Future payroll: the benefits of the Atlanta Braves’ contract extensions
A Narrow Loophole
There’s an exception to the draft pick penalty: if a team is spending like mad and still ends up so bad that they will be drafting at one of the first 6 picks overall, the “move down” penalty will apply to their second-highest draft pick.
Frankly, I’d eliminate that clause to stop rewarding management malpractice, but we’ll move on.
So as a quick example, let’s say that the Mets end up with a final tally of $290 million against the luxury tax. That means…
- They will be $60 million above the threshold
- They will be charged a 20% tax on that $60 million ($12 million)
- They will be charged a 42.5% surcharge on that $60 million ($25.5 million*)
- Their first-round draft pick next Summer will be moved down 10 positions… to around the front of the second round.
So for spending $290 million… they are actually spending $327.5 million… and if another dime is spent, that surcharge jumps to 60%*.
* NOTE: it’s not clear from the text on MLB’s site whether that applies to the entire overage or just the amount above these 40 or 60 million dollar barriers. Either way, the penalty is obviously intended to be painful.
One final word on the luxury tax primer: the taxing thresholds are scheduled to rise over time:
- 2022: $230 million
- 2023: $233 million
- 2024: $237 million
- 2025: $241 million
- 2026: $244 million
Okay… that explains the ugly payroll math… let’s get back to the Braves.
Guessing the Braves’ Behavior
The reason I went through all of that is that by saying “we want to be a Top 5 payroll club”, the Atlanta Braves are effectively declaring “we will be at or above the luxury tax threshold”.
The Braves aren’t necessarily opposed – either morally or by team policy – to paying penalties for exceeding such barriers.
How do we know this? In recent years, they have routinely exceeded their spending pool for draft bonuses in order to secure their selected players.
There is a 75% tax on the overages for doing so, but they have also limited the damage to 5% of their bonus pool monies. For example, had they completely max’d out that 5% (and they pretty much did), their tax liability comes close to $400,000 (out of a total expenditure falling just short of $11 million).
The reason for stopping at this 5% mark involves the severity of the penalties for going higher, which includes the outright loss of future draft picks.
Thus there’s a point at which it makes good business sense to incur some levels of penalties, but it also makes sense to draw a “not to exceed” line to avoid others.
The Braves have embraced this concept, and it stands to reason that their thinking when it comes to the luxury tax threshold might be the same.
A Delicate (Competitive) Balance
That’s where a dance might be in play for payroll considerations near the taxing threshold level for a given year. Being above the threshold one year is one thing (20% tax), but doing that year after year (30%, then 50% tax levels) could become debilitating.
While I could see the Braves flirting with the threshold as part of their pledge to be a Top 5 payroll team, I don’t see them bursting into the surcharge levels… that would be hard to justify from a business point of view.
Buying a free agent for $20 million is one thing. Having to pay $32.5 million to get him (adding 20%, plus a 42.5% surcharge) to satisfy the MLB taxes is quite another. No chance the Braves do that.
But that’s why the team-friendly contract extensions that the Braves have now lined up are so important.