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MLB has a problem

MLB doesn’t officially have a salary cap but the Competitive Balance Tax has worked like one, causing teams to practically ignore the top free agents this offseason.

Miami Marlins Press Conference
He’s not to blame for the rest of MLB’s doings, but Derek Jeter has been up to his own shenanigans this offseason.
Photo by Mike Ehrmann/Getty Images

This offseason has been sloooooooowwww. Perusing MLB Trade Rumors’ Top 50 Free Agent list, only Wade Davis, Carlos Santana, Zack Cozart, and Jay Bruce have found homes this winter. Addison Reed would be included if you choose to eliminate Masahiro Tanaka from the list, who declined to exercise his opt-out shortly after the conclusion of the World Series. While an interesting decision, Tanaka may have made a brilliant choice based on the fact that the huge contracts we’re used to seeing haven’t been thrown around yet.

However, while the big contracts should eventually come, they might not be as large as we first thought. A contributor is the Competitive Balance Tax, a de facto salary cap that some teams have been fighting to remain under this offseason. For the 2018 season, any team with a payroll above $197 million for the first time would have to pay a 20% tax on the amount over the threshold. A second violation results in a 30% tax, and any violations after that led to a 50% tax. However, just one season under the luxury tax threshold resets the penalties, which has led to the strategies we’ve seen from teams over the past few months. (There’s a lot more to the luxury tax, but this is the one that’s most relevant for now.)

First, consider that the Dodgers traded away Brandon McCarthy, Scott Kazmir, and Adrian Gonzalez (along with Charlie Culberson) for Matt Kemp. While the trade was cash-neutral in the end, the Dodgers were able to get under the tax threshold for 2018, resetting their penalties. Then we saw the Yankees trade away Chase Headley in what appeared to be a salary dump, only to acquire the remainder of Giancarlo Stanton’s massive $325 million contract. Impressively, the Yankees still expect to reset their penalties even after picking up Stanton.

It’s not just those two teams, but around MLB organizations are looking to shed payroll. In doing so, there’s been a league-wide realization that free agency just isn’t as helpful as it was believed. The nature of free agency means players are getting paid for what they’ve done rather than what is expected of them to accomplish, leading to a lot of dead money at the end of the contract. Teams are noticing this problem and rather than risk having to pay Yu Darvish over $25 million per season five years from now when he’s 36 years old, they’re preferring to spend their money on younger, cheaper, and shorter-term investments.

On top of that, while there are top players available such as Darvish and Jake Arrieta, the real carrots lay amongst the 2019 free agents: a 26-year old Manny Machado and a 26-year old Bryce Harper. Whichever teams sign those players are going to significantly improve their playoff odds, but it will also cost a significant amount of money, probably at $30 million per year minimum. Their suitors will likely be those high payroll teams and thus it makes sense why they would want to start all over with the 20% overage fee if signing one of those players means you’re at risk of being taxed several years in a row.

Unfortunately, getting rid of the luxury tax won’t be easy. It’s negotiated into the Collective Bargaining Agreement and won’t expire until December 1st, 2021, so we’re probably stuck with slow offseasons for several years now. That also means player salaries are going to stagnate even more than they have, which is a shame because we go to games to watch the players on the field, not the owners in their suites. I hope the players’ union can get the luxury tax eliminated because while it was infuriating to see the Yankees outspend for the top players, it also made the offseason more fun to watch.