A very preliminary look at the Cubs’ 2018 payroll and how it relates to the luxury tax

Major League Baseball doesn’t have an official salary cap, as some other sports do, the National Hockey League in particular. The NHL’s cap is one reason so many different teams have won the Stanley Cup in recent years, and the prime example is the Blackhawks, who simply don’t have enough room under the NHL’s cap to keep all their good players.

Baseball, though, has what has become a de facto salary cap through what is officially termed the Competitive Balance Tax, known better to all of us as the “luxury tax.” Whether this was intended as a cap or not, in practice it has held salaries down, as there aren’t many teams that want to go over it. That’s particularly true because it has penalties like this:

A club exceeding the Competitive Balance Tax threshold for the first time must pay a 20 percent tax on all overages. A club exceeding the threshold for a second consecutive season will see that figure rise to 30 percent, and three or more straight seasons of exceeding the threshold comes with a 50 percent luxury tax. If a club dips below the luxury tax threshold for a season, the penalty level is reset. So, a club that exceeds the threshold for two straight seasons but then drops below that level would be back at 20 percent the next time it exceeds the threshold.

Clubs that exceed the threshold by $20 million to $40 million are also subject to a 12 percent surtax. Meanwhile, those who exceed it by more than $40 million are taxed at a 42.5 percent rate the first time and a 45 percent rate if they exceed it by more than $40 million again the following year(s).

Beginning in 2018, clubs that are $40 million or more above the threshold shall have their highest selection in the next Rule 4 Draft moved back 10 places unless the pick falls in the top six. In that case, the team will have its second-highest selection moved back 10 places instead.

The Cubs paid luxury tax on their 2016 payroll; it amounted to a tax of $2.96 million. USA Today reported that the Cubs were over the tax limit in 2017, but that report was shot down by Patrick Mooney:

It’s been widely assumed that the Cubs want to stay under the tax threshold again for 2018. That threshold has ticked up just slightly from $195 million to $197 million. This figure includes salaries — but not necessarily a straightforward salary number for the season in question, it can also be based on the average annual value (AAV) of a multi-year deal. It also includes the following:

Competitive Balance Tax: Payrolls are for 40-man rosters and include averages of multiyear contracts; health and pension benefits; clubs medical costs; insurance; workman’s compensation, payroll, unemployment and Social Security taxes; spring training allowances; meal and tip money; All-Star game expenses; travel and moving expenses; postseason pay; and college scholarships.

Well, just how much is that? Those amounts are never going to be published or even made public, so we have to guess. If you look at the salary spreadsheet kept by Cot’s at Baseball Prospectus, it estimates that will be about $13 million for the Cubs in 2018.

So that’s the number I’m going to go with in putting together this guesstimate. One of the reasons the Cubs really want to stay under the tax number this year is this, quoted from the box at the top of this post (italics added by me):

If a club dips below the luxury tax threshold for a season, the penalty level is reset.

Thus the Cubs are at the lower tax rate for 2018 and can stay at the lower tax rate in 2019 if they stay below that $197 million tax threshold for their 2018 payroll — and the tax threshold is scheduled to jump by $9 millon (about 4.5 percent) to $206 million for 2019. That would give the Cubs quite a bit more payroll room for 2019.

In looking at Cubs salaries for 2018, then, I’ll post here both the actual salary number and the number that is counted for “cap,” or tax purposes. In many cases that will be the same. In some, it isn’t. Basically, for cap purposes each player counts according to the average annual value (AAV) of his contract.

Specifically, it appears that Jason Heyward is carrying a tax hit based on his entire $184 million contract, even though he can opt out after 2018 (he won’t). He's on the books for an $85 million, three-year deal right now (thus the $28 million-plus actual salary for 2018). The tax hit appears to be calculated based on the full eight-year contract, as it shows as only $23 million for this year (and each year for the rest of the contract).

Take the Brandon Morrow deal as another example. It's reported as $9 million (2018) and $9 million (2019), with a vesting option for $12 million (2020) with a $3 million buyout. For tax purposes, they appear to be treating it as the total of the guaranteed money over the guaranteed years. So at least to start, it appears to go as a two-year, $21 million deal for cap purposes, thus a $10.5 million tax hit. ($9 million + $9 million + $3 million/two years).

Similarly, Drew Smyly’s contract has two guaranteed years at a total of $10 million in guaranteed money. Thus, even though he’ll make $3 million in 2018, his “tax hit” is $5 million for this coming season.

Bet you didn’t know you needed a degree in accounting just to be a baseball writer (and I don’t have one). But here we are.

The figures below are either from published or other public sources, or in the case of arb-eligible players, they are my best estimate of what the player will get in arbitration. Steve Cishek’s contract was reported at somewhere between $12 million and $14 million for two years, so I split the difference for this purpose. Here are some arb estimates from MLB Trade Rumors; I’ve bumped some of them up a bit. Players not yet eligible for arbitration (in italics), who will thus get the minimum salary or close to it, are listed in one amount at the bottom of the table and their individual lines are blank; another figure sums up what minor leaguers on the 40-man roster will get.

I’ve also listed here only players who I think have a reasonable chance of making the 25-man roster (those who have no salary listed are part of the “25-man 0-3 players” total, and that dollar estimate and the minor league estimate are from the Cot’s spreadsheet). Of course, the Cubs could still add others from outside the organization before Opening Day; that’s why this is termed a “very preliminary” look at the payroll.

And now, the numbers:

So, assuming you would like Theo & Co. to save about $10 million for mid-season deals (considering that if you acquire a $20 million player at midseason, that’s all you’d need, or you could use that to acquire two $10 million players), that still leaves about $27 million of space (before they’d hit the luxury tax threshold) that the Cubs could use right now to sign a free agent or two.

It would appear, then, that there’s still room to re-sign Wade Davis. Or Jake Arrieta, but not both. There would also seem to be room for a reunion with Alex Avila.

Obviously the Cubs wouldn’t want to spend all $27 million of that estimated remaining money; contingencies come up and they’d certainly want to leave enough room so that they don’t go over the $197 million tax cap.

But it certainly seems as if the Cubs can put a very good team on the field in 2018, and still have plenty of room for payroll growth in 2019 without paying the luxury tax. Again, keep in mind that some of the figures noted above are estimates and the actual numbers could be different, even though I tried to be a little generous in the arb figures I posted here.

Nice work, Theo & Co.

Many thanks to BCBer The Deputy Mayor of Rush Street for sending me links to a number of these sources and for helping me get my thoughts organized for this article.