Explaining MLB's luxury tax in relation to 2020 Phillies

Explaining MLB's luxury tax in relation to 2020 Phillies

The conversation around the Phillies last January was all Bryce Harper and Manny Machado. 

The conversation this January is all about the luxury tax.

The Phillies are approximately $6 million below MLB's $208 million competitive balance tax, colloquially referred to as the luxury tax. 

What is the tax? What are the harms of going over? Here's a quick explainer:

1st-time offenders

A team exceeding the tax threshold for the first time pays a 20 percent penalty on its overages. So if you're at $210 million, that means paying an extra $400,000. If you're at $220 million, that means paying an extra $2.4 million.

Repeat offenders

A team exceeding the tax threshold for a second straight season pays a 30 percent fine. Three straight years and the penalty rises to 50 percent. 

Harsher penalties

The penalties are harsher for teams way over the tax. If you exceed the tax by $20 million, there is a 12 percent surtax, and if you exceed it by $40 million there is a 42.5 percent tax. 

This is why teams over the tax badly want to reset. The Nationals did in 2019 but the Red Sox did not. No owner wants to be the owner of a team over the tax that missed the playoffs.

Draft pick

There are also non-financial penalties. If you are more than $40 million over the tax, your top draft pick is moved down 10 spots. That's a meaningful drop.

Phillies' financial near-future

The Phillies have about $50 million coming off the books after 2020, mainly because of Jake Arrieta, David Robertson and Didi Gregorius. Those three account for $45 million this season.

But the Phillies also badly want to extend J.T. Realmuto, whose annual average salary will rise significantly from last year's $5.9 million to something right around $20 million. That removes a chunk.

Many, many Phillies fans are frustrated by the team's inactivity since signing Zack Wheeler and Didi Gregorius. The biggest holes appear to be at the back of the rotation and in the bullpen. Many are mistaking the Phillies' preference to remain under the tax for frugality, which is ridiculous for an organization that has expended $700 million over the last three offseasons and is already running a projected payroll over $200 million.

What can and should be called into question is the number of holes a team spending this much money still has. That is a problem that didn't begin this offseason. This was the gradual endpoint of several years' worth of mistakes and bad luck.

The Phillies will probably be more willing to exceed the luxury tax when they have a better sense that they're actual contenders. You can understand why they didn't exceed the tax to sign Dellin Betances or Rick Porcello. If they have a strong first half, they'll add at the trade deadline. If they have a promising season, they'll be aggressive again in the offseason.

It doesn't feel like the Phils have done enough to leapfrog the Braves and Nationals, but they did at least lay a stronger foundation with Wheeler, Gregorius, Joe Girardi and Bryan Price. Good fortune with injury, balls in play and a few career years could alter the conversation we're having in January.

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