Mets found out last season, their new closer melted under the bright lights of Gotham. In fact, the Boston Red Sox and Chicago Cubs are considering the opposite this offseason.
To keep costs below the CBT, another strategy is to swap change-of-scenery candidates. And each franchise hopes a reclamation project will regain his prior form.
Nearing CBT’s highest level has happened with Chicago (NL) and Boston, plus both organizations are now paying the price for those decisions. Presently, New York (AL) is exceeding even the top tax rate. As for the Washington Nationals, they are again under the CBT, but they have holes at the hot corner and in the pen.
Perhaps, the Fightins will try this new method by only surpassing the first threshold of $208 million AAV and using 2021’s $210 million AAV to reset below the CBT and avoid higher penalties. For instance, a few teams could reach $223 million AAV and pay $3 million: a 20 percent tax on $15 million.
Limited competition:
For the Phillies, borrowing from 2021’s available space manipulates the CBT with a one-time tax and an AAV payroll reset a 162 later. So, the basic idea is paying $1-3 million to ink a specific free agent but then avoid a second consecutive penalty: The Los Angeles Dodgers considered this to sign Cole.
In 2019, the Cubs finished at $242.89 million AAV and received the second level tax. But they are currently at $214 million AAV and must shed $6 million AAV despite a weakened relief corps. In fact, they are listening to proposals for third sacker Kris Bryant as a retooling effort.
The Red Sox had captured 2018.’s Fall Classic but didn’t re-up their closer because they were at $242.43 million AAV. Now, they are shopping David Price, and Mookie Betts wants to test free agency. Plus they are presently at $237.45 million AAV: They fired president Dave Dombrowski following 2019’s drop-off as a result.
After missing on Cole, the Los Angeles Angels increased their payroll to $177.08 million AAV with a superstar’s inking at third base. Yes, they have the AAV flexibility to sign a starter and can add to their bullpen.
Last summer, the Nationals reached $209.03 million AAV but are now at $176.51 million AAV. And even though they could spend for Josh Donaldson, they are preceding cautiously by not adding more relievers except for re-upping Daniel Hudson to avoid the 30 percent tax for transcending the CBT again.
In a similar situation, the Dodgers hit $209.67 million AAV for ’19 but are presently at $188.97 million AAV. However, they want to re-up Hyun-Jin Ryu, and they might pick up another late-inning fireman as well. But although they considered inking Cole, they may not want another penalty otherwise.
Crossroads:
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Decision time is here for the Phillies because even trading prospects for a setup man or a critical-inning fireman will exceed the $208 million AAV ceiling. But if they move Odubel Herrera, they would have payroll space for Hudson at $6 million AAV or Dellin Betances at $7 million AAV.
Phillies 2020 competitive-balance threshold of $208 million:
- Estimates beginning at $205.35 million AAV
- Herrera: -$6.1 million AAV via trade for $199.25 million AAV.
- Bruce: -$12 million AAV via trade for $187.25 million AAV.
- $208 million AAV minus $187.25 million AAV equals $20.75 million AAV.
For now, Jay Bruce is the left-handed bat off the bench, and Josh Harrison could be the right-side pinch hitter. Plus swapping Herrera and signing Betances would be a wash monetarily. Otherwise, they could keep Bruce plus ink a starter and a reliever after trading Herrera to go $10 million AAV over the CBT for a $2 million tax.
Bruce has value for a club that can absorb $12 million AAV but will only add $1.65 million for 2020’s payroll. Basically, Kentak doesn’t want to part with that bargain but might be open to pairing him with Herrera to acquire a starter. Or management may reconsider the $2 million tax in July instead of now.
First, do you stop after dealing Herrera and signing Betances or Hudson? Second, do you also move Bruce to ink a fifth starter? Lastly, do you surpass the CBT now or July? My choice: They’ll do the first option and wait until July to exceed the CBT, but I won’t gripe if I match a failing move. So, what would you do?
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