Dodgers Offseason: What’s the Big Deal About Exceeding the Luxury Tax?

In the wake of Trevor Bauer’s suspension being reduced to time served and him being immediately reinstated, the Dodgers might go over the luxury tax again in 2023. Let’s take a look at why a team like L.A. might want to get under the luxury tax for a year.

The fact is, Los Angeles might have already gone over the first luxury tax threshold and just don’t know it yet. The math currently shows about $0.7 million of wiggle room, but that math includes salary estimates on L.A.’s nine arbitration-eligible players and doesn’t include potential bonuses.

If my calculations are correct, Trevor Bauer getting docked 50 games of pay would reduce his $32 million salary by 31%. So #Dodgers would owe him $22 million, with $23.5 million going toward CBT payroll. That would bring them to $232.3 million, just under $233-million threshold.

— Mike DiGiovanna (@MikeDiGiovanna) December 23, 2022

Noah Syndergaard, for example, has $1.5 million in potential bonuses in his contract. If he throws 150 innings in 2023, he earns $1 million, which puts Los Angeles into the luxury tax even if the arbitration estimates didn’t undersell anyone.

From L.A.’s standpoint, going a dollar over the tax is as bad as going over by millions of dollars. The reason they want to get under for this year isn’t the actual money they’ll pay in tax this year, it’s to reset the escalating penalties that apply to teams that pay luxury tax in consecutive seasons. The Dodgers have been over the tax number the last two seasons, and a third straight year would put them in the highest tax bracket.

Let’s look at a real-world example: Let’s say the Dodgers were to sign Shohei Ohtani next year to a contract that put them $30 million over the luxury tax number. If the Dodgers successfully get under the luxury tax this year, that $30 million overage would cost them $7.2 million in taxes — $6 million for the base 20% tax rate on the $30 million overage, plus a 12% surcharge on the last $10 million.

If the Dodgers don’t get under the luxury tax for 2023, that same deal would cost them $16.2 million in taxes, because the base rate would be 50% instead of 20%.

Let’s look at Steve Cohen’s Mets as an example. Their current luxury tax payroll is estimated at $384 million. If this were their first year going over the limit, their tax bill would be $95.7 million, which is huge. But because it’s their second straight year going over the limit, that adds an extra $15.6 million because the base rate goes from 20% to 30% and one of the surcharge rates goes from 42.5% to 45%. And in 2024, as a third-time offender, the same payroll would cost him $141.5 million in taxes. That’s a difference of $45.8 million just for being a three-time offender.

There are non-financial implications to getting under the luxury tax, too. The Dodgers are receiving two compensation picks in next year’s draft because they lost Tyler Anderson and Trea Turner in free agency after making them qualifying offers. If L.A. had been under the luxury tax in 2022, those picks would come after the second round. Instead, they come after the fourth round. Similarly, if the Dodgers had signed Carlos Rodon or any other player who had rejected a qualifying offer, they would have lost their second and fifth picks in next year’s draft and $1 million in international bonus money; if they’d been under the luxury tax in 2022, those penalties would have been just their second pick and $500,000 in international bonus money.

To put it more simply: Getting under the tax for one year makes it less painful to go over the tax in future years.

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